Landlords Should Seek Legal Advice As To Whether Service Charges Can Be Passed On To Leaseholders

Case Study: Gateway (Leeds) Management Ltd v (1) Naghash (2) Shamsizadeh [2015] UKUT 333 (LC)

Landlords Should Seek Legal Advice As To Whether Service Charges Can Be Passed On To Leaseholders

Both residential and commercial landlords aim for a 'clear lease': where the costs of repair, maintenance and provision of services are met by the tenants rather than being deducted from the rent received by the landlord. Where a building is in multi-occupation, it is sensible for repair, maintenance and services to be controlled by the landlord, with the costs being recovered from tenants through what is known as a service charge.

In the case of Gateway (Leeds) Management Ltd v (1) Naghash (2) Shamsizadeh [2015] UKUT 333 (LC) decided last month in the Upper Tribunal (Lands Chamber), the Court was asked to further define a ‘service charge’ under section 18 of the Landlord and Tenant Act 1985 and decide whether rent for leases of land obtained for a gym and a concierge service were ‘reasonable’ under section 19 of the same Act.

The Facts of the Case

The Respondents were leaseholders of flats in a mixed-use development in Leeds. The Appellant was a party to the leases as a company responsible for providing certain services to the building, with a power to provide others. Pursuant to that power, it had chosen to organise a gym and on-site concierge service. Under the terms of the flat leases, the Respondents covenanted to contribute to the costs incurred by the appellant in providing the services.

To provide the gym and an office for the concierge, the Appellant leased two plots of land from the freeholder which incurred a cost of rent, which the Appellant sought to pass onto the tenants.

The tenants objected to the cost, stating that they were unreasonably high, a fact which the First-Tier Tribunal (Property Chamber) agreed with and, therefore, the charges were reduced by 50 percent.

The Appeal

The Appellant appealed on the grounds that these were not variable service charges and so fell outside the First-Tier Tribunal’s powers. It also argued attention was focused inappropriately on whether the charges for the gym, CCTV and concierge office were expensive, rather than whether the costs had been reasonably incurred.

The Upper Tribunal dismissed the appeal because the lease on the flat obliged the respondents to pay a proportion of the costs incurred in providing the services in a conventional service charge arrangement. How the appellant chose to provide those services was a matter for it alone and could not affect the nature of the charge due under the flat leases.

It was also held that the First-Tier Tribunal had had clearly borne in mind whether the charges were reasonable for what was being obtained.

What This Decision Means

Service charge clauses are narrowly construed against the landlord. If a cost is not recoverable under the lease then the tenant will not have to pay.

Management companies and landlords should seek legal advice as to whether or not charges for new services will be recoverable before choosing to invest in the provisions, or else be prepared to foot the bill themselves.

For queries relating to services charges please contact Mark Oakley 0208 290 7337 or email moakley@judge-priestley.co.uk