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Service charges and how not to recover them

The complexity of the statutory regime surrounding residential service charges and the ease with which mistakes are made is well known.  Two recent decisions illustrate just how expensive such mistakes can be.

Earlier this year, the CoA decided Daejan Investments v Benson [2011] EWCA Civ 38, [2011] HLR 21, [2011] L & TR 14.  The decision was an appeal from a decision of the Upper Tribunal (Lands Chamber) which itself had been made on appeal from the LVT.  The case was sufficiently important for Carnwath LJ to sit as a member of the Lands Tribunal to determine it.  It concerned the circumstances in which dispensation of the requirement that a lessor of residential premises consult with its long lessees before undertaking major works may be given. 

Section 20 of the Landlord and Tenant Act 1985 caps the amount of service charge recoverable in respect of “qualifying works” or “qualifying long term agreements” to £250 per lessee unless “the consultation requirements” have either been complied with, or dispensed with by the LVT.  The consultation requirements are set out in the snappily titled Service Charges (Consultation Requirements) (England) Regulations 2003. The requirements are fairly complex, with more than one stage of consultation. 

The LVT’s power to dispense with some or all of the consultation requirements is contained in s. 20ZA of the 1985 Act and can be exercised – prospectively or retrospectively – if the LVT “is satisfied that it is reasonable to dispense with the requirements”. 

In Daejan v Benson the proposed works to a block of flats were to cost over £400,000.  Daejan attempted to comply with the requirements but failed to do so in certain respects.  The LVT refused to dispense with the consultation requirements resulting in Daejan only being able to recover £1,250 against a demand for £270,000. Daejan appealed to the Lands Tribunal on the questions whether it had failed to comply with the requirements and whether compliance should be retrospectively dispensed with. Daejan lost. So it appealed to the Court of Appeal on the question whether compliance should have been dispensed with. It lost again.

In both the Court of Appeal and the Lands Tribunal, considerable reliance was placed on an earlier decision of the Lands Tribunal, Camden LBC v Leaseholders of 37 Flats at 30-40 Grafton Way [2008] EWLands LRX_185_2006 (a case in which the author of this article appeared for the tenants). That decision established that the financial consequences for the landlord of a refusal of dispensation were not material to the exercise of the LVT’s discretion – for otherwise a landlord would be more likely to be excused compliance on a large contract than a small one. The principal consideration for the LVT should be whether “any significant prejudice has been suffered by a tenant as a consequence of the landlord’s failure to comply with the requirement or requirements in question”. Both the Lands Tribunal and the Court of Appeal in the Daejan v Benson case endorsed this approach. For landlords, the obvious moral of the story is be very careful to comply with the consultation requirements to the letter. For those advising tenants, the moral is that the landlord’s purported compliance should be carefully scrutinised.

A different type of error proved very expensive in another recent decision: London Borough of Brent v Shulem B Association Ltd [2011] EWHC 1663 (Ch), [2011] NPC 69. In that case Morgan J considered the limitation period imposed by s. 20B of the Landlord and Tenant Act 1985. Section 20B(1) prevents a lessor from recovering as service charge any costs incurred by more than 18 months before a demand for payment was served on the lessees in question. There is some mitigation of the potential harshness in s. 20B(2) which provides that s. 20B(1) does not apply if the lessor has, within 18 months of incurring the costs, notified the lessee in writing “that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge”.

Brent Council were the freeholder of the block of flats in Shulem B. Brent carried out works to the total value of £639,000 in seven stages.  However, Brent did not demand service charges from its tenants in respect of the first five stages of the works within 18 months of incurring the costs of those parts of the works.  Brent sought to rely on a letter it had written to all the lessees within the relevant 18 month period as notification under s. 20B(1) that costs had been incurred. That submission succeeded at first instance in the CLCC, allowing Brent to see off an application by the Shulem B Association Ltd, which had 15 of the leases, to strike out Brent’s claim for service charges.

The Shulem B Association appealed successfully.  The letter relied on by Brent had stated that the actual costs of the works had not been calculated yet, but demanded payment of a sum based upon on an estimate that had been given to the lessees during the pre-commencement consultation process.  The letter went on to say that a further invoice would be sent making any necessary adjustment once the true costs were known.  Morgan J held that this letter did not comply with s. 20B(2) because it did not state a figure for the costs which had been incurred by Brent. It contained a figure which was expressly stated not to be the actual cost of the works.

Morgan J was referred to various inconsistent decisions about what is sufficient notification for the purposes of s. 20B(2). Without reference to any of the authorities Morgan J set out his construction of s. 20B(2) by way of guidance to future litigants. He held that the notification must state a figure for the costs which have been incurred, even if that figure is an estimate and later turns out to be wrong.  Landlords could protect themselves by stating the highest figure that they thought that the costs incurred might have come to. Morgan J held that the notification had to inform the lessees that they would be required to pay service charge in respect of the costs in question but did not need to tell them what that service charge would be. The moral of this story for landlords and those acting for them is that if nearly 18 months have passed since costs were incurred but the service charge accounts are not yet ready, serve notification under s. 20B(2) and make sure that it states a figure, preferably the highest possible figure, for the costs that had been incurred. Otherwise, like Brent, a landlord should expect to end up severely out of pocket.

Article by Daniel Gatty