The RICS has produced a voluntary Code of Practice for service charges in commercial leases, effective 1st April 2007. The principles behind the Code are that the services provided should be efficiently delivered, should be good value for money, and that there should be fairness in allocation of contributions between tenants and transparency in respect of the management charges. The essential ethos of the Code is that the services and service charge should be operated on a ‘not for profit, not for loss’ basis.
Owners are to be encouraged to draft new leases to reflect the aims of the Code, and to operate existing leases in compliance with the spirit of the Code.
Some may say that the Code is being introduced not a moment too soon following the Judge’s pithy comments in the 2006 case of Princes House Limited -v- Distinctive Clubs Limited in which the Court protected the tenant from the landlord who delayed repairs to the roof of the premises until the period of the tenant’s service charge cap had expired.
When the tenant took the lease of part in 1998, there were already grave concerns about the condition of the roof and, partially for this reason, the tenant negotiated a cap to its contribution to the service charge for the building until the end of 2003. It also negotiated an obligation on the landlord to use its reasonable endeavours to carry out all necessary repairs covered by the service charge.
In 2001, the landlord commissioned a survey which confirmed the state of the roof and the need to replace it, and advised the tenant that it intended to carry out the works in 2003. A planning application was submitted but, in March 2003 the Landlord changed course and proposed a grander scheme for the roof. The consequential delays meant that work did not start until 2004 and was not finished until 2005.
The landlord sought full recovery of the service charge from the tenant but the tenant claimed the benefit of the cap on the basis that the works should have been carried out earlier and certainly before the end of 2003.
The Court decided for the tenant, largely on the basis that the landlord had agreed to use reasonable endeavours to carry out the repairs and had agreed the service charge cap precisely because of the tenant’s concerns about the state of the roof. The negotiations on the lease terms also made it clear that the landlord knew about the state of the roof in general terms in 1998.
Summing up, the Judge noted the managing agents apparent failure to read the lease and analyse what were properly service charge items of expenditure, the landlord’s decision to include all expenditure without a proper breakdown, the tenant being asked to pay four times the originally estimated amount without explanation, and the tenant’s consequential refusal to pay, and commented:
‘It would be difficult to devise a more potent recipe for expensive and unproductive litigation’