First-tier Tribunal rules on service charge disputes for residential flats

OUTCOME: Allowed

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In the FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Tribunal Case reference : LON/00AK/LSC/2024/0060 Property : Various flats, [ADDRESS] [POSTCODE] Applicants : [redacted] Tenants, represented by Dr [RESPONDENT] of Flat 49 Respondent: [redacted] represented by Ms [COUNSEL] of counsel Type of application : Service charges Tribunal : Judge Adrian Jack, Tribunal Member [NAME], Tribunal Member [NAME] JP Date of decision : 5th March 2025

DECISION (corrected under the slip rule)

Procedural 1. By an application received on 13th February 2024, the [ADDRESS]’ Association applied for the determination of the reasonableness and payability of certain service charges in the service charge years from 2019-20 to 2022-23. It subsequently became apparent that the Residents’ Association was not a recognised residents’ association within the meaning of section 29 of the Landlord and Tenant Act 1985.

Accordingly, we clarified at the start of the hearing that the tenants listed in the Schedule of Tenants at the end of this decision were the appropriate applicants. All parties were in agreement with this substitution. Equally all parties agreed that Dr [NAME], one of the tenants, was properly authorised to represent them at the hearing before us.

The disputed service charges

2. The disputed service charges for each of the four service charge years in question per flat are these:

2

Managing agents’ fee: £426.31, £548.70, £432.35 and £402.88 Electricity: £309.91, £253.88, £529.37 and £497.92 Lift maintenance: £489.75, £308.01, £329.56 and £563.56.

The description “managing agents’ fee” is misleading. This figure is in fact the sum which the freeholder charges [NAME], which [NAME] then recharges to the tenants.

[ADDRESS]

3. [ADDRESS] is block of 51 residential flats. It forms part of [ADDRESS] Centre. There are another two blocks of residential flats, but these are not relevant to issues in this case. As the name implies, the shopping centre has a large number of retail premises with some other businesses like a gym.

4. The current freeholder is [COMPANY] (“EGL”). It bought the freehold from the original freeholder in November 2018. EGL has an agent, Ashdown Phillips, whose primary responsibility is the management of the commercial premises. We heard evidence from [NAME] of Ashdown Phillips, who had had involvement from the start of EGL’s purchase.

5. The respondent (“[NAME]”) is a social housing provider. It holds [ADDRESS] under a 125 year lease from Lady Day 2007. It now holds direct from EGL. From 2008 [NAME] granted sub-leases of 48 flats in the block to tenants under “staircasing” leases, whereby the tenant initially beneficially owns a small share of the equity of the relevant flat, but is later able to purchase more equity in the flat, so as eventually to own the whole of the equity in the flat. To date 18 flats have been staircased up to 100 per cent. The three flats which were not sub-leased on staircasing leases are let on assured tenancies.

6. In 2018, it came to light that the staircasing leases were defective in that [NAME] was not itself under a repairing obligation to the tenants, nor was there any service charge obligation on the part of the tenants to reimburse [NAME] for expenditure. These defects were cured by retrospective variations of the 48 leases made by this Tribunal on 24th May 2018 and 7th June 2019 under references LON/00AK/LVL/ 2018/0002 and LON/00AK/LVT/ 2018/0017.

The terms of the headlease and staircasing leases

7. By clause 3.5 of the headlease [NAME] is obliged:

to repair, maintain and clean the non structural parts of [ADDRESS];

to keep it in good and substantial repair and condition; and,

where necessary, to carry out all works of rebuilding, reinstatement and renewal

3 By clause 3.6 [NAME] must decorate all parts of [ADDRESS] (as not comprised in any unit of accommodation) to a reasonable and appropriate standard.

By Schedule 3 the Head Landlord has repairing obligations in relation to structural parts of [ADDRESS] and the common parts of the Centre. Schedule 3 also permits the Head Landlord to recover a proportion of the costs they incur in complying with these obligations from [NAME] pursuant to the service charge provisions therein.

8. Under the staircasing leases, the tenant is obliged Clause 3(2)(c) To pay the ground rent, service charge and any other payment reserved under the Headlease or such proportion thereof as is attributable to the Premises (being [ADDRESS]) such fees to be payable to the Landlord at the time and in the manner specified in the Lease. Clause 3(2)(d) To pay a sum or sums of money equal to 1/51st of the amount which the Landlord may expend in fulfilling its obligations under the Headlease and to do so in accordance with the machinery contained in Schedule Clause 3(2)(e) To pay a sum or sums of money equal to 1/51st of the amount which the Landlord may expend in fulfilling the obligations under Schedule 4A of the Lease, and to do so in accordance with the machinery contained in Schedule 4A.

9. Clause 5 contains [NAME]’s covenants, including: Clause 5(6) For the purpose of clauses 5(7) and 5(8) the Premises shall mean the Premises as defined in the Headlease, save this demise. Clause 5(7) Throughout the term to keep the Premises in good and substantial repair and condition and in addition where necessary to carry out all works of rebuilding, reinstatement and renewal of the Premises Clause 5(8) To decorate and clean all parts of the Premises (as are not comprised in any unit of accommodation) as are usually or ought to be decorated or kept clean and keep them decorated and clean to a standard reasonable and appropriate to the use of the Premises. Clause 5(9) To provide and maintain such security installations and measures as the Landlord considers appropriate. Clause 5(10) To set aside (which setting aside shall be for the purposes of Schedule 4A hereto be deemed to be an item of expenditure incurred by the Landlord) such sums of money as the Landlord shall reasonably consider necessary to meet future costs to be incurred by the Landlord in carrying out works pursuant to clauses 5(7), 5(8) and 5(9) above.

10. Schedule 4A provides:

4 Para 1 The aggregate expenditure incurred by the Landlord in carrying out its obligations under Clauses 5(6), 5(7), 5(8) and 5(9) hereof (“the Total Repairs Expenditure”). Para 2 The Service Charge means 1/51st of the Total Repairs Expenditure Para 3 (method of service charge calculation and payment mechanism) which can summarised thus: i. The service charge year runs from 1 April to 31 March. ii. In or about [NAME] produce an estimate for the upcoming year. iii. A demand is made for such sum, to be paid in 12 equal monthly instalments. iv. At the end of the year, between June and September, a final statement is sent to leaseholders (containing actual costs) and any balancing charge demand along with a narrative.

11. There is no dispute between the parties that the three heads of disputed charges fall within the above provisions.

Managing agents’ fees

12. As we have noted above, the description of this sum is misleading. It relates solely to the sums charged by EGL to [NAME] and then recharged to the tenants. There is no dispute about any managing agents’ fees as such.

13. We heard from [NAME], who had been the relevant manager at [NAME] since 2018. She said the figures claimed in respect of this head was as follows (including VAT): 2019-20 £21,741.68 2020-21 £27,983.79 2021-22 £22,050.00 2022-23 £20,546.95

14. In cross-examination, we were able to examine the accounts in support of these figures. From these it became apparent that the 2021-22 and 2022-23 figures were estimates. The actual figures for 2021-22 were £11,877.32, plus VAT to give £14,252.78 (£279.46 per flat) and for 2022- 23 £11,979.91 plus VAT to give £14,375.89 (£281.88 per flat). Ms [NAME] said that [NAME] would pay the tenants difference in due course.

15. The tenants raised no issues on the underlying amounts claimed by EGL in respect of 2021-22 and 2022-23.

16. In relation to 2019-20 and 2020-21, the position is this. The previous freeholder made an agreement with [NAME] by way of a side letter. Under this [NAME] agreed to pay £16,997.71 plus VAT, subject to annual review, in respect of the service charges due to the freeholder under the headlease. The tenants argue that this agreed sum does not fall within the definition in clause 3(2)(c) and (d), because the sum is not a “service charge”. We

5 disagree. It was open in our judgment to [NAME] to agree what payment was due under the headlease (subject of course to [NAME] adopting a reasonable approach to the quantification).

17. Once EGL terminated the side letter agreement, it commissioned a report from a surveyor, Mr [NAME]. He made a quite complicated analysis of how costs should be apportioned between the commercial parts of the estate and the three residential blocks. In our judgment it was reasonable for [NAME] to take the view, whilst the side letter was in force, that it was not necessary or proportionate to insist on such an apportionment.

18. As regards the first two years in dispute, we therefore confirm the figures of £426.31 and £548.70 per flat. As regards the last two years in dispute, we see no reason not to declare the actual figures as being the sums due. Accordingly, we determine the figure due for 2021-22 is £279.46 per flat and for 2022-23 £281.88 per flat.

Electricity

19. The tenants were concerned that the cost of electricity had gone up so dramatically. Initially, they wondered whether the [ADDRESS] meter was also being used to measure the electricity supplied to [ADDRESS], one of the other residential blocks. [NAME] investigated this and found no evidence of this. The tenants have adduced no evidence to suggest there was any electricity supplied to [ADDRESS]. On the contrary, [ADDRESS] had its own meter.

20. We heard evidence from [NAME], [NAME]’s energy services manager, as to the procurement process adopted by [NAME]. He explained that [NAME] did carry out a tendering process. A problem, though, was that [NAME] is one of the largest landlords in the country. They therefore needed quotations from suppliers who were able to supply all the supply points where electricity was needed. This was of the order of 5,000 points. Smaller suppliers of electricity could not guarantee such a capability. EdF, who provided the electricity during the whole of the relevant period, were the cheapest of those who tendered. The cost of electricity was fixed for a year, so fluctuations in price were minimised. The cost of electricity had nonetheless increased, hence the figures demanded.

21. The tenants had obtained a quotation from Bionic on 9th August 2024 for the supply of electricity at 25.87 pence per kilowatt-hour. We do not consider that this assists in deciding whether the cost of electricity in the earlier period between 2019 and 2023 was reasonable or not. It is within the Tribunal’s knowledge that the cost of electricity fluctuated very substantially over the period with which we are concerned.

22. In our judgment, [NAME] followed a reasonable procurement system. The sums claimed are reasonable. We disallow nothing.

6 Lift maintenance

23. On the charges for the lifts, the tenants’ complaint was not in respect of the amount of individual bills. Their complaint was the frequency with which the lifts broke down. They argued that the sinking fund should have been used to replace the lifts. Some tenants had been trapped when the alarm system did not operate.

24. We heard from [NAME], [NAME]’s senior lift engineer. He explained that there is a good paper trail of inspection reports, which shows the lift being inspected regularly and for the most part appropriately.

25. As regards the tenants’ complaints about breakdowns, a recurring problem, particularly during Covid, he said, was that there were a lot of home deliveries. The deliverymen would often block the doors of the lift in order to put into the lift all the items to be delivered. This had a tendency to cause the lift-doors to become misaligned, thereby causing a breakdown. As to complaints about the alarm system in the lifts not working, the position was that the alarms were regularly checked. The alarm systems were, however, designed so that they would not operate when there was no fault in the lift. This avoided the expense of false callouts. Once an alarm was activated, the engineers had a target of one hour to attend to free the trapped lift user.

26. As to replacing the lifts, he said the cost of replacing both lifts would have been of the order of £400,000. It would also have left the tenants reliant on one lift for an extended period. The existing lifts had not finished their useful life.

27. It is right that his predecessor as senior lift engineer, [NAME], in any email of 25th February 2021 to the tenants said that he would “look at the history of the lift and the finances in more depth with a view to recommend [sic] the lifts for a refurbishment.” This does not, however, show in our judgment that [NAME] should have replaced the lift. Mr [NAME] was talking of refurbishment, not replacement.

28. We agree with the points made by Mr [NAME], which were not answered adequately by the tenants. We also note that there were insufficient funds in the sinking fund to cover all the cost of replacement, so the tenants would have had to meet a substantial demand if the lifts had been replaced.

29. There is, however, a point on which the tenants in our judgment are entitled to a reduction. The lift contractors, until they were replaced, were BES. There were four occasions on which they attended, but could not carry out an inspection, for example, because BES had not brought the relevant key to access the box in the lift. In our judgment, the cost of these four inspections should be disallowed, a total of £240.

7 Costs

30. The applicants seek an order pursuant to section 20C of the Landlord and Tenant Act 1985. The Tribunal will not lightly interfere with a landlord’s right to reimbursement under a lease. In the current case, however, there has been exceptionally bad communication by the landlord with its tenants. We have little doubt that, had there been proper engagement by the landlord, the current application could have been avoided. Standing back and looking at the matter in the round, in our judgment it is appropriate to prevent the landlord recovering 75 per cent of the legal costs expended on these proceedings.

31. The Tribunal has a discretion as to the fees payable to the Tribunal. These total £320. The starting point in deciding who should pay the fee is the principle that costs should follow the event. Here there has been a measure of success on both sides. In our judgment, [NAME] should refund the tenants £160 in respect of the fees.

DECISION

(a) The sums payable per flat in respect of managing agents’ fees are £426.31 in service charge year 2019-20, £548.70 in 2020- 21, £279.46 in 2021-22 and £281.88 in 2022-23.

(b) We disallow nothing in respect of electricity.

(c) In respect of the lifts we disallow £240 in total.

(d) The respondent shall pay the applicants £160 in respect of the fees payable to the Tribunal.

(e) We make an order pursuant to section 20C of the Landlord and Tenant Act 1985 limited the recoverability of the respondent’s legal costs of these proceedings of 25 per cent of their costs.

[NAME]: 5th March 2025 Corrected under the slip rule Date: 13th June 2025

SCHEDULE OF TENANTS (corrected under the slip rule) Flat number and name 3 [NAME] 4 [NAME] and [NAME] [NAME]

8 5 [NAME] [NAME] 6 [NAME] and [NAME] 7 [NAME] [NAME] 8 [NAME] 10 [NAME] 11 [NAME] 12 Mr [NAME] 13 [NAME] 14 [NAME] 15 [NAME] ([NAME]) 16 [NAME] [NAME] 17 [NAME] 18 [NAME] [NAME] 19 [NAME] [NAME] 20 [NAME] 22 [NAME] [NAME] 23 [NAME] 24 [NAME] [NAME] and [NAME] 26 [NAME] 28 [NAME] 30 [NAME] 32 [NAME] 33 [NAME] and [NAME] [NAME] 34 [NAME] and [NAME] 35 [NAME] 36 [NAME] and [NAME] 38 [NAME]

9 40 [NAME] [NAME] 41 [NAME] ad [NAME] [NAME] 44 [NAME] [NAME] and [NAME] 47 [NAME] 48 [NAME] 49 [NAME] 50 [RESPONDENT] V [APPELLANT] OF LEGISLATION Landlord and Tenant Act 1985 (as amended) Section 18 (1) In the following provisions of this Act "service charge" means an amount payable by a tenant of a dwelling as part of or in addition to the rent - (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose - (a) "costs" includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period. Section 19 (1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period - (a) only to the extent that they are reasonably incurred, and (b) where they are incurred on the provisions of services or the carrying out of works, only if the services or works are of a reasonable standard; and the amount payable shall be limited accordingly. (2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and

10 after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise. Section 27A (1) An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to - (a) the person by whom it is payable, (b) the person to whom it is payable, (c) the amount which is payable, (d) the date at or by which it is payable, and (e) the manner in which it is payable. (2) Subsection (1) applies whether or not any payment has been made. (3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to - (a) the person by whom it would be payable, (b) the person to whom it would be payable, (c) the amount which would be payable, (d) the date at or by which it would be payable, and (e) the manner in which it would be payable. (4) No application under subsection (1) or (3) may be made in respect of a matter which - (a) has been agreed or admitted by the tenant, (b) has been, or is to be, referred to arbitration pursuant to a post-dispute arbitration agreement to which the tenant is a party, (c) has been the subject of determination by a court, or (d) has been the subject of determination by an arbitral tribunal pursuant to a post-dispute arbitration agreement. (5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment. Section 20 (1) Where this section applies to any qualifying works or qualifying long term agreement, the relevant contributions of tenants are limited in accordance with subsection (6) or (7) (or both) unless the consultation requirements have been either— (a) complied with in relation to the works or agreement, or (b) dispensed with in relation to the works or agreement by (or on appeal from) the appropriate tribunal .

11 (2) In this section “relevant contribution”, in relation to a tenant and any works or agreement, is the amount which he may be required under the terms of his lease to contribute (by the payment of service charges) to relevant costs incurred on carrying out the works or under the agreement. (3) This section applies to qualifying works if relevant costs incurred on carrying out the works exceed an appropriate amount. (4) The Secretary of State may by regulations provide that this section applies to a qualifying long term agreement— (a) if relevant costs incurred under the agreement exceed an appropriate amount, or (b) if relevant costs incurred under the agreement during a period prescribed by the regulations exceed an appropriate amount. (5) An appropriate amount is an amount set by regulations made by the Secretary of State; and the regulations may make provision for either or both of the following to be an appropriate amount— (a) an amount prescribed by, or determined in accordance with, the regulations, and (b) an amount which results in the relevant contribution of any one or more tenants being an amount prescribed by, or determined in accordance with, the regulations. (6) Where an appropriate amount is set by virtue of paragraph (a) of subsection (5), the amount of the relevant costs incurred on carrying out the works or under the agreement which may be taken into account in determining the relevant contributions of tenants is limited to the appropriate amount. (7) Where an appropriate amount is set by virtue of paragraph (b) of that subsection, the amount of the relevant contribution of the tenant, or each of the tenants, whose relevant contribution would otherwise exceed the amount prescribed by, or determined in accordance with, the regulations is limited to the amount so prescribed or determined.] Section 20B (1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.

12 (2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge. Section 21B (1) A demand for the payment of a service charge must be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to service charges. (2) The Secretary of State may make regulations prescribing requirements as to the form and content of such summaries of rights and obligations. (3) A tenant may withhold payment of a service charge which has been demanded from him if subsection (1) is not complied with in relation to the demand. (4) Where a tenant withholds a service charge under this section, any provisions of the lease relating to non-payment or late payment of service charges do not have effect in relation to the period for which he so withholds it. (5) Regulations under subsection (2) may make different provision for different purposes. (6) Regulations under subsection (2) shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.