As increasing numbers of investors now include residential and mixed use properties in their portfolios there are bound to be issues dealing with the residential element of service charges and you really can’t be too careful about the administration of residential service charges.
From our perspective it seems like an almost endless stream of cases appear on the subject of residential service charge and this is a short summary of the most significant, highlighting just how much attention to detail is required when setting up and managing service charges for buildings and estates with any residential element.
- The first (and most recently decided) case is the most significant in legal terms and unusual in that the landlords were the victors. The Supreme Court in Arnold v Brittondeclined to bend the usual rules of construction in favour of the tenants of holiday chalets let on long leases.
The service charge provisions in the long leases were inconsistent but a significant minority of them provided for a fixed charge service charge with annual uplifts which resulted in a huge individual service charge liability as the term progressed. The fixed service charge increased in an amount that was massively higher than inflation and well beyond the actual service costs.
The Supreme Court held that, because the service charge was a fixed amount, it would be legitimate for the landlord to continue to collect that fixed amount without any need for the landlord to follow the Service Charge Consultation Regulations and without any scope for appeal to the First Tier Tribunal as to the reasonableness of the sums charged. A warning though: the outcome was manifestly unjust to quite a number of the tenants at the holiday park and all of the Law Lords suggested petitioning Parliament for a change in the law. That makes it difficult to say that fixed charge service charges will continue to be outside the service charge consultation requirements and incapable of challenge in the First Tier Tribunal on grounds of reasonableness. For now, however, they are.
- In an unusual case involving a right to manage company (“RTM”) administering the service charge, the Upper Tribunal found that the RTM had not complied with the regulations on service charge consultation to the letter. The RTM had failed to make adequate arrangements for the tenants to be able to inspect the estimates. Failure to comply with the fine detail of the regulations means the amount that a landlord can collect is capped by statute. The statutory cap is just £250 per tenant for one-off expenditure and £100 per tenant for ongoing contracts (an ongoing contract being 12 months or longer). The level of the statutory caps is such that it is highly unlikely that a landlord who fails to comply with the regulations will be able to recover all or even a substantial part of its expenditure.
The Upper Tribunal did point out that the RTM could have proceeded with an application to dispense with the need to comply with the consultation requirements and if it had successfully done so would have been afforded full recovery. We have posted on this process before. The moral to this Ashley Court Right to Manage Company v De-Nucciocase is that the fine details of the consultation regulations really do matter and it is the prejudice that can be suffered by the tenants that the Tribunals will consider in deciding whether or not to allow full or partial recovery, not the size of the actual mistake made by the landlord in complying with the regulations.
- A final case worth mentioning arose when the tenant of a long lease applied to enfranchise his lease, i.e. extend his lease term and vary the service charge provisions, arguing that it was no longer fair to pay service charge on the existing fixed percentage basis. The facts of the case were such that a much altered Victorian property had a service charge where the landlords were collecting well over 100% of the service charge. The Upper Tribunal agreed that the service charge provisions should be amended in principle but we don’t know as yet how the new service charge percentage in the new long lease will be calculated as the Upper Tribunal sent this question back to the First Tier Tribunal. There is therefore more to come from Rossman v The Crown Estate Commissioners and we will, of course, keep you posted.