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JLK Ltd –v- Ezekwe and others [2017] UKUT 227 (LC)

Summary

In a key case for developers and investors in student accommodation, the Upper Tribunal has ruled that the residential service charge regime does not apply to bed-sits with shared facilities. As the laws relating to residential service charges give a significant degree of protection and power to the owners of long residential leases, this is a very important point.

Indeed, in this particular case, the consequences were grave: the building had been so badly run that it was the subject of a Prohibition Order and the units were vacant. Despite this, the investors were unable to challenge their liability to pay the service charge.

Owners and developers should consider the lay-out of their units to see whether this case is likely to be relevant if a service charge dispute arises.

The facts

The case concerned a large fire station in Liverpool that had been converted into student accommodation. The building contained 93 units, each consisting of a single bedroom with a wardrobe and a desk. Communal kitchens and living rooms were shared between blocks of 5 units, and there were other common parts such as a gym and a laundry. Some of the units shared sanitary facilities; others were self-contained.

The landlord sold the units on 250 year premium leases to investors, who would then sublet them to students and collect the rental income. Whilst the annual rent was a peppercorn, there was a service charge to cover the landlord’s costs for running the property.

Initially the building was occupied as intended during 2011-2014. However, it was poorly run and eventually the developer went into administration. In February 2014 the property was sold to a new landlord, JLK Ltd.

In April 2014 the local Council served a Prohibition Order because the boiler had broken and there was no hot or cold water. The Order meant that the units could not be occupied, and so the investors could no longer receive any income.

As a consequence, 56 of the long leaseholders applied to the First Tier Tribunal to challenge their liability to pay the service charge.

The law

The services to be covered by the service charge and the contribution to be paid by each individual unit were all set out in the leases in the usual way.

However, where a service charge is payable under a long residential lease, the Landlord and Tenant Act 1985 (“the Act”) sets out some ground rules. In particular, the Act defines what is considered a service charge, sets out requirements for “reasonableness”, and stipulates strict rules for prior consultation of leaseholders before costs are incurred.

It also gives the paying tenant the ability to apply to the First Tier Tribunal for a declaration as to whether a particular charge is reasonable. Consequently the Act can prove very valuable to a leaseholder who is facing a substantial service charge demand.

It is important to note that much of this turns on the wording in the Act that says “a separate dwelling”. If an investor has purchased a long head lease of multiple units or that is subject to various subleases, the Courts have held that this still qualifies under the Act. Such an investor would therefore be able to challenge the service charge just as an individual occupier would be able to do.

However, if those individual units are not self-contained, in light of the decision below, the position may well be different.

The issues

The Tribunal had to consider the following issues:

  • To qualify as a “dwelling” under the Act, was it necessary for the unit to be used as – or intended to be used as - someone’s home?
  • If the answer to question 1 was yes, did the units in question satisfy this requirement?
  • Were the units in question occupied or intended to be occupied as “separate” dwellings, or were they prevented from being separate by virtue of the common facilities?

The first decision

The First Tier Tribunal found that the units were “dwellings” and so the Act did apply. This meant that it had jurisdiction to determine the service charge that it was reasonable for the leaseholders to pay.

JLK appealed.

The appeal

Taking each of the issues in turn:

  • The legal meaning of the word “dwelling” had been identified in 2002 by the House of Lords as meaning “the place where one lives and makes one’s home”. In that case, a lack of cooking facilities had not prevented a room from being a “dwelling”.

Bearing this in mind, the Upper Tribunal found that it was not necessary for the units to be someone’s home to be a “dwelling”. JLK therefore failed on the first point.

  • The units were clearly “part of the building” and were capable of being dwellings. JLK also failed upon the second point.
  • However, on the third point, the Upper Tribunal felt that it had to take into account a substantial volume of previous case law that had found it was necessary for premises to be let as a “separate” dwelling in order to meet the criteria under the Act.

The Upper Tribunal looked closely at the arrangement of the units within the building and found that a lease of each unit plus a right to use the common parts was not sufficient to constitute a “separate dwelling”.

The units were not intended to be occupied as separate dwellings, but as part only of each student’s living space, with the remainder being the common parts. The units were neither occupied nor intended to be occupied as “separate dwellings”.

Consequently the Act did not apply, and the Tribunal was therefore unable to rule on the reasonableness or level of the service charge payable by the leaseholders.

Our views

This is a very useful decision because it clarifies an important point for an area of the property market that is growing rapidly.

However, the consequences for the investors are steep. Having spent a great deal of money on the premium leases with a view to receiving income from occupying students, the investors in this case in fact ended up with vacant units in a poorly run building, and no recourse to challenge the continuing liability to pay service charge.

Developers and investors should be aware of this decision and in particular the importance of the lay out of the individual units. Where the properties are fully self-contained, this is unlikely to be an issue. Where there are shared areas, investors should not assume that they will have the ability to challenge service charge demands further down the line.

In particular, investors may wish to consider options such as:

  • Reviewing the set-up of the development to establish how “separate” each unit is
  • Seeking collectively to acquire the freehold interest or a long head lease that would include responsibility for repairing and insuring the building. This would give the investors a greater degree of control
  • Inserting additional clauses in the lease, for example the exclusion from the service charge of items that have been caused by the landlord’s neglect
  • Seeking to insert a service charge cesser if the building cannot be occupied