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Service charges (general)

This page contains information on two points in particular

St Modwen Developments (Edmonton) Ltd v Tesco Stores Ltd

Brown�s Operating System Services Limited v Southwark Roman Catholic Diocesan Corporation

For a more detailed looked at service charges in the context of residential long leases go to "Long leases" in the Update Library.

Management charges

Introduction

There were in fact three points in this case, which demonstrates the importance of paying careful attention to the drafting of service charge clauses; and on the need carefully to check those clauses on assignment of the lease, or as in this case, the reversion. There is a useful discussion of the position where there is no express clause permitting the landlord to recover a management charge.

Borough Treasurer�s certificate

Tesco is the tenant of premises in Edmonton Green shopping centre under the terms of a 99 year lease dated 18 June 1974. The lease was originally granted to Enfield London Borough Council and it provides that the tenant shall pay service charge by way of further rent subject to:

the Council�s Borough Treasurer

The landlord�s interest passed to the claimant in this case (St Modwen Developments). The lease contained an extended definition of �tenant� to include successors in title but there was no similar extended definition of landlord. It was common ground between the parties that references to �the Council� in the lease take effect as though they were references to St Modwen. However, the tenant argued that references to the �Council�s Borough Treasurer� could not be construed as references to St Modwen�s equivalent financial officer, namely the financial director. The court (Toulson J) placed great emphasis on the fact that the �Council�s Borough Treasurer� was �somebody of known and well established status� (para 8) and held that the parties had not, when the lease was granted, anticipated that the person who might happen to have such a financial role in any future assignee organisation would have the power to create legal liability to pay. In the absence of the borough treasurer, the court found that the mechanism for determining the service charge amount provided for in the lease was of no effect. Accordingly, although the landlord retained the right to recover the service charges there was no mechanism to ascertain the amount and the landlord would have to establish its claim in court by full evidence (subject to the arbitration provisions in the lease). Accordingly, the service charge certificates issued by St Modwen were of no contractual force although they did in practical terms set out the sums claimed.

Removal of refuse

The court also looked at Tesco�s refusal to pay that part of the service charge associated with removal of refuse from the common parts. Tesco argued that some of the refuse actually belonged to another tenant who had failed to prevent its refuse from spilling over into the common parts, and further that it removed its own refuse and that the landlord�s covenant to keep the common parts clean did not extend to such costs. The court found that such costs did fall within the terms of the lease � whether within the landlord�s covenants to keep the common parts clean, or as part of its overall management of the centre.

Management charge

Finally, the court looked at St Modwen�s addition of a 10% management fee to the service charges. The court accepted that this was in line with modern practice, and that clearly management time had to be spent managing the centre. However, the lease did not allow for the recovery of such charges so that St Modwen were not entitled to such a figure in the absence of any investigation into the actual costs of providing the services in question. See in particular paragraph 34 of the judgment for some guidance in determining a fair percentage figure:

�As a matter of principle, the parties are agreed that the right place to start is with the services that are themselves to be provided. The amount that St Mowden can charge for them is not necessarily confined to the lowest tier of employee or agent who provides the service. Some costs of middle and upper management may be recoverable if it can be demonstrated that their time has indeed been spent in ensuring that those services are provided. The further up the hierarchy one goes, the more difficult it may be to establish the amount of time that has been spent referable to the provision of the ultimate service. However, that is a matter of evidence, not a matter of principle. Ten per cent as a percentage has no magic value..�St Modwen Developments (Edmonton) Ltd v Tesco Stores Ltd [2006] EWHC 3177 (Ch); [2007] 06 EG 166

What happens to unused money at the end of the lease?

The facts

This case concerned a service charge provision in a 15 year lease with a tenant�s break clause.

The tenant was obliged under the terms of his lease to pay service charges as additional rent being the tenant�s contribution towards the costs of the services the landlord was obliged to provide. Those services included the usual repairs, building maintenance, heating, insurance, cleaning, maintenance of car park and gardens etc. Also included in those services was the ability of the landlord to make �reasonable provision for expenditure likely to be incurred in the future�. There was no provision within the lease for the setting up of a sinking fund, nor did the landlord set one up.
The landlord had been in the habit of demanding on account service charge payments from the tenant that were higher than the anticipated and actual cost of the services provided, and then carrying forward the balance each year �on account of future expenditure� (but in fact never using this surplus). By the time the balance of the �on account of future expenditure� held by the landlord reached �17,000, the tenant demanded a service charge holiday. The landlord refused and the tenant then exercised his break clause under the lease, refusing to pay the last two quarters service charge of almost �10,000. The landlord sued for that sum (with interest) and the tenant counterclaimed for the balance of the monies held �on account of future expenditure�� as being rightfully his.

At first instance, the court held that the �on account� amount was the landlord�s money, that it had been built up for the benefit of the building and that the landlord was entitled to retain it at the end of the lease.

Decision

The Court of Appeal overturned that decision, and found in favour of the tenant. Lady Justice Smith:

�the lease permitted the landlord to include in the total service cost a reasonable sum for future repairs and renewals. However, the lease did not provide for the creation of a reserve fund. Nowhere in the lease does the expression 'reserve fund' appear.� (para 29)She did however accept that the lease provided that monies could be held by the landlord either in reserve or retained as excess, but emphasised that this was not a reserve fund. She then went on to look at the provisions of the lease in order to decide what should happen to any money held by the landlord when the lease came to an end, in the absence of any provision on that point in the lease. The only provision was that such money was to be applied (paragraph 2(d) of the 3rd Schedule of the lease) to meet authorised expenditure in each succeeding year. From that paragraph, Lady Justice Smith inferred that such money belonged to the tenant and should therefore be returned to the tenant at the end of the lease regardless of whether the lease expired by effluxion of time, or (as in this case) was ended by the operation of a break clause.

Comment

This was not a sinking fund case. Under its lease, the tenant had no liability to contribute through the service charge to repairs that took place after the end of the lease, so sums not spent by then had to be returned to the tenant. The decision was based on the lease wording, which failed to provide for how excess service charge monies would be managed. The case highlights the importance of considering at the outset who is to be entitled to excess service charge monies when the lease is terminated, and then drafting the lease clearly to reflect the parties' intentions

Brown�s Operating System Services Limited v Southwark Roman Catholic Diocesan Corporation [2007] EWCA Civ 164

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