Service charges collected in advance of expenditure were the focus of a recent case before the Upper Tribunal (Lands Chamber)

In a recent appeal case the Upper Tribunal (Lands Chamber) considered the issue of determining whether a service charge which was payable on account was "reasonable" for the purposes of the Landlord and Tenant Act 1985 s.19(2).

CHARLES KNAPPER & ORS v (1) MARTIN FRANCIS (2) REBEKAH FRANCIS, [2017] UKUT 3 (LC)

A group of tenants applied to the First Tier Tribunal (FTT) for a determination of the reasonableness of sums estimated and claimed on account of the service charge, by their landlords in December 2014, for the calendar year of 2015. A number of items of anticipated expenditure had been included in the amount demanded on account, but the expenditure had not actually been incurred during 2015. In making its determination, the FTT ruled that it should ignore the fact that part of the anticipated expenditure had not been incurred in the allotted period.

The tenants appealed against the FTT determination, submitting that (1) the language of the Landlord and Tenant Act 1985 s.19(2) imposed a general test of reasonableness which meant that the tribunal had been wrong to confine its consideration to information available at the date of the demand for payment and should have had regard to the fact that certain expenditure had not been incurred by the end of the accounting period of 2015 and (2) alternatively, the second limb of s.19(2), which allowed for "any necessary adjustment" should be employed to adjust their liability once it became clear that the anticipated expenditure had not been incurred.

The appeal was dismissed on both counts and the determination of the liability of each of the appellants by the FTT was upheld. The following key points were made in the judgement.

The starting point was the contractual position. The lease required the tenants to pay such sum as the landlords might reasonably require on account of the service charge. It had not been suggested by the tenants that when the 2015 budget for the park was prepared, the landlords did not intend to incur the costs included in it. The contractual position was therefore that the tenants were obliged to pay on account their proportion of the total budgeted sum.

Regarding point (1) above, in principle, the FTT had been correct to disregard matters which became known only after the tenants' contractual liability arose. The ability of a landlord to collect funds in advance of expenditure was an important part of most service charge schemes and was for the benefit of both parties. It ought not to be undermined and Parliament was likely to have intended that the statutory protection afforded by s.19(2) should do no more than protect tenants from unreasonable demands, which in the instant case the FTT had addressed in making a deduction in favour of the tenants.

The landlords had reasonably considered on the payment date that they required the sum demanded on account to meet their proposed expenditure and the FTT had been satisfied that the amount was reasonable, subject to the deduction which it made. A reasonable sum required as a payment on account did not retrospectively become an unreasonable sum simply because the expenditure had been avoided in the accounting period.

Regarding point (2), whilst the true purpose of the second limb of s.19(2) was unclear, the wording of s.19(2) did not confer jurisdiction on the FTT to direct repayment of any sum which had been collected in advance by a landlord but which exceeded the expenditure actually incurred during the period in question.

If you have any issues relating to a lease, please find out more about our Leasehold Management team here  Leasehold Management - Judge & Priestley LLP

Or get in touch using our Contact Form