First-tier Tribunal Rules on Proper Calculation of Service Charges

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

Case reference : CHI/43UM/LSC/2022/0093

Properties : 5 and 10 [RESPONDENT[NAME], [ADDRESS], [POSTCODE].

Applicant: [redacted]

Representative : None

Respondent: [redacted] : [COUNSEL] of application : Determination of liability to pay service charges under Section 27A of the Landlord and Tenant Act 1985

Tribunal member : Judge David Clarke

Hearing Venue:

: Determination on the papers

Date of decision : 27 February 2023

DETERMINATION AND STATEMENT OF REASONS

© CROWN COPYRIGHT 2023

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Determination

1. The Tribunal determines that the service charge properly payable in respect of the Flats numbered 5 and 10 within [RESPONDENT[NAME] is, in accordance with clause 3 of the second part of the Second Schedule to the Leases, one tenth of the total allowable expenditure incurred by the Landlord.

2. To the extent to which Flats 5 and 10 have been charged amounts in excess of one equal tenth part of such expenditure, the service charge has been wrongly calculated. The amount properly payable in respect of the service charge due from the leaseholders of Flat 5 and Flat 10 [RESPONDENT[NAME] for each of the service charge years 2012 through to 2021 is one tenth of the allowable expenditure incurred by the Landlord.

Statement of Reasons

The Application 1. This Application was made on 30 November 2022 under section 27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) by [APPELLANT[NAME] and [APPELLANT] (“the Applicants”) who are, respectively, the Leaseholders of Flats 5 and 10 (“the [RESPONDENT]”) in a building known as [RESPONDENT[NAME], [ADDRESS], [POSTCODE] (“the Building”). The Respondent is [RESPONDENT[COMPANY], a company whose only members are the ten leaseholders of flats in the Building. The representative putting the case for the [COMPANY] is [RESPONDENT], a Director of the Respondent. The Applicants are ‘buy-to-let’ landlords and do not reside at the [COMPANY]. Indeed, it appears that most of the ten flats in the Building are rented from the relevant leaseholders.

2. The Application asks the Tribunal to determine the amounts that are properly payable in respect of service charges made for each of the ten accounting years 2012-2021. The Applicants also ask the Tribunal to provide for the consequences of any over or under payments of service charge.

3. Following the usual Directions, the matter was determined by the Tribunal on the papers submitted by the parties.

The [RESPONDENT] and the Building 4. The Building, [RESPONDENT[NAME], was constructed in about 1988/89. It consists of 10 flats on two floors. There are eight studio flats (numbered 1-4 and 6-9) each consisting of a bedsitting room, with a kitchen and bathroom, and two one-bedroom flats, the [COMPANY], numbered 5 and 10, which are about 60% larger in floor area.

5. The freehold of the Building was originally held by the firm of [RESPONDENT]. The freehold is now vested in the [COMPANY], [RESPONDENT[COMPANY], a company formed for the purpose of the purchase of the freehold in 2000 by the then leaseholders.

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The current members of the [COMPANY] are the owners of the ten leasehold flats (currently eight individuals as two of the leaseholders of the studio flats are each the owners of two flats).

The Leases 6. The Tribunal was provided with a copy of the Lease of Flat 5. It is dated 3 August 1990 for a term of 125 years from 25 March 1989 at a yearly rent of £50. The only provision that is relevant to this application is clause 3 of the second part of the Second Schedule to the Lease which relates to the service charge. It provides that:

“The Service Charge payable by the Tenant (which the parties agree shall be reserved and payable as further rent) shall be one equal tenth part of the total expenditure incurred by the Landlord in respect of the items specified in the First Part of the Schedule”.

The Application and papers are submitted are on the basis that the lease of Flat 10 is in the same terms as Flat 5, and it is stated that there is also a provision for a one tenth service charge for Flat 10. Together, the leases of flats 5 and 10 are referred to as the Leases. It appears that all the flats in the Building provide for a one tenth payment. The Tribunal proceeds on that basis.

7. Neither party challenges the obvious and clear meaning of Clause 3 above and agree that, notwithstanding the difference in size of Flats 5 and 10, it is clear for the future that each flat in the Building has to pay one tenth of the service charge expenditure. There is also no dispute as to the reasonableness of the total service charge levied over the past ten years. The issue is confined to that of whether the payments made by Flats 5 and 10 in respect of service charge in the period of ten years from 2012 to 2021, which are acknowledged to be in excess of one tenth, are sustainable in the light of the provision in the Leases.

The Relevant Facts 8. The relevant facts, shorn of the submissions of the parties in the light of those facts, can be shortly stated. Prior to the purchase of the freehold by the [COMPANY], service charges were low and in 2002 the service charge levied was £300 per flat. A company AGM was held on 16 June 2003 attended by both of the then leaseholders of the one-bedroomed flats 5 and 10. [NAME], the [NAME] of flats 2 and 7, is also recorded as present and he continues as [NAME] of those flats at the present time. The minutes record:

“[NAME] gave out new standing order mandates to those present . . . (Studio flats £75 per quarter and 1 bed flats £100 per quarter)”.

No reason for the change from equal tenth payments is recorded in the minutes. The minutes also record the presence of both [NAME] as a director and [NAME] of flat 3 and [NAME] of flat 6 as Company Secretary.

9. Between 2000 and 2021, in order to avoid the cost of a managing agent, the management of [RESPONDENT[NAME] was carried out by [RESPONDENT], without remuneration, and with the assistance of [NAME] da Roza as company secretary and later by [NAME]

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[NAME] as well. Mr [NAME] clearly had accounting ability but, as he did not use a computer or email, he maintained traditional hand-written books of account from which the annual accounts and returns to Companies House were prepared by a professional firm. Communications between leaseholders as members of the company were by telephone and any approvals for work to be done was obtained by Mr [NAME] orally. There were no annual or other meetings of the company in any year after 2003 until 2021.

10. In the 18-year period from 2003 to 2021, the total amount of service charges in any year were both decreased and increased but throughout that period, the differential payments between the eight studio flats and the two one-bedroomed flats were maintained in what [NAME] said was to a similar ratio (rounded to the nearest pound) but the notes to the Directors meeting of 1 March 2022 suggest were inconsistent ratios. It can be noted that there were what is termed ‘cash calls’ in 2019 (for external decoration) and in 2021 (for roof repairs). However, it does appear from the minutes of a directors meeting on 1 March 2002 that each [NAME] paid the same sum for these one-off items and those cash calls ‘had been apportioned equally as per the terms of the Lease’.

11. The Applicants purchased their flats, respectively, in 2012 and 2015. Since those purchases, until 2021, the two Applicants continued to pay a service charge at an amount exceeding one tenth of the total service charge levied.

12. An annual general meeting of the [COMPANY] was held by [NAME] on 5 October 2021. Six leaseholders are recorded as being present, namely both Applicants, two members who own two flats each ([NAME] and [NAME]) and [NAME] and [NAME]. The following relevant matters are recorded:

1. [NAME] resigned as a director, citing ill-health;

2. An increase in service charges for 2022 was agreed to £800 per studio flat and £1.100 per one bed flat – ‘a vote took place, and the proposal was accepted’. [NAME] submission that ‘there were no abstentions or votes against’ has not been disputed by the Applicants.

3. The first Applicant was appointed as a director of the [COMPANY].

4. A prospective managing agent, [RESPONDENT], attended the meeting and made a presentation and answered questions. He was appointed as the [COMPANY]’s agent after he had left the meeting.

Nature of the dispute 13. Following the appointment of [NAME] as managing agent, he sent an e mail on 24 February 2022 to all directors of the [COMPANY], who now included the first Applicant, pointing out that he proposed dividing the service charges in future equally between the ten flats in accordance with the terms of the Leases and notwithstanding the agreement at the 2021 AGM recorded above. He also asked relevant questions seeking to determine why equal payments had not been paid in the past and wondering if some form of agreement existed to change the terms of the Leases.

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14. It is not necessary for the Tribunal to set out in full the emails and meetings between members of the [COMPANY] from the time this email was sent until this Application was issued. In short:

1. The first Applicant sent an email on 25 February 2022 saying that she was previously unaware of the terms of the Lease until the email from [NAME], pointing out that the Leases were the legal framework that directors should observe and asking for an urgent meeting of the directors.

2. A directors meeting was held on 1 March 2022 by [NAME] with [NAME] attending in his role of company secretary. It was agreed that, going forward, the service charge would be apportioned equally, one tenth to each flat. A proposal to adjust the service charge in previous years back to 2015, the last time one of the flats changed hands, was not accepted by all so it was agreed to call an extraordinary general meeting so that all leaseholders could participate.

3. The EGM was held on 5 April 2022, with 7 leasehold attendees and two proxy voting forms. [NAME] attended. There was no agreement on a solution to the issue and [NAME] left the meeting on the basis that there had been abusive and rude behaviour. The motion to recalculate and make a financial readjustment for the most recent seven years 2015-2022 was rejected with support from three leaseholders (flats 3, 5 and 10) and opposition from leaseholders of flats 1,2,6,7,8 and 9.

Submissions of the Applicants 15. The Applicants do not in terms ask for a determination of the amount payable for the ten accounting years 2012-2022 but this is implicit in their statement of case referring to the terms of the Leases providing for equal service charge payments. They also ask that the Tribunal ‘agree that it is appropriate that leaseholders of the studio flats make good their underpayment’ and seek a resolution to that effect.

16. The limitations of the jurisdiction of the Tribunal are outlined below and the Applicants’ claim in their Application for a repayment, listing refunds sought for each year, are not matters that this Tribunal can consider.

17. However, in response to the [COMPANY]’s submissions that the differential charges in years prior to 2022 can be justified, the Applicants make the following points:

1. There is no legal deed of variance of the equal one tenth allocation of the service charge or evidence of a decision to vary the existing Leases.

2. Cash calls were equally split between all leaseholders.

3. The Applicants were unaware of the terms of the Leases until [NAME] appointment, and it was not obviously apparent that unequal payments were being made as copies of the bookkeeping ledgers were never made available, there were no annual company meetings and no evidence that the conveyancers acting for the Applicants were specifically told that the terms of the Leases were not being followed.

4. They dispute the claim that the fault is that of their solicitors when they purchased because the accounts sent to would be purchasers did not provide details of individual payments.

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5. The agreement at the 2021 AGM to pay unequal service charge payments was because they did not know of the provision for equal allocation in the Leases. 6. The fact that the unpaid efforts of [NAME] over a period of 18 years gave a benefit to all leaseholders does not justify maintaining an unequal allocation for those years.

Submissions of the Respondent 18. On behalf of the [COMPANY], [RESPONDENT] submits:

1. While accepting that no permanently binding change to service charge allocations were implemented, the changes were fair and agreed by all.

2. The Applicants could not have failed to see from the service charge accounts that not all ten leaseholders were paying the same as Flats 5 and 10 since a simple division of the total would have revealed the discrepancy. When each of the Applicant’s purchased, [APPELLANT] honestly answered all questions on the enquiry forms and Mr [NAME] completed a witness statement to that effect.

3. The Applicant’s solicitors would have been given copies of the last three years accounts and could and should have seen the unequal nature of the service charges.

4. The Applicants were fully aware of the different apportionment of the service charges and voted in favour at the 2021 AGM.

5. Ignorance of the terms of the Lease does not justify a back dated claim for monetary compensation.

6. The EGM voted not to disturb the previous year’s allocations or to pay compensation.

19. In summary, Mr [APPELLANT] submits that the Applicant’s claim that they unknowingly paid a higher rate of service charge is not supported by the evidence. Both Applicants are experienced buy-to-let investors. The service charges at Building were kept low for over 20 years by the unpaid work of directors who were leaseholders of the studio flats for the benefit of all, including the Applicants. The unequal allocations were not unfair.

Determination 20. The Tribunal determines that the service charge properly payable in respect of the Flats numbered 5 and 10 within [RESPONDENT[NAME] is, in accordance with clause 3 of the second part of the Second Schedule to the Leases, one tenth of the total allowable expenditure incurred by the Landlord. To the extent to which Flats 5 and 10 have been charged amounts exceeding one equal tenth part of such expenditure, the service charge has been wrongly calculated. The amount properly payable in respect of the service charge due from the leaseholders of Flat 5 and Flat 10 [RESPONDENT[NAME] for each of the service charge years 2012 through to 2021 is one tenth of the allowable expenditure incurred by the Landlord.

21. The reason for this determination is that the terms of a lease can only be changed either by a deed of variation (preferable) or by a clear agreement by the parties to the lease to alter those terms. A deed of variation is preferable because later owners of the lease will be bound by its terms; whereas an agreement between the parties can only take effect as a contract which will not necessarily bind a later owner, unless novated. There is no

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agreement entered into by the Applicants demonstrated in this case which binds the Applicants to pay a service charge which is different from what the Leases require.

22. The general legal position is reinforced by subsections 4(a) and 5 of section 27A of the 1985 Act. Section 27A(4)(a) states that no application can be made in respect of a matter that has been agreed by the Applicant. There is no agreement by the Applicants to pay a higher service charge than one tenth and the oral agreement to pay at the 2021 AGM was withdrawn when the true position came to light. Moreover, clause 5 states that a tenant is not to be taken to have agreed to any matter by reason only of having made a payment of rent. Therefore, the earlier payment of the service charge (which is reserved as rent) at a level above a one tenth amount, cannot be taken as an agreement to pay that higher amount.

23. None of the other submissions of [NAME] can alter the basic legal position. It is certainly disappointing that the solicitors acting in the Applicant’s purchasers did not draw their client’s attention to the terms of the Leases or more closely examine the company accounts. But those shortcomings do not assist in showing an agreement to unequal payments. Nor can an EGM resolution alter the rights of the Applicants under the Leases.

24. It is quite possible that back in 2003 there was a clear agreement by all leaseholders at that time to alter the level of service charges so that the one bed flats paid more. But there is no evidence to that effect and neither [NAME], or [NAME] have offered any witness statement on that issue despite all being present at the meeting in 2003. But not even a signed document, unless a deed of variation, would require the Applicants to pay other than one tenth.

25. There does seem to be a significant level of animosity arising from this dispute. The Applicants have been accused of knowing that they were paying more than the terms of the Leases required but the evidence in the statements and documents provided is strongly to the effect that they did not know the true position until [NAME] brought the terms of Clause 3 to their attention. On the other hand, there is also no evidence that that [NAME] was, over the years, acting in any dishonest or underhand way; but rather working without remuneration for the benefit of all using a basis for service charge division that he thought was accepted by all.

26. The Tribunal only has jurisdiction to rule on the amount of a service charge that is payable, or as to the reasonableness of the charges, namely whether they have been reasonably incurred or done to a reasonable standard. Consequently, the Tribunal cannot rule, as the Applicants request, on whether it is appropriate that leaseholders of the studio flats make good their underpayment of service charge in previous years nor can the Tribunal make any resolution or determination in respect of refunds or repayments.

Other matters 27. The Application includes an application under section 20C of the 1985 Act. No submissions have been made on the issue. The Tribunal does not consider, in any event,

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that an order under that section is appropriate in the circumstances of this case especially where the Respondent is a [COMPANY].

28. The Application also ticked the box relating to an application under Paragraph 5A of Schedule 11 of the Commonhold and leasehold Reform Act 2002. An order would not be appropriate in this case as it is inapplicable.

Closing Remarks 29. This determination only gives a ruling in relation to the amount payable by the Applicants for the ten accounting years 2012-2021. Resolution of any action by way of rectifying the overpayment by the Applicants and the underpayments by the studio flat leaseholders must be found elsewhere.

30. The Tribunal hopes that the leaseholders can determine those matters by agreement perhaps by a reconsideration of the motion that was before the EGM on 5 April 2022. If agreement cannot be achieved, the parties must bear in mind that any defendant in court proceedings will not be another individual [NAME] but will be [RESPONDENT[COMPANY], in which all have a share (and a stake in a secure freehold protecting their leasehold interest).

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Right of Appeal

1. A person wishing to appeal this decision to the Upper Tribunal (Lands Chamber) must seek permission to do so by making written application to the First-tier Tribunal at the Regional office which has been dealing with the case ([EMAIL] ). The application must arrive at the Tribunal within 28 days after the Tribunal sends to the person making the application written reasons for the decision.

2. If the person wishing to appeal does not comply with the 28-day time limit, the person shall include with the application for permission to appeal a request for an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then decide whether to extend time or not to allow the application for permission to appeal to proceed.

3. The application for permission to appeal must identify the decision of the Tribunal to which it relates, state the grounds of appeal, and state the result that the party who is making the application for permission to appeal is seeking.

4. Any application to stay the effect of the decision must be made at the same time as the application for permission to appeal.