Recovery of interim service charges – do failures to comply with certification requirements matter?

*Most* leases require leaseholders to pay, in advance, an amount on account of their service charge liability. This puts landlords in funds to discharge their obligations under the lease. After the service charge year has ended, and the landlord knows how much has actually been spent, a balancing exercise is carried out to ascertain whether leaseholders have underpaid or overpaid for that year.

Leases often set down the machinery against which on account demands are paid, and also by which balancing charges are paid. Leases often require landlords to comply with certain requirements in relation to things like how they’ve decided what should be demanded on account, and reconciling what’s happened at year end.

Leases are specific in relation to their requirements, which makes “hard and fast” rules difficult.

Leases will turn on their own specific clauses.

And it was in the recent appeal in Wigmore Homes (UK) Limited v Spembly Works Residents Association Limited [2018] UKUT 0252 (LC), that the Upper Tribunal were called upon to consider, by reference to the lease, whether the provision of certificates were a condition precedent to liability for interim service charges.

 

Relevant background

Spembly Works is a former office and factory building, converted into 33 residential flats in or around 2000. Due to non-payment of service charges, the landlord commenced County Court proceedings for recovery of interim service charges, which was subsequently transferred to the FTT for determination.

 

Terms of the lease in Spembly

Under each lease, the leaseholder was required to pay each year “such sum as the landlord shall consider is fair and reasonable on account of the service charge”.

On receipt of the certificate (see below) the leaseholder was required to pay to the landlord any balance of the service charge then found to be owing.

At the end of each financial year, the lease required the landlord to provide each leaseholder with an account of the service charge payable for amounts carried forward from previous financial years.

The expenditure was required to be certified annually by a certificate (“the certificate”) signed by the landlord or its managing agent as soon as practicable after the year end.

 

What happened in Spembly?

The landlord sent demands for payment of the interim service charge to the leaseholder in each of the years in question. These were described as “interim invoices”. It did not go unnoticed by the Tribunal that the estimated service charge for the years 2011 to 2015 was identical……..

So far as accounts were concerned, the landlord had attempted to comply with the accounting provisions of the lease. Accounts were produced in respect of every year. Those accounts included a short report from the independent accountants who had prepared the report, a summary of income and expenditure, a balance sheet showing the assets and liabilities.

The accounts for the year ending 2011 and 2015 were signed on behalf of the landlord. The accounts for years ending 2012, 2013 and 2014 were not.

The Upper Tribunal were in “no doubt” that there was a failure to comply with the obligations in the lease because:

  1. The lease required the certificates to be signed by the landlord, and the certificates for a number of years had not been signed by the landlord.
  2. Although the certificates certified the annual expenditure, there was no annual certificate of “the amount of the service charge” (as required by the lease).
  3. Equally, there was no reference to “any amount which may have been overpaid by the [leaseholder]”.

 

Decision of the Upper Tribunal

The Upper Tribunal recognised that there have been a number of decisions on the question of whether a valid certificate is a condition precedent to the recovery of monies due in respect of the service charge or an interim service charge. The Upper Tribunal reminded themselves of those decisions, and in particular what had been said by the Deputy President in Urban Splash Work Limited v Ridgway.

“In every case the function and significance of the certificate will depend on the terms of the agreement”.

In Spembly, the interim payment was set by reference to what the landlord considered fair and reasonable, and not by reference to what may be certified.

Certification was not, therefore, a condition precedent to the payment of the interim service charges.

However…… the lease required in the interim service charge to be a “fair and reasonable” amount on account. The reasonableness of the demand has to be assessed by what’s known at the time the leaseholder’s liability arises. Accordingly, the relevant date for assessment is the date of the invoice.

In Spembly, the Upper Tribunal noticed that there was a consistent pattern of expenditure of approximately 50% of the interim service charges that had been demanded. The fact, too, that the amount demanded for each year was precisely the same is a clear indication in the view of the Tribunal that the landlord had not carried out a careful assessment each year, and that the figure claimed as interim service charge was not based on a genuine estimate of the likely expenditure.

The Upper Tribunal made clear that the onus is on the landlord to establish the reasonableness of the estimate. It is for the landlord to justify.

In the circumstances, the Upper Tribunal reduced the demands by 50% for six of the seven years under challenge.

 

Commentary

Although the landlord succeeded on the condition precedent point regarding payment of interim service charges (and such points are always lease specific), this case serves as a reminder to landlords that the onus on establishing the reasonableness of their demands sits with them. And it is for the landlord to justify why the estimate they’ve given is reasonable.

 

 

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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