Service charges and other issues
A guide to service charges, administration charges, ground rent, recognised tenants associations and forfeiture.
A recent decision concerned the recovery of costs for collecting ground rent.
Recently we have seen a useful decision at the Upper Tribunal (Sinclair Gardens Investments (Kensington) Limited v Avon Estates (London) Limited ) where it was held that a lease provision which permitted the landlord to recover their costs and expenses incurred in managing the estate and block of flats did not give liberty to the landlord to recover its solicitor’s and barrister’s fees for litigation.
Similarly, in the recent decision of Fairhold Freeholds No 2 Limited and Moody , the Upper Tribunal (Lands Chamber) on appeal from First-tier Tribunal (FTT), was asked to consider the lease and whether under its terms the appellant landlord correctly applied costs recovery clauses of the respondent’ lease in relation to administrative fees.
Mr Moody is a lessee of a two bedroom flat in Bristol and is required to pay a ground rent of £100 per year due in equal instalments in February and August.
Under clause 4.1 of the lease, he is obliged:
“…. to indemnify the Lessor against all actions proceedings costs claims and demands in respect of any breach non-observance or non-performance thereof.”
A problem arose when the landlord’s agents sent out a ground rent demand of £50 to Mr Moody’s previous address of residence and it was not until 5 months from the date of the first demand that Mr Moody became aware of the outstanding ground rent. By this time, in addition to the outstanding £50 for the ground rent, the landlord’s agents added a further £50 administrative charge to the demand.
Mr Moody agreed to pay the ground rent but disputed the landlord’s entitlement to recover administrative charges under clause 4.1 of the lease. The landlord made an application to the First-tier Tribunal to recover administrative charges. Before the application to the Tribunal the landlord increased its administrative charge to £150. A further £180 was attributed to the landlord’s solicitor’s charges.
The FTT determined that clause 4.1 of Mr Moody’s lease did not entitle the landlord to recover a £50 administrative charge or to recoup the costs of its own solicitors when enforcing an alleged breach of the lease.
Decision on main issue of appeal
The Upper Tribunal (UT) agreed with the FTT – the landlord was not entitled to recover a £50 administrative charge or his solicitor’s charges under clause 4.1 of the lease. An important distinction was made between clause 4.1 and other covenants in the lease. Namely, clause 4.1 was “defensive in nature” and could only be triggered if a third party took action against the landlord. Whereas other costs recovery clauses in the lease could be triggered with the landlord’s own initiative.
A question the UT asked was whether Mr Moody’s breach by way of non-payment of the ground rent has given rise to the landlord’s liability to a third party. The answer was “no” as it was the landlord who took the initiative and instigated action against Mr Moody, as opposed to a third party taking action against the landlord and consequently forcing him to take action against Mr Moody.
Take aways from this decision
- Construction of a lease and the wording of recovery clauses are a useful starting point as to whether a landlord is entitled to receive administrative charges for the late payment of ground rent.
- A covenant of indemnity, similar to clause 4.1 of Mr Moody’s lease, is not the same as a covenant to reimburse the landlord’s own costs incurred in taking steps to enforce the lessee’s obligations.
- If a lease is unclear as to the entitlement to recover a particular type of expenditure such as £50 administrative charge, then it is unlikely that such charges can be recovered.
- Live webinar – Leasehold Property Enquiry forms – 1 December 2016
- Recorded webinar – Much obliged – a guide to residential leasehold covenants