First-tier Tribunal Rules on Service Charge Surplus Deductions

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00BD/OCE/2024/0118 Property : 44 [ADDRESS] [POSTCODE] Applicant : [redacted] : [APPELLANT], solicitors Respondent : [redacted] : n/a Type of [NAME] : An [NAME] to determine the sums payable under paragraph 3(1)(b) of Schedule 5 of the Leasehold Reform Housing and Urban Development Act 1993 Tribunal : Tribunal Judge I Mohabir Date of Decision : 18 February 2025

DECISION

2 Background 1. This is the Applicant’s statement of case in support of its [NAME] for

a determination of the appropriate sum due from the Applicant to the

Respondent under paragraph 3(1) of Schedule 5 of the Leasehold

Reform, Housing and Urban Development Act 1993 (“the 1993

Act”), in respect of a vesting order made by the County Court at Central

London in claim number H02CL038 on 10 November 2023.

2. The factual background to this [NAME] has, helpfully, been set out

in the Applicant’s statement of case and may be summarised as follows.

3. The Respondent is the registered freehold proprietor of 44 [ADDRESS], [POSTCODE] (“[NAME]”).

4. The Applicant is a [COMPANY] which was

incorporated on 3 January 2020. It is the nominee purchaser under the

1993 Act on behalf of the participating qualifying tenants at [NAME], namely (a) [NAME] of Flat 1, (b) [NAME] and [NAME] of Flat 2, and (c) [NAME]

[NAME] of Flat 3.

5. [NAME] is a semi-detached building comprising 5 flats. The non-

participating tenants were Mr [NAME] of Flat 4

and Mr [APPELLANT] of Flat 5.

6. On 15 May 2020 the Applicant served upon the Respondent a notice

pursuant to section 13 of the 1993 Act claiming the right to acquire the

Freehold. The Respondent served a counter-notice pursuant to section

21 of the 1993 Act on 28 July 2020 admitting the right to purchase

[NAME] but disputing the terms of acquisition.

7. On 30 October 2020 the Applicant made an [NAME] to the Tribunal

pursuant to section 24(1) of the 1993 for a determination of the terms of

acquisition which remained in dispute, namely the purchase price.

8. On 27 May 2021 the parties agreed the terms of acquisition in the form

of a draft TR1, recording an agreed purchase price of £30,250, following

which the Tribunal [NAME] was withdrawn. Thereafter, the Applicant

requested relevant service charge information to enable it to establish

the total amount that would be payable to the Respondent under

paragraph 3(1) of Schedule 5 of the 1993 Act. However, no service

information was ultimately provided and the parties never entered into

a binding agreement as, shortly after the terms of acquisition were

agreed, on 22 June 2021 the Respondent was struck off the register at

[NAME].

9. On 29 June 2022 the Respondent’s managing agent, HML, served upon

[NAME] an Income and Expenditure account for the year ended 31

December 2019 which recorded a surplus of £10,152 to be credited to

[NAME].

3 10. On 10 September 2021 (due to limitation issues) the Applicant issued

proceedings in the County Court at Central London in claim number

H02CL038 seeking a vesting order of [NAME] under section 24(a)

of the 1993 Act.

11. On 28 January 2022 the Respondent’s director, [RESPONDENT],

served a witness statement stating that when the Respondent had been

restored to the register at [NAME], the Respondent would

proceed to execute and provide to the Applicant the transfer of the

Freehold in the terms previously agreed.

12. On 18 March 2022 the Respondent was restored to the register at

[NAME]. However, the Respondent failed to complete the

transfer of [NAME] to the Applicant or provide any service charge

information to enable the Applicant to determine the appropriate sum.

13. On 10 November 2023 the County Court at Central London granted to

the Applicant a vesting order in respect of [NAME]; and transferred

to the Tribunal, pursuant to section 176A of the Commonhold and

Leasehold Reform Act 2002, the question of the appropriate sum to be

paid by the Applicant to the Respondent pursuant to paragraph 3(1)(b)

of Schedule 5 of the 1993 Act.

Relevant Law

14. Paragraph 2(1) of Schedule 5 of the 1993 Act sates:

“Where any interests are to be vested in the nominee purchaser by

virtue of a vesting order, then on his paying into court the appropriate

sum in respect of each of those interests there shall be executed by such

person as the court may designate a conveyance which—

(a) is in a form approved by the Tribunal, and

(b) contains such provisions as may be so approved for the purpose of

giving effect to the relevant terms of acquisition.”

15. Paragraph 3(1) of Schedule 5 of the 1993 Act provides as follows:

“In the case of any vesting order the appropriate sum which in

accordance with paragraph 2(1) is to be paid into court in respect of

any interest is the aggregate of—

(a) such amount as is fixed by the relevant terms of acquisition as the

price which is payable in accordance with Schedule 6 in respect of that

interest; and

b) any amounts or estimated amounts determined by the appropriate

tribunal as being, at the time of execution of the conveyance, due to

the transferor from any tenants of his of premises comprised in [NAME] in which that interest subsists (whether due under or in

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respect of their leases or under or in respect of agreements collateral

thereto).”

16. It is clear the amount payable in paragraph 3(1)(a) of Schedule 5 of the

1993 Act, is the purchase price in accordance with Schedule 6 of the

1993 Act, namely £30,250 as per the terms of acquisition. By paragraphs

2 and 6 of the Order dated 10 November 2023, the Applicant is entitled

to deduct from this the sum of £10,644 payable by the Respondent to the

Applicant in respect of the costs of County Court proceedings.

17. The issue is what further deductions the Applicant is entitled to make to

determine the appropriate sum payable by the Applicant to the

Respondent under paragraph 3(1) of Schedule 5 of the 1993 Act.

18. On 3 December 2024, the Tribunal issued supplementary directions to

enable the determination to be made. The Applicant has complied with

the directions. The Respondent did not and has not participated in these

proceedings at all. However, it would appear that the Respondent has

indicated in correspondence with the Tribunal that it does not oppose

the [NAME].

Decision 19. The Tribunal’s determination took place on 18 February 2025 and was

based solely on the documentary evidence filed by the Applicant. The

[NAME] was, therefore, unopposed. In the absence of any evidence

from the Respondent, there was no basis on which the Tribunal could

not reach the conclusion it did below.

20. The Tribunal agreed with the Applicant’s submission that the only

information the Applicant has regarding service charges provided to

[NAME] within [NAME] to enable it to assess the amount due

under paragraph 3(1)(b) of Schedule 5 of the 1993 Act is the Income and

Expenditure Account for the year ended 31 December 2019. This records

that the surplus standing to the credit of [NAME] was £10,152. On

completion of the transfer of the Freehold, this sum should be

transferred to the Applicant, for the Applicant to hold to the credit of

[NAME].

21. The Applicant also alleged that the Respondent had breached of its

repairing obligations under the leases by failing to carry out any repairs

or maintenance and [NAME] has fallen into a state of disrepair. In

particular, the Applicant, via one of its directors, [APPELLANT], has had

to incur expenditure undertaking emergency repairs to [NAME] to

deal with leaks. On 7 January 2022 urgent damp repairs were

undertaken by The [COMPANY] in the sum of

£2,768. On 20 December 2022 exterior works were undertaken at a cost

of £6,144 to fill in cracks and apply a K-render system with

reinforcement fibre mesh to deal with a leak at [NAME]. The

disclosure relating to the relevant invoices relating to this expenditure

were in the hearing bundle. Accordingly, the Applicant submitted that

this expenditure incurred on behalf of the Respondent is £8,822.00

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should also be deducted from the service charge surplus under

paragraph 3(1)(b) of Schedule 5 of the 1993 Act. 22. No guidance is provided by the 1993 Act about how this claimed

deduction should be treated. The Tribunal did not consider that it could

safely make a finding that the Respondent has in fact breached its

repairing obligations as alleged because it heard no evidence from either

party on this issue.

23. However, the Tribunal did not consider it was appropriate to leave the

issue in abeyance so that the Applicant would have to commence further

litigation to determine it with the attendant time and costs being

incurred. The Tribunal was especially mindful of the fact of the

Respondent’s non engagement in the litigation that taken place so far

and that it did not oppose this [NAME].

24. In the Tribunal’s judgement, the Applicant appeared to have a prima

facie case in relation to the allegation about the Respondent’s breach of

its repairing obligations under the leases. This in turn potentially gives

rise to an equitable set off in relation to the remedial costs incurred by

the Applicant. Therefore, the Tribunal accepted the Applicant’s

submission that the further sum of £8,822.00 should be deducted

from the service charge surplus.

25. Accordingly, the Tribunal determined that the appropriate sum payable

to the Respondent under paragraph 3(1)(b) of Schedule 5 of the 1993 Act

is £632.

Name: Tribunal Judge I Mohabir Date: 18 February 2025

Rights of appeal By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the tribunal is required to notify the parties about any right of appeal they may have. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written [NAME] for permission must be made to the First- tier Tribunal at the regional office which has been dealing with the case. The [NAME] for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the [NAME]. If the [NAME] is not made within the 28 day time limit, such [NAME] must include a request for an extension of time and the reason for not complying with the 28 day time limit; the tribunal will then look at such reason(s) and decide whether to allow the [NAME] for permission to appeal to proceed, despite not being within the time limit.

6 The [NAME] for permission to appeal must identify the decision of the tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking. If the tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).

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