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The million-dollar service charge reduction: The latest round of Phillips v Francis

By Cassandra Zanelli Partner at PM Legal Services and Ibraheem Dulmeer of the Leasehold Advisory Service

April 2017

The Phillips v Francis/Point Curlew Tenants’ Association v Francis litigation is still running and so far has effectively made new law on service charges no less than three times. Remarkable, given that the law has been shaped on decisions pertaining to leases of chalets and not flats (the most common form of leasehold ownership).

Background:

The chalet owners hold their properties under 999 year leases that date back to 1975. Mr and Mrs Francis, the Freeholder, purchased the park in 2008 (in wake of a company which was in severe financial difficulties).

The Tribunal was called upon to determine the payability and reasonableness of the service charges from 2008 to 2012, inclusive.

As far as reasonableness of service charges are concerned, section 19 of the Landlord and Tenant Act 1985 provides that  they are only payable to the extent that they are reasonably incurred, and where incurred in the provision of works and services, only to the extent that those works or services are of a reasonable standard.

On purchasing the Holiday Park in 2008, the Freeholder immediately set about undertaking major works to the property racking up costs amounting to almost £1.3 million.

October 2016 Decision:

As a matter of good general practice, record keeping should be at the forefront for anyone who proposes to incur costs and then recover them as a service charge. Notably, the Landlord in this case had not had much previous experience of property management. However, as a builder, he arranged and supervised much of the work himself, thinking this would in fact keep the costs to a minimum.

In October 2016, 5 years of service charges (2008-2012) went before the First-tier Tribunal (Property Chamber) for determination. While permission has been granted to appeal an earlier determination of the FTT in relation to the 2015 service charges, so far the charges for 2013 and 2014 remain to be determined.

In the recent FTT case, the amount the Landlord had sought by way of advance service charge demands for the years in question had been in excess of £3.5 million. Although (because of the partial determination of the 2008 and 2009 liabilities in an earlier part of the litigation) the disputed amount before the FTT – based on claimed spending – was reduced to £1,280,710.47). This is still a rather hefty sum.

Following a 5-day hearing in October last year – and after considering contractual liability under the lease and reasonableness under section 19 – the FTT delivered its decision on the 9th March 2017. It determined that the amount recoverable by the Landlord was actually £379,973.89, a considerable reduction of £900,736.58.

The Million-dollar question:

The reduction of service charges by is by far the biggest the writers have seen to date. The question remains, whether this will be appealed and whether the matter will make new laws in the area of service charges – for a fourth time.

Take away pointers for readers:

Further information:

LEASE is governed by a board, appointed as individuals by the Secretary of State for the Department for Levelling Up, Housing & Communities.

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