Mixed use developments, typically with commercial units on the lower floors and residential units above, are becoming increasingly common. These developments present particular challenges for landlords and their managing agents, especially in the area of service charges, where failure to follow statutory procedures can severely restrict financial recovery.
The statutory regime applicable to service charges for residential property is well known. It is not always recognised, however, that the regime can extend to mixed use developments. Where there is a lease, whether headlease or underlease, of premises that include separate dwellings within the demise, the residential statutory regime must be followed. Thus, the regime can apply to both the superior and the intermediate landlord.
Four particular points to note are as follows:
The landlord should comply with the residential consultation regime to minimise the risk of a recovery shortfall. Failure to comply can result in non-recovery of anything above the statutory threshold of £250.
The statutory consultation regime applies where the landlord is proposing to carry out any major works that will exceed the current statutory limit of £250 or in respect of certain long term contracts entered into by the landlord. The tenants must be served with a series of notices containing prescribed information and the landlord then has a duty to have regard to any observations the tenants make in response.
A landlord can apply to the tribunal formerly known as the Leasehold Valuation Tribunal (“LVT”), but which since 1 July 2013 forms part of the First-tier Tribunal (“Property Chamber”) to be allowed to dispense with the consultation requirement. Dispensation will only be granted if the tribunal considers it reasonable to do so.
Landlords have found some comfort from the Supreme Court’s recent decision in Daejan Investments Ltd v Benson  UKSC14, whichoverturned by a 3:2 majority the decisions of the LVT, Upper Tribunal and Court of Appeal.
In Daejan, the landlord of a mixed use development had failed to comply fully with the statutory consultation regime and had applied to the LVT for dispensation. The LVT had refused to grant dispensation and had reduced the residential tenants’ contributions to £250 each. The Supreme Court, however, found that the residential tenants had not actually suffered much, if any, prejudice, despite breaches by the landlord of some of the consultation requirements, and granted dispensation.
The landlord only has eighteen months from the date on which it incurs costs to demand payment or notify the tenant of the amounts due. It is therefore important to maintain momentum and diarise key dates.
A tenant can challenge the service charge by applying to the Property Chamber to determine whether the service charge is payable and if so what amount is reasonable. Thus, the head landlord might face an application by a sub tenant directly against it to determine these issues.
A service charge demand must be accompanied by a summary of the tenant’s rights and obligations. If the prescribed statutory information is omitted the tenant is entitled to withhold payment of the sum demanded. It is therefore imperative to ensure that all demands comply with the relevant regulations.