Interim service charges: is certification a condition precedent to liability to pay?

The Tribunal is no stranger to service charge disputes where landlords have not followed the certification machinery set down by the lease.  And leaseholders withhold payment of service charge, arguing that conditions precedent have not been adhered to.

There have been many cases in recent years in which these issues have been examined, and the recent decision of the Upper Tribunal in Klosterkotter-Dit-Rawe v Greyclyde Investments Limited [2017] UKUT 0289 (LC) is the latest in an increasingly long line.

 

Relevant facts

The lease in this case permitted the landlord to demand service charges in advance and on account, based on what the landlord (or its agent) thought to be a fair and reasonable interim payment.

The lease went on to require the landlord, as soon as practicable after the end of each financial year, to employ the services of an accountant to determine the amount of service charge payable by the leaseholders for the financial year, and for that accountant to prepare a written statement (referred to in the lease as “the accountant’s certificate”). This certificate was required to contain a summary of the costs, expenses and outgoings.

It was common ground between the parties in this case that no certificates had been issued which complied with any of the certification provisions contained in the lease. However, the landlord argued that this did not prevent the leaseholder being liable to pay interim service charges in any event.

 

Proceedings in the Tribunal

The dispute before the FTT concerned the service charge years 2011-2016. It was argued by the leaseholder that none of those sums were payable, because the certification provisions had not been complied with. It’s important to note that all of the sums demanded from the leaseholder were on account, interim sums.

The FTT considered the terms of the lease, but found that there was nothing to indicate that a failure to provide the year end certificate meant that no charges were recoverable. The absence of the end of year certification meant that the landlord would be unable to recover any balancing charge. But in this case, the FTT were dealing with payments on account, and so far as the FTT were concerned, the landlord had followed the procedure in the lease for providing an estimate.

 

Decision of the Upper Tribunal

It was argued by the leaseholder on appeal to the Upper Tribunal that she did not owe any of the service charges because of the landlord’s failure to provide lease compliant accounts. The essence of her argument was that the landlord had unilaterally and impermissibly changed the mechanism for financial reporting under the lease from certification to non-certification.

The landlord resisted this, arguing that there was nothing in the lease that required the on account service charge to be certified.

The Upper Tribunal recognised that it’s common for service charge machinery and leases to require tenants to pay, in advance, an amount on account of their service charge liability for each relevant accounting year. This kind of provision enables a landlord to discharge their obligations under the lease because they’re in funds and are able to do so.

After the service charge year has ended, a balancing exercise is carried out to ascertain whether leaseholders have underpaid or overpaid for the year in question. Any necessary adjustment is then made, depending on the provisions of the lease.

The Upper Tribunal in this case emphasised that decisions relating to these kind of disputes are lease specific. Each case turns on the interpretation of those leases.

And whilst the Upper Tribunal agreed with the leaseholder that the landlord’s failure to provide an accountant’s certificate in respect of the sums actually expended “blatantly disregards the [landlord’s] obligations under the lease”, it did not entitle the leaseholder to withhold payment of the service charge sums claimed on account.

The Upper Tribunal agreed with the FTT that there were no clear words which would indicate that a failure to provide the end of year certificate meant that no charges at all were recoverable.

Accordingly, and based on the specific terms of this lease, the provision of year end accounts were not a condition precedent to the liability on the part of the leaseholder to pay their on account service charges, notwithstanding that the certification machinery had not been adhered to.

 

Commentary

The case perhaps serves to highlight the often overlooked distinction between service charges that are demanded on account compared to the position at year end once the actuals are known and a balancing exercise can be carried out.

Different provisions may well apply depending on whether it’s an interim, on account demand for service charges or, alternatively, whether it’s part of a year end balancing exercise. The provisions at year end may well be stricter, and may well involve some form of certification, whereas the provisions for an on account demand could simply be based on the discretion of the landlord’s agent (as in this case).

 

 

30 September 2018

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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