Is a leaseholder’s ability to pay a service charge relevant to reasonableness?
By Fenella Maddan, Legal Adviser
This appeal from an LVT decision concerned the issue of relevant considerations when considering reasonableness of service charges under Section 19 of the Landlord and Tenant Act 1985.
The appellants were leaseholders of flats in a building that had suffered historically from neglect. The first respondent was the lessor and the second respondent had been appointed as manager by the LVT using powers in the Landlord and Tenant Act 1987 Part II.
Substantial major works were proposed by the manager. The service charge demands sent to leaseholders increased steeply in 2009 and 2010. They applied to the LVT under sections 19 and 27A of the 1985 Act for determination of the charges.
The leaseholders did not dispute that the works were necessary or that the cost of them was reasonable. The issue was whether carrying out the works under one contract paid for in the 2009 and 2010 service charge years was reasonable given the additional service charge burden on leaseholders.
The LVT held that consideration of reasonableness of costs did not include consideration of individual leaseholder’s ability to pay. They felt reasonableness related to the works themselves and their costs not to the ability of persons to pay for them.
On appeal, the Upper Tribunal decided that the LVT should, when considering the issue of reasonableness, be able to take into account the same issues as a property manager. The manager agreed they had chosen to put off additional works to spread the impact for leaseholders and so it was clear financial impact was being taken into account in management decisions. There is nothing within the 1985 Act to limit the scope of reasonableness so as to exclude considerations of financial impact. Of course this will only be one consideration out of several in an individual case.
This poses a problem for managers in that they may not be aware of individual leaseholder’s financial circumstances. The upper tribunal addressed this in paragraph 16 of the decision by suggesting the financial impact could be considered in broad terms with reference to past service charge requirements and the nature and location of the property. It was stressed that liability to pay service charges could not be avoided simply on the grounds of hardship.
This case seems to add an additional requirement on property managers, particularly when considering the timing of major works. In practice, the emphasis should be on spreading out service charge costs where possible through use of a reserve fund. Consideration must be given to the lease terms to establish that a reserve fund is provided for. In this case the manager had been given the ability to create a reserve fund and so this option should have been considered in relation to the timing of the works.
Building management is a delicate a balancing act of competing factors. This judgement emphasises the need to take all relevant factors into account and take account of the needs of all leaseholders.