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Construction of the lease
Statutory control - reasonableness
Service charge demands
Administration charges
Summary of leaseholder's rights
Insurance
Managing agents
Reserve funds
The 18-month rule
Consultation of tenants
Compromise of service charge dispute
Transfer to First-tier Tribunal

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Statutory control - reasonableness

Introduction

At common law, service charges must be fair and reasonable both in regard to their quantum and their nature (Finchbourne Ltd v Rodrigues [1976] 3 All E.R. 581, C.A). However, the common law has been regarded as inadequate protection and so there is a detailed and sophisticated control of residential service charges. This page deals with that system of control.

What are “service charges”?

The answer is in the statutory definition (s18 of the Landlord and Tenant Act 1985), not any definition in the lease otherwise the landlord could circumvent the tenant’s statutory protection.

“Service charge” is:
    “an amount payable ... as part of or in addition to the rent ... payable ... for services, repairs, maintenance, improvements or insurance or the landlord's costs of management ... the whole or part of which varies or may vary according to the relevant costs”.


“Relevant costs” are:
    “the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable”.
The service charge must be variable. Fixed service charges are not recoverable: Re 184 Stockwell Park Road P/SC/CR/008/027/00. A fixed management charge forming part of a variable service charge can still form part of a service charge within s18 (Longmint v Marcus (2004) Lands Tribunal LRX/25/2003, unreported).

“Reasonableness”

Above all, service charges must be reasonable (s19 Landlord and Tenant Act 1985)

Both the courts and the Tribunal have jurisdiction to determine reasonableness issues. By the CLRA 2002, Sch 12 para 3 the court “may” transfer to the Tribunal. Venue is often an important issue early in county court proceedings as the landlord will not be able to recover costs at the Tribunal (unless the lease allows it). The parties cannot contract out of the Tribunal's jurisdiction ( LTA s27A(6) of the 1985 Act).


Determining reasonableness

Limits of Tribunal's powers to determine reasonableness

Dehavilland Studios Limited v Peries
[2017] UKUT 322 (LC)

Summary

The Upper Tribunal reversed the decision of the First-tier Tribunal that the decision of the landlord to repair the windows rather than replace them was unreasonable on the basis that the surveyors’ reports of both parties suggested that replacement was the preferable option. As both options were reasonable, it was not open to the FTT to find that charges incurred in repairing the windows were unreasonable.

Facts

The FTT was asked to determine the reasonableness of a number of service charge items, including the repair of the windows. The parties were in agreement that the windows in the building were defective. However, there was a considerable dispute as to the consequences of the disrepair. It was the landlord's (L’s) view that the windows could be repaired and that was the solution it proposed. It was the tenants’ view that all of the windows in the building should be replaced.

Replacing the windows was a significantly more expensive option, but there was expert evidence before the FTT that the windows were near to the end of their natural life and, even after repair, would need to be replaced in around 15 years.

First Instance

In respect of the windows, the FTT held that the costs incurred in respect of repairing the windows were not reasonable. The Tribunal went on to say that it considered that the replacement of the windows was “the most reasonable option.” The Tribunal recorded in its decision that both experts had said that replacement or repair was reasonable. L appealed principally on the basis that the FTT had applied the wrong test.

Decision on appeal

The Upper Tribunal granted the appeal and dismissed a cross appeal. The Upper Tribunal found that the FTT had not determined that it was unreasonable for L to repair the windows. On the contrary, it had determined that both repair and replacement were reasonable but that in its view replacement was the better option. Such an approach was wrong in law and contrary to authority.

The Upper Tribunal relied upon the recent summary of the FTT’s powers in relation to the reasonableness of charges given by the Court of Appeal in Waaler v Hounslow LBC [2017] EWCA Civ 45. Particular reference was made to the comments of Lewison LJ at paragraph 37 of that judgment:
    ”In my judgment, therefore, whether costs have been reasonably incurred is not simply a question of process: it is also a question of outcome. That said it must always be borne in mind that where the landlord is faced with a choice between different methods of dealing with a problem in the physical fabric of a building (whether the problem arises out of a design defect or not) there may be many outcomes each of which is reasonable. I agree with Mr Began that the tribunal should not simply impose its own decision. If the landlord has chosen a course of action which leads to a reasonable outcome the costs of pursuing that course of action will have been reasonably incurred, even if there was another cheaper outcome which was also reasonable.”


In considering whether the FTT had erred in deciding whether repair was a reasonable option at all, The Upper Tribunal found that such a decision had been open to the FTT on the evidence presented to it. H.H. Judge Behrens said the main matters that had influenced him included:
    “1. Neither expert suggested that a decision to repair was an unreasonable option even though both regarded replacement as the better option… Neither expert gave oral evidence at the hearing. Thus there was no cross-examination.
    2. There is no doubt that replacement of the windows is a significantly more expensive option than repair. It is true… that individual tenants would have in addition to fund the glazing and this would reduce the differential from the figures suggested in the reports. Even so there is still a significant difference in cost and this is a matter the Directors were entitled to take into account. This is a case where DHS is a company where all the shareholders and directors are owners of flats within the building. Its assets are limited and comprise moneys in the reserve funds.
    3. Whilst it is true that there was clear evidence that the windows were near the end of their life they were not at the end and there was a suggestion that repair would extend their life by up to 15 years.
    4. It is true that repair of the windows would not give as good a result as replacement. However, it was common ground that it would substantially improve the position…”


Comments

This case serves as an important reminder of the limited role of the First-tier Tribunal in determining whether service charges incurred by landlords are reasonable. The FTT should not go as far as to substitute its own opinion for that of the landlord when choosing between two ostensibly reasonable options. Here, while both experts had preferred replacement of the windows, there also were certain merits to the option of repair, not least the fact that it would keep costs down in the short-term and satisfy the landlord’s repairing covenant. Therefore, it was open to the FTT to find that repair was a reasonable option. Further, having found that repair was a reasonable option, it was not open to the Tribunal to decide that the landlord should have eschewed repair in favour of another option.

It seems that the Tribunal will generally allow the landlord a wide discretion as to how best to perform its covenants under the Lease, as long as the option selected falls within the bounds of reasonableness. However, as the Court of Appeal held in Waaler v Hounslow LBC [2017] EWCA Civ 45, the test is not one of perversity, but rather, whether the landlord, objectively-speaking, acted reasonably, taking into account the interests of the tenants as well as the other circumstances of the case: (see Wandsworth LBC v Griffin [2000] 2 E.G.L.R. 105).


When is service charge payable? – Tribunal has no discretion

Southend-on-Sea Borough Council v Skiggs [2006] 21 EG 132

Section 27A of the Landlord and Tenant Act 1985 allows tribunals to determine whether a service charge is payable and if so, by whom, to whom, the amount, the date it is payable and the manner in which it is payable. However, the section only allows the Tribunal to state what the position is under the terms of the lease in those respects. It does not give the Tribunal a discretion to allow the tenant to delay payment where it is so payable.

In this case the Tribunal determined that the service charges were payable but then went on to give the tenants time to pay. It was wrong to do so. Judge Huskinson at para at para 18:
    "section 27A was introduced to confer jurisdiction on LVT's to decide the legal rights of parties on points that previously could have been dealt with only by the county court. This is quite different from conferring a discretion on the LVT to adjust these legal rights in such manner as the LVT may think just and equitable."

Advance charges

Likelihood of a third party paying the sums covered by the service charge

Avon Ground Rents v Cowley
[2018] UKUT 92 (LC)

Summary

The Upper Tribunal determined the reasonableness of advance service charge demands under section 19(2) of the Landlord and Tenant Act 1985 in circumstances where the landlord’s relevant costs were likely to be repaid by an NHBC warranty.

Facts

The claim concerned the building covered by an NHBC warranty. A leak was discovered in the central courtyard of the building, caused by a failure in the waterproof membrane.
The landlord commenced the statutory consultation procedure in respect of the costs of repair of the membrane, however one of the tenants suggested that the landlord seek payment under the building’s NHBC warranty.

NHBC appeared to accept liability under the policy and proposed to cover the service charge liability of the residential tenants in full, although no final agreement was reached. Nevertheless, the freeholder proceeded to demand the full amount to the tenants and sought a determination from the FTT that the relevant costs of repairing the membrane were reasonable and recoverable from the tenants.

Issues

How likely must it be that payment will be made from another source before the service charge payable in respect of work could be reduced to reflect the anticipated receipt?

Decision

The FTT held that the works proposed were reasonable and recoverable through the service charge. However, it found that the contributions by the residential tenants were nil, as the costs would be recouped via the NHBC.

Decision on Appeal

The FTT’s decision was upheld on appeal – whilst the sums for the works were recoverable from the tenants as a matter of contract, section 19(2) of the 1985 Act meant that the Tribunal was entitled to consider other matters, such as the fact that it was likely that the landlord would be reimbursed for the costs incurred by other means.

In this case, there was no real dispute about NHBC’s liability and the FTT was entitled to conclude that the sums would be paid by NHBC within a reasonable period of time.



Affordability

Remission of case to Tribunal

Hillfinch Properties Ltd v Lessees of Southbourne Court
[2013] UKUT 096 (LC)

Summary

The Tribunal had erred in failing to consider the tenants’ ability to afford works when determining that certain works were reasonably incurred.

Apportioning costs

Management charges

South Tyneside Council v Ciarlo
[2012] UKUT 247 (LC)

A local authority landlord had made arrangements with a management company to manage its housing stock. As a result of the way the contract was structured it was difficult precisely to calculate the specific cost of managing individual buildings. The landlord devised a way to apportion the costs of management and to charge the tenants accordingly. The Upper Tribunal held that it was open to the landlord to manage its properties in this way. The management costs that the landlord had sought to recover from the tenant had properly represented the expenses of the tenant’s building. The management charges were reasonable and recoverable.


Caretaker

Insistence of head-landlord

Carey-Morgan v de Walden
[2013] UKUT 0134 (LC)

Summary

The freeholder had threatened to forfeit the intermediate landlord’s headlease if, in breach of covenant, no full time resident caretaker was employed. It was therefore reasonable for the intermediate landlord to include the cost of a full time resident caretaker in the estimated service charge payable on account, notwithstanding the fact that both the intermediate landlord and the tenant agreed that a cleaner would suffice.

Facts

The freehold of premises was owned by F and a headlease was vested in H. This headlease contained a covenant on the part of H to employ a full-time caretaker to reside in the basement flat throughout the term.

The underleases were vested in the Ts. These contained a covenant by the Ts to contribute towards the costs of the services provided by the landlord. The services included “employing such staff as the landlord may in its absolute discretion deem necessary to provide caretaking services for the Building … including … where accommodation is provided for the use of occupation of such person a sum equivalent to the market rent of such accommodation”.

Despite these covenants, the basement flat was let to obtain a commercial rent. F threatened to apply for a declaration that H was in breach of covenant. As a result, H decided to employ a full time resident caretaker. The caretaker’s contract of employment required her to live in the basement flat.

H then sought to recover the cost of doing so and also a sum equivalent to the market rent of the basement flat from the Ts. This greatly increased the total estimated service charge from around £8,000 to £56,000 per year.

Issues

The Ts contended that they were not liable to pay through the service charge for the costs of the caretaker or for the market rent of the basement flat. H accepted that, given a free hand, it would not have thought it appropriate to employ a full time resident caretaker.

First Instance

On the issue of the reasonableness of the estimated service charges, the LVT accepted that H had grounds for concern that F might try to forfeit the headlease. It concluded that it was prudent (viewed from H’s perspective) to employ a resident caretaker. It was not, however, necessarily reasonable, within s19(2) of the Landlord and Tenant Act 1985, to impose upon the Ts the full costs of taking the commercial decision to employ a resident caretaker. The LVT concluded it was reasonable to employ – and therefore to budget for – a cleaner rather than a resident caretaker and that the reasonable estimated costs of employing a cleaner were properly to be included within the estimated on account service charges. Having reached these conclusions, the LVT decided that as the costs of employing a resident caretaker were not properly recoverable there could be no recovery of the notional amount of the market rent of the basement, such that it was not necessary to consider the question of whether this notional rent was capable of being challenged under s19 of the Landlord and Tenant Act 1985.

Decision on Appeal

The Tribunal allowed the appeal and found for H.

The Tribunal held that it was reasonable for H to employ a full time resident caretaker in order to remedy a breach of covenant in the headlease and to avoid the risk of forfeiture proceedings. Accordingly, despite the fact that a full time resident caretaker was not needed for the proper day-to-day enjoyment of the building, those costs would be costs which were reasonably incurred within section 19(1)(a). Therefore an estimated amount for the on account service charges which included an amount for the costs of employing a full time resident caretaker would be, in principle, a reasonable amount.

The Ts accepted that if the LVT's decision was wrong, such that the costs of employing a full time resident caretaker could reasonably be included in an estimated on account service charge, then so also can there be included a sum in respect of the notional loss of the market rent of the basement flat.


Delay in carrying out repairs affects service charge recovery

"Historic neglect"

Continental Property Ventures Inc v White
LRX/60/2005

One of the big issues that has arisen over the years has been the effect of delay on the cost of repairs. The landlord fails to obey that basic rule of common sense when dealing with property - a stitch in time can save nine. He delays in carrying out the repairs. As a result when they are done the cost is much greater than it would otherwise have been. The tenant in the past has argued that the sums claimed by the landlord were not reasonably incurred (within the meaning of s19 of the Landlord and Tenant Act 1985). Some LVT's have been prepared to accept this argument but it has now been held to be wrong. Whether or not the sums on repair have been reasonably incurred turns simply upon the need for the repairs and the cost of them. The cause of the current defect is irrelevant to that issue. However, and it is a big however, since the introduction of s27A of the 1985 Act (by the Commonhold and Leasehold Reform Act 2002) the LVT has been able to determine whether or not "a service charge is payable"; and it is not payable if the tenant has a right to set-off some other claim against the service charge demand. Where the landlord has failed to carry out repairs in the past that may lead to a claim in damages, which can be set-off against the service charges.

In this case the landlord delayed carrying out repairs resulting in the eventual cost of the repairs being significantly more than they would have been had the work been carried out expeditiously. The Lands Tribunal held that the costs of the repairs had been reasonably incurred but that the landlord's neglect gave rise to a claim in damages against it. The tenants were therefore entitled to a defence of equitable set-off against the landlord's claim for the full cost of the repairs. HH Jg Michael Rich QC:
    "It was submitted that the determination of such claims for damages was outside the jurisdiction of the LVT. I accept that the LVT has jurisdiction to determine claims for damages for breach of covenant only in so far as they constitute a defence to a service charge in respect of which the LVT's jurisdiction under s.27A has been invoked. I see no reason of principle why such jurisdiction should not extend to determining even a claim for loss of amenity or loss of health arising from breach of a repairing covenant, but would draw attention to what I said in Canary Riverside Pte v Schilling as to the desirability of the LVT's exercising restraint in the exercise of the extended jurisdiction given to it by the Commonhold and Leasehold Reform Act 2002. (para 15). As I pointed out in the Canary Riverside case the LVT may, as a matter of its discretion, think it inappropriate to exercise its jurisdiction, which it holds concurrently with the County Court, at least where one party asks it not to do so, in a matter where the LVT accepts that the nature of the issues makes a court procedure more appropriate (para 16)".
Article: "Landlords beware of delays to repair" by Justin Bates, Arden Chambers - Detailed discussion of the case and its consequences. Justin concludes by suggesting that if a tenant can set-off claims "the LVT is now able to hear a wide variety of factual allegations; breaches of the repairing covenant; claims for loss of amenity or loss of health; allegations of fraud or forgery; disputes about where agreements are void or voidable; and perhaps even personal injury claims flowing from the breach of covenant. The only limiting factor is that the matters raised must be capable of amounting to a set-off". However, as HH Jg Rich QC pointed out in the case the LVT may consider it inappropriate to exercise its jurisdiction and instead transfer to the county court. (Property Law Journal, 17 April 2006, p16).


Right to buy houses - limit on service charges

Extent of liability

Havering LBC v Smith
[2012] UKUT 295 (LC)

Summary

Liability to a service charge in respect of a flat, that had previously been bought under the right to buy scheme, was limited to the amount set out in the landlord’s s125 notice as a result of an estoppel in the case. However, as a matter of principle it is possible to “straddle” costs over a period that falls within and outside the five year period referred to in s125(C) of the Housing Act 1985 – which limits the amount of service charges.

Facts

The original tenant had purchased premises from the local authority in 2001 pursuant to the “Right to Buy” legislation in the Housing Act 1985. At that time a notice was served on the original tenant pursuant to s125 of the Housing Act 1985, concerning the value of the property. This stated, inter alia, that liability to contribute to repair costs during the initial period (normally the first five years of the lease) was limited by the Act. It also set out the estimated service charge in respect of repair works to be a certain figure.

The current owner of the flat (T) bought it in 2004. T had made enquiries about the service charges and proposed works before the purchase of the lease and had been assured by a local authority employee that she would be protected by the s125 notice, and had bought relying on that assurance.

Certain works were subsequently done by the local authority landlord (L) and a bill was sent for the service charge costs of approximately three times the figure given in the s125 notice.

The reason for the substantial difference between the estimate and the final account was that the works had been carried out, in the main, outside the 5-year reference period during which the statutory limitation on the amount to be paid applied. L had adopted a system of apportionment known as “straddling” so that T was charged fully for the weeks of the works contract that fell outside the reference period.

Decision

The amount recoverable was limited to that specified in the s125 notice: L was estopped from denying that the cost of the works was limited to that set out in the s125 notice due to the assurances it had given to T prior to her purchase.

However, as to the principle in relation to apportioning costs to a service charge the Tribunal held that “straddling” the costs over the period that falls within and outside the reference period is an acceptable method of dealing with costs for works which fall both within and outside the reference period.

Such a method of calculating the service charge does not fall foul of the statutory provisions contained in ss125 and 125A of and para16B of Sch 6 to the Housing Act 1985.

Further, a landlord is not prohibited from charging for any previously unplanned work. Para 16B(3) of Sch 6 to the Housing Act 1985 expressly provides for the limitations for charging for such works. The s125 notice does not guarantee that works will be carried out within a particular period or that the costs estimated will in fact be incurred during that period.



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