Construction of the lease
The starting point in any service charge dispute is the lease. The landlord can only recover charges from the tenant if they are recoverable under the terms of the lease. This page deals with the following points:
- Caretaker's flat - recovery of landlord for notional rent in respect of the flat.
- Credit for third party contributions
Failure to serve a certificate
What is the effect – what does the lease say?
Urban Splash Work Ltd v Ridgway & Cunningham
 UKUT 0032 (LC)
The Upper Tribunal considered an appeal relating to the recoverability of service and administration charges pursuant to the terms of a lease, where the landlord failed to issue a certificate.
The Appellant is the freehold owner of a block of apartments and the Respondents are the long leasehold owners of a flat within the block. The parties were in dispute about various service charges and other fees levied upon them by the freeholder between 2010 and 2017. Although required by the lease, no certificates of expenditure for any of the service charge years were served on the tenants until December 2016. The managing agents had levied on the tenant several administration charges arising from enforcement action taken to recover the arrears.
- Whether the failure to certify the landlord’s expenditure was a condition precedent to recovery of service charges; and
- Whether the various administration charges were recoverable?
The FTT declined to make a determination about the 2010 service charge year on the grounds that there was insufficient evidence to do so and gave the freeholder an opportunity to file further evidence. Further, it found that none of the variable administration charges were payable and made a section 20C order in favour of the tenants.
Decision on Appeal
On appeal, the Upper Tribunal noted that the Appellant failed to serve on the tenants any certificate of expenditure until December 2016. The Appellant submitted that the service of such a certificate was not a condition precedent to the tenants’ liability, relying on cases such as Pendra Loweth Management Limited v North  UKUT 91 (LC).
However, as the Tribunal pointed out, these cases did not establish any general principle that the provision of a certificate is not a condition precedent to liability – rather each case turned on the construction of the lease in question. In this case, on its proper construction the lease did provide for a certificate to be served before the tenant was liable make payment. Further, none of the certificates belatedly served by the landlord complied with the terms of the lease – accordingly the balancing charges levied upon the tenants were not due, even at the date of the appeal.
As regards the administration charges levied by the managing agents, the Tribunal noted that these were extra charges levied by the managing agents. Therefore, it was incumbent on the Appellant to show that it was required to pay that sum to the managing agent. There had been no disclosure of the manager’s retainer for 2010, and as regards the 2011 – 2016 retainers, they did not demonstrate that the Appellant was required to pay (over and above the normal management fee) for the agent’s services in collecting rent and service charges. Further, because of the certification issue set out above, there may not have been any arrears to pursue.
As regards the 2010 service charge year, the Appellant accepted that it was never going to be able to provide more evidence of the charges levied. However, it maintained that it was for the tenant to raise a defence to the sums said to be owed, and the tenant had failed to do so. That submission was rejected by the Tribunal – where the tenant raises questions as to the basis of the charge, the burden falls on the landlord to explain what the charge is for. It is not enough for the landlord to assert that they are entitled to the sum merely because it appears on the agent’s account.
See also the page dealing with reasonableness of service charges for a case dealing with whether or not it was reasonable to recover the costs of a caretaker where the intermediate landlord and the tenants agreed that it was not necessary but the head landlord insisted on it and threatened forfeiture if no caretake was installed.
 EWCA Civ 1777
On a true construction of the lease L was not entitled to recover the notional rent of a caretakers flat. The lease was construed contra proferentum. The cost could not be considered to be moneys expended within the meaning of the lease.
 24 EG 178
In this Lands Tribunal case, HH Michael Rich QC set out the principles to be applied when deciding whether or not the notional rent for a flat occupied by a caretaker working in the property can be recovered as a service charge under the terms of the lease:
- "(i) It is for the landlord to show that a reasonable tenant would perceive that the [lease] obliged it to make the payment sought.
- (ii) Such conclusion must emerge clearly and plainly from the words used.
- (iii) Thus, if the words could reasonably be read as providing for some other circumstance, the landlord will fail to discharge the onus upon it.
- (iv) This does not, however, permit the rejection of the natural meaning of the words in their context on the basis of some other fanciful meaning or purpose, and the context may justify a 'liberal' meaning.
- (v) If the consideration of the clause leaves an ambiguity, the ambiguity will be resolved against the landlord as 'proferror'." (para 20)
In this case, one of the items of "costs expenses outgoings and matters incurred in connection with the management and running of the Building" that was described as "service charge expenditure" included "the cost of employing maintaining and providing accommodation in the building for a caretaker including an annual sum equivalent to the market rent of any accommodation provided rent-free by the Lessor .. in respect of such accommodation.". The Tribunal had no difficulty in concluding that the landlord was entitled to recover a notional rent of the caretaker's flat as part of the service charge. (para 25).
Note: Although the point did not fall for a decision in the case, the President "doubted whether a notional cost would fall within the definition of "relevant costs" in s18 of [the Landlord and Tenant Act 1985]" (para 26). If so, it will not be possible to challenge the reasonableness of such a charge under s19.
Credit for third party contributions
Preventing double recovery
 EWCA Civ 225
A local authority landlord was required to give credit to leaseholders for funds received from third-parties when recovering a contribution to the cost of major works.
A flat located on a large Council-owned estate was held by a long-leaseholder (T). Major works were conducted on the whole estate, funded in part by Npower, as the Council’s commercial partner under the government’s Community Energy Savings Program (CESP). Although a certain amount of the CESP funds were attributable to works on T’s property, the Council did not allow for this in her bill for the major works. One difficulty for the Council in this regard was that the CESP funding was not applicable to the whole estate, and only related to certain works to certain properties in the areas where it did apply. The relevant covenant to pay service charges was as follows:
- “Subject (so far as applicable) to the provisions of paragraphs 16A to 16D and 18 of Schedule VI of the 1985 Act to pay to the Council from time to time as part of the Service Charge a reasonable part of the costs and expenses which the Council may from time to time incur or estimate to be incurred in carrying out repairs and improvements to the structure and exterior of the demised premises and the Building …”
T had challenged the recoverability of the major works charges on numerous grounds and had been unsuccessful before the Leasehold Valuation Tribunal. On appeal to the Upper Tribunal she was also largely unsuccessful, but she succeeded in part in relation to the CESP funding. Mr Martyn Rodger QC found that, to the extent that the Council’s expenditure on the cladding works had been funded by Npower under the CESP Scheme, that part of the cost had not been “incurred” by the Council within the meaning either of the above clause or in the relevant schedule to the Lease. The Council appealed to the Court of Appeal.
The Court of Appeal dismissed the appeal. The lease should be interpreted, if at all possible, so that the Council should not be entitled to ‘double recovery’. The Court considered that it had three options in this regard:
- Ascribing a limited meaning to the phrase “cost and expenses which the Council may in time to time incur” (in the clause referred to above) and the phrase “costs, expenses and outgoings incurred … by the Council” in the relevant schedule to the lease; or
- Treating “actual costs, expenses and outgoings” in the relevant paragraph in the schedule to the lease as limited to those which leave the Council out of pocket; or
- Treating the avoidance of double recovery as a matter to be taken into account when determining a “fair proportion” of the Council’s incurred costs, expenses and outgoings to be paid by the Lessee, under the relevant paragraph of the schedule to the lease.
Both LLJ Briggs and Longmore felt that it was artificial to construe the word ‘incur’ so as to limit it to the net costs that fell upon the lessor. They considered that the matter was best approached by a question of what was a ‘fair proportion’ of the charges incurred to be paid by the lessee. LJ Lewison disagreed. For him, the best way to approach the problem was to construct the term ‘actual costs, expenses and outgoings’ as the costs that ultimately leave the lessor out of pocket.
Although this case focussed on the construction of particular service charge provisions in the lease at hand, it has potentially wider implications. The primary submission from the respondent, that the service charge provisions should be constructed so as not to permit double recovery by the lessor, is likely to apply to the vast majority of residential leases, in the absence of a clear indication otherwise.
Further, as pointed out by LJ Briggs in his judgment, the principle has a wider application than just the CESP scheme. Double recovery scenarios could easily arise in circumstances where costs of works were recovered under the lessor’s or a third party’s insurance or where work was carried out under a builder’s guarantee. Tenants and landlords would be well advised to be alert to potential double recovery scenarios when considering service charge recovery.