Service Charges for 2017-2018 and 2018-2019 Deemed Reasonable and Payable

OUTCOME: Dismissed

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Case Reference : CHI/00ML/LSC/2020/0041

Property : [ADDRESS] [POSTCODE]

Applicant : [redacted]

[NAME_1]

Respondents : [redacted]

(2) One Brighton (New England

Quarter) Management Limited

Type of Application : The Landlord and Tenant Act 1985, section 27A

Tribunal Members : Judge M Davey

Mr J [NAME_5], B.Sc. MRICS

Date of deliberations : 18 December 2020

Date of Decision with reasons : 25 January 2021

© CROWN COPYRIGHT 2021

DECISION

The disputed service charges for Flat 55 Pullman Haul in 2017-2018 and 2018- 2019 were payable and reasonable in amount.

FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

2 REASONS

The Application

1. By an application dated 12 May 2020 (“the Application”), [NAME_19] (“the Applicants”), the joint under-lessees of [ADDRESS] [POSTCODE] (“the Flat”) applied to the First-tier Tribunal (Property Chamber) (“the Tribunal”), under section 27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) for a determination as to the payability and reasonableness of the service charge, under their (under)lease of the Flat, for the service charge years 1 April 2017 to 31 March 2018 and 1 April 2018 to 31 March 2019. The First Respondent to the Application is the head leaseholder landlord, [COMPANY_4] (“[NAME_4]”) and the Second Respondent is One Brighton (New England Quarter) Management Limited, the Management Company under [NAME_6] headlease.

2. [NAME_7] issued Directions on 20 July 2020 stating that it was likely that the application could be determined on the papers without an oral hearing in accordance with Rule 31 of the First Tier Tribunal Property Chamber Procedure Rules 2013 and setting out a timetable to enable the matter to be determined. On 12 October Judge E Morrison issued further Directions adding the Second Respondent as a party to the Application and setting out a revised timetable.

The Leases

3. The development known as One Brighton comprises two buildings

(Blocks E and F). Block E (“Brighton Belle”) is eleven storeys high

and contains 109 residential apartments. Block F (“Pullman Haul”) is

an eight-storey building with 63 residential apartments, together with

five commercial units and a two level community area.

4. [NAME_4], a charitable registered provider, holds a lease (“the Superior

Lease”) of 54 residential units at One Brighton; three in Brighton Belle

and 51 in Pullman Haul. The freeholder under that lease, which was

granted on 18 March 2008, for a period of 125 years less 10 days from

25 December 2007, is [COMPANY_8]. The

Management Company, which is a party to the Superior Lease,

appointed [COMPANY_9] to manage the development.

5. Twenty five of [NAME_6] 54 flats at the development (including Flat 55

Pullman Haul) are the subject of shared ownership leases, whilst the

remaining 29 are let by [NAME_4] to periodic tenants under social

rented agreements. The Applicants hold a shared ownership under-

lease of the Flat (“the Shared Ownership Lease”), dated 30

November 2009 and made between the First Respondent [COMPANY_4] (“the Landlord”) and the then underlessees, [NAME_10] and [NAME_10]. The under-lease was granted for a term of

125 years less 15 days from 25 December 2007.

6. The structure of the Superior Lease is that the Management Company

undertakes to supply services to the development for which the

headlessee ([NAME_4]) will pay “The Tenant’s Proportion of the

Maintenance Expenses”.

7. The Maintenance Expenses are the moneys actually expended or

reserved for periodical expenditure by or on behalf of the

Management Company in carrying out the obligations in the Sixth

Schedule of the Superior Lease. Part A of the Schedule contains the

Estate Service Charge, Part B the Block Service Charge, Part C a

Parking Spaces Service Charge and Part D Costs Applicable to any or

all of the previous parts of that Schedule.

8. Paragraph 12 of the Sixth Schedule to the Superior Lease provides that

the maintenance expenses include “Such sum as shall be considered

necessary and proportionate by the Management Company ….to

provide a reserve fund or funds for items of future expenditure to be

or expected to be incurred at any time in connection with the

maintained property (save for any part or parts thereof which are

specifically addressed in Part B of this Sixth Schedule).”

9. The Tenant’s Proportion is as set out in the Seventh Schedule to the

Superior Lease. Parts A, B and C are the amounts attributable to the

costs incurred in relation to the matters mentioned in the

corresponding Parts A, B and C of Schedule 6. The Management

Company’s costs incurred in relation to these matters are also

recoverable as part of the Tenant’s Proportion by virtue of Part D of

Schedule 6 and the Seventh Schedule.

10. The structure of the Shared Ownership Lease is that the

underlessees pay a specified annual rent (in respect of the proportion

of the ownership that they have not yet bought), a Service Charge

(which includes a managing agent’s fee for management of services)

and a Management Charge (the last being the Landlord’s (i.e. [NAME_6])

administrative costs in respect of the underlease and management of

payments thereunder). The Shared Ownership Lease provides that all

of these sums are payable monthly on the first day of each month

(Clause 3(1)).

11. The Service Charge is defined, in clause 1(2)(c) of the Shared

Ownership Lease, as meaning all sums payable under the Superior

Lease so far as the same are attributable to the Flat. This includes, but

is not limited to, the Rent and the Tenant’s Proportion of the

Maintenance Expenses as defined in that Lease. (The Rent is a ground

rent payable by [NAME_9] to a third party).

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The Service Charge Machinery of the Leases.

12. Paragraph 5 of Schedule 7 to the Superior Lease provides that at the

end of each year ending on the last day of February, the

Management Company shall as soon as practicable thereafter

provide an account of the Maintenance Expenses incurred in that year

(distinguishing between actual expenses and reserves funds for

future expenditure

13. Paragraph 6 of Schedule 7 provides that the Tenant must pay

quarterly payments of the Tenant’s proportion in advance each year on

1 March, 1 June, 1 September and 1 December based on the estimates of

anticipated expenditure by the Management Company or its managing

agents.

14. Paragraph 7 of Schedule 7 provides that within 21 days of the service on

the Tenant of a certificate under paragraph 5 the Tenant shall pay any

deficit whereby the actual expenses incurred exceed the budgeted

sums paid in advance under paragraph 6. If there has been an

overpayment this will be credited against future payments due.

15. Clause 3(2)(c) of the Shared Ownership lease provides that the

obligations owed by the lessee under the Superior Lease are owed by

the underlessee of the Shared Ownership Lease to the landlord under

that Shared Ownership Lease. It also obliges the underlessee to pay the

Service Charge as defined in the Superior Lease. However, it is

specifically provided that any sums thereby due from the

underlessee shall be payable to the landlord under the shared

ownership lease in such manner as that Landlord shall determine. [NAME_4] is able to pass on to the underlessees liability for payment for

services provided by the Management Company under the Superior

Lease through its agent [NAME_9].

The Application

16. By their Application the Applicants challenge specific service charges

costs in the years 2017-2018 and 2018-2019 as charged by [NAME_4].

The items challenged fall under the following headings:

2017-2018

PMA – Payment to Managing Agent - £1,521.01

PMH – Payments to [NAME_11]’s Homeowners - £1,354.32

The Applicants ask

(1) what these charges are; (2) why they differ from the original budget;

5 (3) how they have been calculated by [NAME_4]; (4) whether they are reasonable.

2018-2019

PMW – Payment to [NAME_12] - £617.61

PMH – Payments to [NAME_11]’s Homeowners - £1054.40

The Applicants also ask the same four questions in relation to these

charges.

17. More generally the Applicants state that their service charge is £3,600

(2018-19), which seems to them to be inordinately high. They also

consider that “[NAME_4] continually fails to budget sufficiently for the

payments to the managing agent and yet expects to recoup this from

shared owners at the end of the year.” The Applicants further comment

that their service charges have gone up by six times the inflation rate.

The First Respondent’s Statement of Case.

18. The First Respondent’s Statement of Case, dated 28 September 2020,

was signed on behalf of [NAME_4] by [NAME_13], who is [NAME_6]

Service Charge Officer.

19. In that statement it is explained that the service charge costs, for which

[NAME_4] is billed by the Management Company under the Superior Lease,

are broken down on [NAME_6] system into four service charge elements.

They are: PMA, PMF, PMH and PMW.

PMA (Payment by [NAME_4] to Managing Agent) is the costs of services

which are payable by all residents save that it does not include any

management fees paid to the Managing Agent or any costs

recoverable from home owners such as repairs, buildings insurance

and provisions for future major works. It is in effect the Estate

maintenance charge.

PMF (Payment by [NAME_4] to Managing Agent) is the Managing Agent’s

management fee charge.

PMH (Payment by [NAME_4] to Managing Agent – Homeowners) is the

costs incurred for repairs, buildings insurance and major works or

sinking fund contributions. These costs are only passed on by

[NAME_4], via the Service Charge, to homeowners. This is the block

maintenance charge.

PMW is the personal water and sewage rates charged directly from the

Managing Agent to [NAME_4] and passed on to residents. The individual

water charges are based on floor area.

20. The First Respondent explained that the reason the final charge for

2017-2018 differed from the initial estimate was that when the estimate

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was prepared by [NAME_4] at the start of the year it did not have [NAME_9]’s

budget for that year. It therefore used the 2016-2017 budget uplifted

by 2%. By the end of 2017-2018 [NAME_4] had become aware that [NAME_9] had

included in its estimate for that year, new costs for planned internal

decoration works, which [NAME_4] was not aware of at the time it set its

service charge estimates.

21. The First Respondent says that residents were provided with the

following explanation on their year-end service charge statement.

“2017/2018 Year End deficit due to the increase of the Managing

Agent Budget.

“The 2017/2018 Budget has been increased to include a fund to cover

the expenditure to undertake improvements to the Communal areas

of One Brighton such as internal decoration, as well as

renewal/repair within these areas where required.”

22. The First Respondent says that when it prepared its service charge

estimate for the year 2018/2019 it was based on the [NAME_9] budget for

2017/2018 but excluding the amount of £58,500 towards internal

repairs/decoration, as [NAME_4] did not anticipate this cost being applied

again in the 2018/2019 year. [NAME_4] uplifted the remainder of the

[NAME_9] estimated costs for 2017/2018 by 3%. When the service

charge reconciliation for 2018/19 was completed the First Respondent

was now aware that the final service charge expenses for that year

were higher than estimated in their earlier budget. The reason for the

difference was explained to residents in a covering letter. The

differences were accounted for by (1) an increase in the [NAME_9]

budget for personal water and (2) information received from the

managing agents in relation to the replacement of communal lighting

as part of the works to redecorate internal communal parts of the

building.

The Second Respondent’s Statement of Case

23. The Second Respondent provided a statement of case, dated 30

October 2020 and signed by [NAME_15], Property Manager of

[NAME_9], which says that each year [NAME_9] prepare an annual budget,

which is approved by the Second Respondent. The Budget is based on

the previous year’s expenditure and anticipated future costs. It is then

sent to the First Respondent with an invoice for the charges. [NAME_9] sent

the Budget for 2017-18 to [NAME_4] with a covering letter dated 30

March 2017 and requested its remittance by return.

24. The Second Respondent confirmed that the budget for 2017-18 had

been increased to allow for anticipated additional costs, such as the

requirement to increase the caretaker hours by 2 hours a week,

necessary repairs to the CCTV and to carry out regular testing of the

fire safety equipment to comply with fire regulations.

7 25. The Second Respondent also confirmed that the budget included an

element of £58,500 being a contribution to the internal reserve

account. The comments on the budget stated

“In order to comply with the terms of the lease it is necessary to

redecorate the internal communal parts of the building. As this has not

been carried out in full since completion took place, the directors

have authorised this work to be undertaken this year. The cost

allowance is an estimate at this stage and may differ once tenders are

obtained. A full consultation process will be carried out to comply

with Landlord & Tenant legislation.”

26. The covering letter which accompanied the budget, and is dated 30

March 2017, explained that the figure was based on an estimate

from the building surveyor department prior to a specification

being prepared and going out to tender.

27. The Second Respondent stated that the increase in the 2018 - 2019

budget relating to [NAME_6] category was the result of the collection

by [NAME_9] of a £28,500 contribution to the internal reserve account. It

was explained in the comments on the budget as follows:

redecorate the internal communal parts of the building it has been

agreed that the communal lights need to be replaced at the same

time as the current fixtures are not economical to replace or

run. The cost allowance for this reserve fund is an estimate at

this stage and may differ once tenders are obtained. A full

Consultation process will be carried out to comply with Landlord &

Tenant legislation.”

28. It was also stated in the cover letter, from [NAME_9] to [NAME_4], dated 28

March 2018, that

“As with last year’s budget the additional heading has been included for

schedule 2 & 4 toward the internal common way redecoration reserve

account. In order to comply with the terms of the lease the

Management Company are obligated to carry out cyclical internal

redecorations. As previously advised the Board of Directors have

agreed to carry out internal redecorations this year in 2018-2019.

The yearend 2019 budget figures inserted in the internal decorations

reserves is an estimate towards replacing the commonways lighting as

part of the internal major works decoration project. A full tender

exercise will take place next month and you will be fully consulted to

comply with legislation under the Landlord & Tenant Act, Section 20.

Last year a first stage Section 20 notice was issued in regard to the

internal redecorations however an amended notice is due to be issued

shortly to include the common way lighting which needs to be replaced

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at the same time as it is felt that the current fixtures are not economical

to replace and run.”

The Law

29. The law is set out in the Annex to these reasons.

Discussion and determination

30. This Application has been prompted by the perception of the

Applicants that their service charge is high, relative to the other

payments that they make in respect of their Flat by way of rent and

mortgage repayments. This perception has been more particularly

fuelled by them having received a demand from their landlord, [NAME_4],

the First Respondent, for unexpected balancing charges for services,

following the end of the service charge years 1 April 2017 to 31 March

2018 and 1 April 2017 to 31 March 2019.

31. The Application has also come about in part because the Applicants are

confused as to what is meant by certain service charge heads of

expenditure. This is because when [NAME_4] presents the end of year

service charge statement and accompanying information to its

leaseholders, including the Applicants, its accounting system and

method of charging classifies the costs in a different way to that of the

costs identified by [NAME_9] in its budget and end of year statement that

it sends to [NAME_4].

32. As far as 55 Pullman Haul is concerned, [NAME_9]’s service charge budget

breaks down into the following heads of expenditure identified as

Schedules: Estate charges (schedule 1); Block F charges (schedules 4

and 5); Water charges (schedule 6) and Management Fee (schedule 7).

It is unclear as to what these Schedules refer to. They certainly do not

refer to either the Superior Lease or the Shared Ownership Lease.

33. These charges are then identified differently on [NAME_6] service charge

system (and service charge statements) using the following

classification:

PMA meaning service charge payments made by [NAME_4] to [NAME_9] and

recharged to all residents but excluding management fees and costs

payable only by home owners. (This is the Estate charge).

PMH meaning payments made by [NAME_4] to [NAME_9] in respect of shared

ownership dwellings only and therefore only recharged to the

leaseholders of those dwellings. It covers repairs, buildings insurance,

major works and sinking fund contributions. (This is the Block

maintenance charge).

PMW meaning personal water and sewage charges raised by the

Managing Agent and recharged to residents.

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PMF meaning the Managing Agent’s management fee recharged to

residents.

[NAME_6] own management fee is identified separately on service charge

statements.

34. Thus the questions asked by the Applicants are answered as follows.

First, with regard to the service charge year 2017-2018: the payment

identified as “PMA – Payment to Managing Agent - £1,521.01”

refers to the payment for estate services payable by all residents. The

payment identified as “PMH – Payments to MA’s Homeowners -

£1,354.32” is actually the payment for other services made only by

leasehold owners of each block, such as the Applicants.

35. Second, with regard to 2018-2019, the PMH payment is similarly

explicable as above.

36. The Applicants also ask why the figures for [NAME_6] categories differ

from the budget estimates. The reason is as follows.

37. The Superior Lease provides for a service charge year ending on the last

day of February each year. It also makes provision for advance

quarterly service charge payments based on a budget, payments to be

made on the first day of March, June, September and December

respectively each year. As soon as possible after the end of February the

managing agent must provide a statement of actual costs and then

either demand payment of any deficit or credit the leaseholder with any

surplus.

38. Despite the terms of the lease, in practice both [NAME_9] and [NAME_4] operate

on the basis of a year running from 1 April to the following 31

March. [NAME_9] and [NAME_4] prepare budgets before the start of the

year and issue final statements that produce a deficit or surplus after

the end of each financial year. Unfortunately for all concerned these

two events are not synchronised.

39. As explained in the Statements of Case given by the First and Second

Respondents, when [NAME_4] prepares its budget estimates for the coming

year it does not have to hand [NAME_9]’s estimate for that year. In

each of the years challenged by the Applicants there was a new item of

which [NAME_4] was unaware when it set its budget.

40. However, this does not alter the fact that, on 30 March 2017, [NAME_9] sent

its budget for 2017-2018 to [NAME_4] together with a covering letter that

explained the inclusion of the sum of £58,500 in respect of planned

internal block decoration works. Similarly, on 28 March 2018, [NAME_9]

sent its budget for 2018-2019 to [NAME_4] together with a covering letter

that explained the inclusion of the sum of £28,500 in respect of

planned internal block lighting works.

10 41. It is unclear why residents were not informed of these changed

circumstances earlier than some 18 months later when they received

from [NAME_4] their final service charge statement and balancing charge for

the years in question. This could have been avoided had [NAME_9] and

[NAME_4] co-ordinated their budget preparation and issue dates. However,

that said, the commonly found two stage system of estimated and

final charges always creates the possibility of an unexpected item of

expenditure arising in the interim period. It would nevertheless be

good practice for [NAME_4] to notify residents of such items, when they

become apparent, particularly where large sums are involved.

42. The same explanation applies in the case of the water charges. Like the

other costs these are invoiced to [NAME_4] by [NAME_9] based on estimated

amounts which are then passed onto residents during the same year in

which they are received plus a balancing charge or credit as the case

may be (which is received after [NAME_9]’s year end and therefore passed

on by [NAME_4] to residents during the next accounting period.

43. This caused a particular problem with regard to the water charges

made in the year 2018-2019.The Respondents stated that the PMW

payment for that year is the water charges notified and charged by

[NAME_9] to [NAME_4] and passed on to leaseholders by [NAME_4]. The Applicants

question why their final PMW charge for the year (in which total

water costs were £49,778.00) was apparently £617.61 when the

estimated amount had been £292.08 (based on estimated total

water costs of £52,000).

44. The answer to this conundrum was provided by [NAME_4], in a

Supplementary Statement, received by the Tribunal on 18 January

2021, following a request by the Tribunal for further information.

45. The explanation is as follows. The “actual” PMW coded charge of

£617.59 for water in 2018-2019 reflected not just the actual water

costs for that year but also a balancing charge of £55.21 in respect of

the year 2017-2018, which [NAME_9] sent to [NAME_4] in 2018-2019. It

also reflected a balancing credit of £75.27 in respect of the year

2016-2017, which was credited to [NAME_4] by [NAME_9] in 2018-2019.

46. This came about because there had been an advance payment of

£310.01 in 2016-2017 (which was wrongly coded to PMA) and

therefore when the actual costs proved to be £234.74 there was a credit

of £75.27.

47. To correct the error in coding, [NAME_4], in its 2018-2019 end of year

statement, debited the PMW charge by £234.74 but credited the PMA

item of the account by £310. Thus the Applicants thereby received the

benefit of the £75.27 credit.

48. Furthermore, we are also told that because the actual water cost for

2018-2019 proved to be £313.64, rather than the £327.64 previously

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charged, a credit of £14 was shown on the 2019-2020 service charge

statement.

49. It follows that the balancing charge in 2018-2019, for PMW water of

£325.53, did not mean that the Applicants were charged £617.59 for

water in 2018-2019. The balancing charge in reality was £617.59

less the credit to PMA of £310.01 = £307.58 less £14 (credited in 2019-

2020) = £293.58 less the initial interim payment of £292.08 =

£1.50. Thus the total payment by the Applicants for water in 2018-

2019 was £293.58.

50. It is therefore clear that the charges for water made to the Applicants

by [NAME_4] reflected, according to [NAME_4], the actual bills from the water

supplier. However, it is regrettable, as [NAME_4] now acknowledges, that

the final service charge statement for 2018-19 lacked transparency

and led to understandable confusion on the part of the Applicants (and

initially the Tribunal).

51. The Applicants also ask how the service charges are calculated. The

answer, provided by the Respondents, is that they are based on

estimated or actual costs (as to which see above). The estate wide

services are charged equally and the basis of charge for other services is

the floor area of the Flat in relation to the total floor area for all

properties within the relevant service charge schedules. The Tribunal

finds that this is a fair and reasonable way of charging for the

services.

52. Finally, the Applicant questions whether the charges are reasonable.

The Tribunal has no evidence sufficient to establish that the charges

made by [NAME_4] were in general or in specific instances unreasonable.

However, the Applicants specifically raise the matter of the proposed

redecorations in 2017-2018. They say that they were unable to pinpoint

the works and whether a due process was followed in selecting

contractors.

53. The annual service charge statement for 2017-2018, sent to residents

by [NAME_4] with a covering letter dated 25 September 2018, noted that

of One Brighton such as internal decoration, as well as

renewal/repair within these areas where required.”

54. The earlier budget for that year, which [NAME_9] sent to [NAME_4] with a

covering letter dated 30 March 2017 had stated that the decoration

work would be undertaken in the year 2017-2018 and that a full

Landlord and Tenant Act 1985, section 20 consultation would be

carried out in April 2017 when a full tender exercise would take place.

12 55. It seems tolerably clear that this never came to fruition because on 28

March 2018, [NAME_9] sent the budget for 2018-2019 to [NAME_4] and in its

covering letter stated that

“As previously advised the Board of Directors have agreed to carry out

internal redecorations this year in 2018- 2019.”

It is not clear when the previous advice referred to was given but it

seems reasonable to infer that the redecoration project had been

deferred to 2018-2019. In addition a further figure of £28,500 had

been budgeted for in 2018-2019 for internal lighting replacement.

56. The covering letter of 28 March 2018 from [NAME_9] to [NAME_4] stated that

this work was part of the internal major works decoration project. It

said that a full tender exercise would take place in April 2018 and that

[NAME_4] would be fully consulted to comply with legislation under the

Landlord & Tenant Act 1985, Section 20.

The letter also stated “Last year a first stage Section 20 notice was

issued in regard to the internal redecorations however an amended

notice is due to be issued shortly to include the common way lighting

which needs to be replaced at the same time as it is felt that the

current fixtures are not economical to replace and run.”

57. The Tribunal has no evidence with regard to any section 20

consultation or tender processes. Nor does it have any evidence of

[NAME_4] having cascaded any consultation process to its own leaseholders,

where section 20 is applicable. Thus this Application is not at the stage

of a dispute about section 20 compliance, or the cost of works carried

out. Indeed it has been held by the Upper Tribunal (Lands Chamber)

that the limitation on recoverable costs provided by section 20 of the

Landlord and Tenant Act 1985 does not apply in respect of payments

for works to be carried out in the future and only applies at the stage

when the works are to be done ([ADDRESS] (1998) Limited v

[NAME_16], [NAME_17] [NAME_16] [2016] UKUT 0365).

58. The redecoration/electrical work had clearly not been done by 26

September 2019 when [NAME_4] sent residents, including the Applicants,

their final service charge statement for 2018-2019. It therefore

seems likely that the budgeted sums remain in the service charge

account managed by [NAME_9]. Indeed the Respondents have referred to

them as reserve fund contributions, as to which see below.

59. The issue thus becomes one of whether the advance payments in

respect of the proposed decoration/electrical works were payable and

reasonable at that stage. Section 19(2) of the Landlord and Tenant Act

1985 provides that

“Where a service charge is payable before the relevant costs are

incurred, no greater amount than is reasonable is so payable and after

the relevant costs have been incurred any necessary adjustments

13

shall be made by repayment, reduction or subsequent charges or

otherwise.”

60. The Superior Lease allows for a reserve fund. Paragraph 12 of Part D of

the Sixth Schedule to the Superior Lease provides that the maintenance

expenses include

“Such sum as shall be considered necessary and proportionate by the

Management Company ….to provide a reserve fund or funds for

items of future expenditure to be or expected to be incurred at any

time in connection with the maintained property (save for any

part or parts thereof which are specifically addressed in Part B of

this Sixth Schedule).”

61. A “reserve fund” is a fund created for the purposes of spreading

certain costs across the life of the lease to prevent penalising

leaseholders who happen to be in occupation when items of major

expenditure are incurred. The Association of Residential Managing

Agents has published A Guide to the Management of Mixed Tenure

Developments. Section 4.2 of that Guide provides:

“Best practice for both housing associations and managing agents is

to set up reserve funds on new developments. However there are

considerations of the affordability of service charges for first-time

buyers and the burdens on developers. A life cycle costing of the

development as built should be available to indicate the expected

replacement date for components and the recommended redecoration

intervals.”

Similar Guidance on sinking funds is given in the Service Charge

Residential Management Code of Practice (3rd edition) published in

2016 by the RICS.

62. The evidence provided by the parties includes the certified accounts for 2017-2018. These show that [NAME_9] has set up a number of reserve funds as follows (in the case of Pullman Haul) to cover the costs of large, non regular repair and maintenance work.

1. A general reserve fund for estate costs.

2. A general reserve fund for Pullman Haul internal costs. At 31 March 2018 it contained £63,436.21 including the £58,500 allocation for that year.

3. A lift reserve for Pullman Haul internal, which contained £11,000 at 31 March 2018.

4. A general reserve for Pullman Haul internal, which contained £12,967.88 at 31 March 2018.

14 63. The RICS Guidance also recommends that a reserve fund should

reflect “a costed, long-term maintenance plan that reflects stock

condition information and projected income streams. This should be

made available to all leaseholders on request and any potential

purchaser upon resale.” There is no evidence that such a

maintenance plan exists at One Brighton and much to suggest that

maintenance, including items of major expenditure, is carried out on

an ad hoc basis.

64. It can be seen that the reserve fund for Pullman Haul internal costs has

not been built up gradually. It consisted of £63,436.21 of which

£58,500 had been demanded in 2017-2018, [NAME_9] having told [NAME_4] in

March 2017 that internal decoration would be necessary in the coming

year. Similarly the following year a further “reserve fund” sum of

£28,500.00 for electrical works was demanded and recharged.

65. The Applicants were personally charged £1,080.16 in respect of the

prospective decorating charge in 2017-2018 and £513.46 in respect of

the prospective electrical works charged in 2018-2019. It follows that

although described as reserve fund contributions these sums were for

major works anticipated in the near future for which sufficient funds

would not otherwise be available from the reserve fund. This would

seem to be because, as noted above, the reserve fund does not appear

to be based upon a costed, long-term maintenance plan.

Decision

66. The Tribunal does not have evidence sufficient to establish

that it was unreasonable for [NAME_9] or [NAME_4] to budget for

these imminent decorative and electrical repair costs which

[NAME_9] considered to be necessary at the time, lamentable

though it is that a sufficient reserve fund for the same

had not been hitherto accumulated by [NAME_9]. It would

however be wrong to characterise these payments as

reserve fund contributions by [NAME_4] or the leaseholders,

because the work has obviously not been planned in

accordance with a settled properly funded programme of

planned maintenance. They are simply advance payments

for anticipated imminent costs, which the Management

Company had decided it was necessary to incur.

67. However, the Tribunal is concerned that these payments

were demanded from leaseholders in September 2018 and

September 2019 despite having been planned as early as

March 2017 and March 2018 respectively and with no

apparent progress, including consultation procedures,

having taken place. Whilst it was lawful for [NAME_4] to make

the demands, it is clearly in the interest of good landlord and

tenant relations for the Applicants and other residents to be

informed of why this has not happened and what they can

expect by way of progress including consultation.

15

68. The Tribunal’s decision is of course without prejudice to

whether the works when carried out will prove to be

reasonably incurred and the costs thereof reasonable in

amount. It is at that stage that the applicability of section 20

would become relevant. As noted above, the present

Application and decision thereon simply concerns the

reasonableness of the advance payments.

69. The Tribunal is satisfied that the water charges in 2018-2019

were properly incurred and charged. However, the mapping

of [NAME_9] charges onto [NAME_6] coding system means that there

is scope for confusion, as evidenced above, thereby

highlighting the need for full explanation in covering letters

and accompanying documentation as to how the sums in

question were arrived at.

.

RIGHTS 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.

2. 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.

3. If the person wishing to appeal does not comply with the 28 day time limit, that 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.

4. 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 the party making the application is seeking.

16 Annex: The Law

Landlord and Tenant Act 1985

Section 18(1) defines a “service charge” as:

“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.”

Section 19(1), provides that:

“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 provision 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”.

Section 19(2) provides that

“Where a service charge is payable before the relevant costs are incurred no greater amount than is reasonable is so payable and after the relevant costs have been incurred any necessary adjustments shall be made by repayment, reduction or subsequent charges or otherwise.”

“Relevant costs” are defined for these purposes by section 18(2) of the 1985 Act as “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.