By Rawdon Crozier, a barrister and mediator practising from KBG Chambers and Ibraheem Dulmeer, solicitor at Leasehold Advisory Service
March 2017
Knapper v Francis [2017] UKUT 3 (LC) contains both good news and bad news for leaseholders whose leases provide for “advance service charge demands”, that is demands made by the landlord for service charges before works are actually undertaken.
The leaseholders of chalets in a holiday park applied to the First Tier Tribunal (Property Chamber) (“FTT”) for a determination of the reasonableness of sums claimed on account by the landlords in December 2014 (for the year 2015). The items of anticipated expenditure in the amount demanded included two on which nothing was in fact spent.
What did the lease say?
The leases contained a clause allowing the landlord to demand in advance:
“…such sum or sums as the Lessor may reasonably require on account of the said service charge and any such payment to be credited to the tenant against payment of the services as certified to be due from it (as hereinafter provided) by the certificate issued next after the making of such demand …”
The Law in Issue:
The case concerned the interpretation of section 19(2) LTA 1985 which provides:
“Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.”
The FTT Ruling:
By the time the case came before the FTT in 2016, it was known that during 2015 nothing had been spent on the proposed employment of a new site manager at a cost of £50,000 nor the refurbishment of a children’s play area at a cost of £36,000.
The FTT ruled that it should ignore this fact and went on to allow the estimated cost of refurbishing the play area, although it reduced the estimated sum of £50,000 for the site manager to what it considered to be a reasonable charge of £35,000.
The Upper Tribunal Decision:
The leaseholders appealed to the Upper Tribunal (Lands Chambers) (“UT”) arguing that:
the words “no greater amount than is reasonable is so payable” in section 19(2) of the Landlord and Tenant Act 185 (“LTA 1985”) imposed a test of reasonableness which was not limited to “a snapshot in time” and meant that the FTT should have had regard to the fact the items of expenditure had not been incurred by the end of the 2015 accounting period; and,
the second limb of section 19(2) LTA 1985, which allowed for “any necessary adjustment” enabled the FTT to adjust their liability once it became clear that the anticipated expenditure had not been incurred.
The appeal to the UT failed on both counts, so why does the decision contain any good news for leaseholders?
The Bad News
The case decided that:
in deciding whether a on account service charge demand was “reasonable” for the purposes of the section 19(2) LTA 1985, the FTT was right to disregard the fact that the demand for payment included expenditure which had not been incurred by the end of the relevant accounting period; and,
the wording of the latter part of section 19(2) LTA 1985 did not enable the FTT to direct repayment of any sum which had been collected in advance by a landlord, but which exceeded the expenditure actually incurred during the relevant period (the year ending 31st December 2015).
The Good News
This comes from three other aspects of the decision and may benefit leaseholders in the future, particularly those whose leases provide for advance service charge payments to be made quarterly or half yearly rather than annually. The Upper Tribunal held:
The starting point in any service charge dispute is what is contractually due under the lease and it is only after that has been decided that reasonableness under section 19 (2) LTA 1985 can be considered.
Why is this good news? In service charge disputes landlords will sometimes seek to argue that the overall amount of the service charge is reasonable in order to avoid having to justify each item of expenditure which can be recovered under the terms of the lease. This would make it harder for landlords to avoid the FTT considering whether an item of expenditure is so recoverable for advance service charges.
Although the FTT should disregard subsequent events in assessing the reasonableness of the demand section 19(2) LTA 1985 (despite doubts about its intended purpose) allowed matters not known to a landlord when its budget was set to be taken into account in deciding what was a reasonable sum to be paid in advance. So where advance charges are payable half-yearly or quarterly, rather than annually, the contractual obligation could be modified by reference to circumstances known at the payment dates.
The potential benefit to those whose advance service charges are payable quarterly or half yearly is clear. Had the tenants in this particular case not been required to pay the whole advance service charge at the beginning of the year, the fact that a manager had not been employed during the preceding three or six months would have meant that had to be taken into account at the time the second and any subsequent instalment fell due.
If there is doubt over the time at which the proposed expenditure might be incurred, or whether it might be incurred during the relevant accounting period at all, it might not be reasonable to require the whole payment in advance.
The UT endorsed guidance given at paragraph 23 in Parker v Beckett (2003) LRX/35/2002 (Lands Tribunal), so in an advance service charge dispute the FTT should look at things such as when and how much the landlord is actually likely to pay in the contractual period (or charging period) in question.
Further information:
