Recent court decisions show how important it is for landlords to calculate service charges in accordance with lease provisions – and to keep separate accounts.
Norwich City Council v Redford was a recent decision of the Upper Tribunal, England's highest specialist property court. Mr and Mrs Redford owned a flat on a large estate. The council, who owned the freehold, levied service charges for various items including communal lighting.
The council quite sensibly had a city-wide contract for all communal lighting. It apportioned the costs across its estates in the city, based on the rateable value of each property covered by the contract. But the Redfords' lease required them to pay a fair share of the service charge costs attributable to the block of flats only – it said nothing about a share of citywide expenditure.
The tribunal decided that the method of apportionment used by the council did not match the terms of the lease. It therefore disallowed the entire sum payable for lighting. This may sound harsh but the judge said it was not possible, based on the information provided by the council, to calculate the actual costs of communal lighting payable by the individual flats.
Message for landlords
Of course landlords with large portfolios should aim to benefit from the economies of scale that bulk procurement offers. However, they need to balance this against the risk of tenants contesting apportionments that do not precisely comply with the service charge provisions in the lease.
Message for tenants
Tenants will normally be happy to pay for the reasonable cost of services. Cases such as Redford will give them reassurance that they can expect clarity and transparency when the sums are calculated.
Commercial v residential property
Redford was a residential case, but the decision did not involve any of the special legislation that applies to residential properties. The result would have been the same for a commercial property. Many commercial tenants (especially retailers) employ professional service charge consultants to scrutinise service charges, and this is just the sort of detail they will pick up on.
Residential landlords also need to be mindful of the Landlord and Tenant Act 1985. This says that where service charges are billed to residential tenants, the costs must be reasonably incurred and the services must be of a reasonable standard.
The 1985 Act was the focus in another recent case, Waaler v London Borough of Hounslow. Here window replacement costs were allowed, as there was provision for this in the lease. However, the Upper Tribunal reduced the amount payable, as the landlord had not considered less expensive options nor the potential financial impact on the tenants.
For landlords, it’s clearly important to play by the rules if they want to be protected legally. Wise landlords know that transparent records and tenant engagement are fundamental to maximising collection of service charges without resorting to legal threats.