How to win in the Tribunal: what two service charge cases can teach both landlords and tenants about strategy and tactics
In brief
- For now at least, service charges remain the prevailing mechanism by which a landlord recovers the costs of running and maintaining a jointly occupied building or estate from its tenants.
- One party controls the expenditure while the other bears the cost. As a result, service charges represent an inflection point at which the landlord's and the tenant's interests diverge, making them fertile ground for disputes. Residential leaseholders enjoy a range of statutory protections in relation to service charges, including the right to a compliant consultation process before a landlord carries out qualifying works; the right to request information such as a breakdown of costs and underlying invoices; and the ability to challenge whether service charges are reasonable and payable.
- Two recent service charge disputes heard by the First-tier Tribunal, in which Mishcon acted for the landlord in one and leaseholders in the other, illustrate how these rights work in practice and provide useful takeaways for both parties and advisors.
The cases: background and facts
Mishcon acted for the landlord in Case 1 and for the leaseholders in Case 2. Both cases involved applications under section 27A of the Landlord and Tenant Act 1985 (the "1985 Act") to determine the reasonableness and payability of service charges for major works to the premises.
Case 1: Repairs or improvements?
A mixed-use building in west London suffered from persistent roof leaks and recurring lift breakdowns. The landlord took advice from experts who recommended a substantial scheme of remedial works including the full replacement of the roof. Prior to commencing the works, the landlord followed a compliant consultation process under section 20 of the 1985 Act, giving the leaseholders advance notice of the proposed remedial works and an opportunity to comment on them.
One of the leaseholders objected to the proposed works and argued that they constituted improvements rather than necessary repairs. The landlord’s position, supported by expert evidence, was that the works were reasonable and accordingly the related costs were recoverable through the service charge. The landlord sought to address the leaseholder's concerns by obtaining multiple independent opinions on the remedial works, all of which reached consistent conclusions.
The Tribunal found the works reasonable, citing "the overwhelming preponderance of expert advice" which the landlord relied on. The leaseholder had instructed its own experts for the hearing. The Tribunal emphasised that its task was not to decide which of the parties' experts was right, but whether it was reasonable for the landlord to rely on the expert advice that it did rely on.
The decision underlines the importance of expert evidence in service charge disputes. Such evidence assists the Tribunal in determining whether the works are properly characterised as necessary remedial works rather than discretionary improvements, and whether their scope and specification were reasonably required to remedy the underlying issues. The importance of a thorough landlord consultation process was also a feature of the decision.
Case 2: High-end renovations and a lack of transparency
The landlord proposed a programme of major works, with a cost in excess of £1 million, to the interior of a residential mansion block overlooking Hyde Park.
The bulk of the expenditure was confined to certain areas of the building, which were finished to an extravagantly high standard with luxury fixtures and fittings, while other communal areas received modest attention or none at all. The concentration of the works appeared to benefit only a small minority of leaseholders. The leaseholders challenged the works on several grounds.
The issues were twofold. First, whether the works themselves fell within the scope of costs recoverable under the terms of the leases. Second, whether the costs were reasonable and payable. A significant complicating factor was the lack of transparency around the scope and cost of the works.
A site visit by the Tribunal judge and panel surveyor on the first day of the trial proved fundamental to understanding the building and the works undertaken, particularly given the wide disparity in the standard of works carried out depending on which flats benefited. The Tribunal determined that only a fraction of the major works costs were recoverable and that neither the landlord’s staff costs nor legal costs could be passed on to the leaseholders through the service charge. Although the Tribunal is ordinarily a cost-neutral jurisdiction, it considered that the landlord's conduct warranted an exceptional approach and invited submissions for recovery of legal costs under rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, which permits a costs order where a party “has acted unreasonably in bringing, defending or conducting proceedings.” The Tribunal ultimately made an order that the landlord should pay the leaseholders' costs. This was a powerful reminder that unreasonable conduct carries real financial risk, even in a forum designed to be cost-neutral.
Practical implications
Taken together, these decisions offer practical lessons for both sides of the landlord-leaseholder relationship.
For landlords, early expert advice on the scope of works can be a wise investment, and a properly run consultation process should not be overlooked. Conversely, a landlord who embarks on extravagant or poorly evidenced works that lack cost transparency risks having those costs disallowed and could face an adverse costs order.
For leaseholders, the cases are an important reminder of the statutory protections under the 1985 Act. Leaseholders have the right to challenge service charges and to require their landlord to demonstrate the reasonableness of proposed works and costs. Careful consideration should be given to the value that a Tribunal site visit can add. Leaseholders should also gather evidence of a landlord's conduct at all stages of the dispute. Although costs orders are rare in the Tribunal, they are not unprecedented.
It is also worth noting that the Leasehold and Freehold Reform Act 2024 will further enhance residential leaseholder protections by introducing greater service charge transparency and accountability once the relevant provisions come into force.
How we can help
If you are a landlord or leaseholder involved in a service charge dispute or you are considering challenging or defending a programme of proposed major works, our property litigation team can help. We advise on all aspects of service charge law, including the recoverability and reasonableness of costs, the consultation process, and applications to the First-tier Tribunal.