Recovery of costs via service charge

It’s not uncommon for lessee owned and controlled management companies to seek to recover certain costs in relation to the administration of the company or other costs, such as directors’ and officers’ insurance, via the service charge.

But are these costs always a service charge item? And can they always be properly recovered via the service charge mechanism?

This was the question under consideration by the Upper Tribunal in Chiswick Village Residents Limited v Southey [2019] UKUT 0148 (LC).

 

Relevant facts

Although the bulk of this case is concerned with the recoverability, or otherwise, of costs incurred in objecting to planning permission, the most interesting aspects of this case, in my view, relate to the recoverability of costs of directors’ and officers’ insurance and administration of the company itself.

And it’s important to note at this juncture that the case is lease specific. As with so many of this type of case, they turn on the terms of the lease, making it a little more difficult to draw “hard and fast” rules.

In this case, the freehold was owned by Chiswick Village Residents Limited, which was a company wholly owned by the leaseholders themselves.

The freeholder had procured insurance for its directors and officers. It had also incurred expenditure in organising its AGMs and hiring premises, together with taking advice on the conduct of meetings etc.

The expenditure totalled £7,605.65 for the years in question. And this expenditure had been included within the service charge payable by all leaseholders.

 

Terms of the lease

The lease contained the usual clauses which required each leaseholder to pay a service charge contribution to the landlord.

It contained the usual insurance covenants, requiring the landlord to keep the building insured against all the usual risks, and also the expenses of:

“Effecting insurance against the liability of the lessor to third parties and against such other risks and in such amount as the lessor shall think fit (but not against the liability of the individual tenants as occupiers of the flats in the building)”.

The lease also entitled the landlord to recover:

“All legal and other costs incurred by the lessor including those relating to the recovery of maintenance contribution and other sums due from the lessee:

(a)  in the running and management of the building and in the enforcement of the covenants conditions and regulations contained in the leases granted of the flats in the building…”.

Further, the landlord was entitled to recover:

“All costs incurred by the lessor (not hereinbefore specifically referred to) relating or incidental to the general administration and management of the lessor’s property including any interest paid on any money by the lessor to defray any expenses incurred by it”.

 

Decision of the First Tier Tribunal

The FTT determined that the lease did not permit recovery through the service charge of directors’ and officers’ insurance premiums. Their reasoning was that the directors and officers were separate persons from the landlord itself and insurance taken out for their benefit was not “insurance against the liability of the lessor”.

So far as the corporate expenses were concerned, the FTT found that these did not fall within the lease provisions either.

 

Decision of the Upper Tribunal

The Upper Tribunal took a different view to the First Tier Tribunal on both issues.

Insurance

The Upper Tribunal recognised that without directors’ and officers’ insurance it would be difficult to find individuals willing to take office. They recognised that it would be difficult for the company to function at all unless directors were to be expected to obtain insurance at their own expense, despite providing their services voluntarily and for the benefit of their fellow leaseholders.

Accordingly, and in the context that this was a lessee owned and managed company, the Upper Tribunal took the view that the insurance covenants did allow the landlord to recover the costs of directors’ and officers’ insurance via the service charge. The Upper Tribunal felt the structure of the clause was sufficient to allow for insurance against liabilities of persons other than the landlord itself (although of course the landlord would have to act reasonably in determining that it was appropriate to obtain such insurance).

As the Upper Tribunal put it:

“In the context of the landlord which is wholly owned by the leaseholders of flats in the building and which has no other assets or interests, an obvious risk against which it might wish to insure is the risk of its own directors being sued”.

Corporate Expenses

In its decision, the FTT considered that managing the building and managing the company overlapped to some extent, but did not agree that the corporate expense of running AGMs etc fell within the provisions of the lease.

On appeal, the Upper Tribunal were reminded of the earlier decision in Solar Beta, part of which concerned the entitlement of a tenant owned management company (not a landlord) to recoup the administrative expenses incurred by its own directors through the service charge. In Solar Beta, the management company had no source of income other than the service charge, and would become insolvent if it incurred expenses which it could not recoup from that source. And of course it was only through the activities and decisions of its directors that the company was able to discharge its contractual duties. Non-compliance with provisions of the Companies Act and other relevant regulations would result in the company being struck off and unable to perform the obligations conferred on it by the lease.

And the Upper Tribunal in this case were satisfied that it was legitimate to adopt a similar approach.

General administration and management of the building could not take place if the landlord itself was not managed. The company existed for one purpose only: to administer, manager and run the building on behalf of its members.

All of the corporate governance activities of the company are geared towards that purpose.

Accordingly, the Upper Tribunal had “no difficulty” in accepting that the leaseholders were unlikely to have intended any clear distinction between management of the company and management of the estate.

As such, the Upper Tribunal held that it was appropriate for the landlord to include within its service charge the expenditure incurred by the landlord in conducting its own AGMs and in obtaining advice, on the basis that it was incurred in the running of the building, or was related or incidental to the general administration and management of the building.

 

Commentary

Although this case is lease specific, the clauses in the Chiswick Village lease are not uncommon, and can no doubt be found in many other leases.

This case is therefore useful to lessee owned and controlled landlords (and perhaps by extension management companies) who seek to recover the costs of directors’ and officers’ insurance and also company expenses via the service charge mechanism.

 

 

 

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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