This legal update discusses the case of Arun Mirchandani -v- Thanet Lodge (Mapesbury Road) RTM Co Ltd (2023). This case relates to a dispute as to the reasonableness of service charges imposed by the respondent RTM Company in relation to works and costs at the block but also certain legal fees and mediation costs that were incurred in seeking to resolve disputes with leaseholders.

Background

The Applicant in the case is a leaseholder who owns one of 43 flats in a 5-storey block. The block is one where the leaseholders have exercised the Right To Manage and so is managed by the RTM Company with the assistance of a professional managing agent (HML).  

In October 2022 the Applicant leaseholder sought a determination as to the reasonableness and payability of certain service and administration charges relating to External Building Repair Works, Fire Safety, Internal Redecoration and General work within the flats.

As the RTM had incurred legal charges for advice on the above named matters, the legal fees were also charged to the leaseholders as part of the service charges collected and the Applicant challenged whether any part of those costs could be sought from the leaseholders through the service charge.

The reasonableness issue (failure to consult on major works)

The leaseholder’s challenge to some of the costs of works undertaken to the building succeeded on a simple point, the failure of the RTM to follow the s.20 consultation procedure ahead of appointing the contractor for the works.  As is sadly common, the RTM Directors were aware of the need for s.20 consultation but had erroneously used a “rule of thumb” approach to calculating the level at which s.20 would apply and wrongly concluded that the level of cost on each job did not create a requirement to consult.  Unfortunately, the RTM had failed to understand the correct qualifying criteria for when s.20 consultation was required (see here) and had also not taken account of some lease variations that affected the service charge proportions and had the effect of lowering the threshold for consultation at the block.  The fact that s.20 DID apply to the works and no consultation had been undertaken - no matter how innocent the reasoning - resulted in the FTT concluding that the leaseholder’s argument must succeed and his liability was limited to £250 in the absence of an application for dispensation. No explanation is provided in the FTT ruling for why dispensation under s.20ZA LTA1985 was not sought by the RTM but the writer assumes that the RTM must have considered it as a potential defence/counter argument to what will have been a likely obvious outcome?

The legal costs issue (are they a service charge cost?)

The main challenge though, and the point of this Legal Update, is on the dispute as to legal costs incurred by the RTM Company and whether they were charges properly payable from service charge funds. The legal costs incurred were identified by the RTM company as follows:

• Solicitors’ costs for advice about the membership and constitution of the RTM company, and about a proposed EGM.

• Solicitors’ costs in relation to a dispute with another leaseholder and the consequences of the settlement of a dispute about service charges.

• Legal costs incurred in relation to a compensation claim brought by the respondent.

• Legal costs (solicitors and barrister) for advice in connection with a mediation of the respondent’s compensation claim.

• The RTM Company’s share of the mediation fee incurred in seeking to settle an earlier dispute with the Applicant.

The lease terms

The RTM Company’s argument was that the legal costs could be charged to the service charge under clauses (4)(g)(i) & (ii) of the lease which read as follows:-  

“(i) To employ at the Lessors’ discretion a firm of Managing Agents and Chartered Accountants to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents and service charges in respect of the Building or any parts thereof

(ii) To employ all such surveyors builders architects engineers tradesmen accountants or other professional persons [our emphasis] as may be necessary or desirable for the proper maintenance safety and administration of the Building”

The FTT decision

Following the provision of all evidence the FTT considered, unsurprisingly, that the cost of advice on the membership and constitution of the RTM company was clearly not contained nor contemplated by those drafting the lease terms and, as a result, was not recoverable via the service charge.

In terms of other legal costs, the FTT referred to the decision in Sella House Ltd v Mears (1988) 21 HLR 147 and No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd (see our Legal Update here on the latter) confirming that the clauses identified by the RTM were drafted intentionally wide such as it is reasonable to suggest that 'lawyers' would be reasonably included within the term “other professionals”.  However, it was also necessary for there to be mention elsewhere in the lease for the use of lawyers.  In the absence of a specific mention in the lease of legal costs, lawyers or proceedings, the FTT found that the general words of the clauses at (4)(g)(i) & (ii) could not be said to have been meant to include legal costs (no matter how impractical that might prove to be for the RTM Company) and therefore the legal costs - no matter how reasonable or necessary it was to incur them - were not recoverable as a service charge under this Lease.

The FTT recognised the issues faced by leaseholder owned RMC’s or RTM companies in terms of obtaining necessary advice (on any matters and not just litigation) and the ability to fund the inevitable cost of that where the leases provide no basis on which those cost can be paid from the service charge, the RMC/RTM simply has to find alternative means of funding that cost.

Implications of this decision

In actual fact there is nothing new in this decision.  It, like numerous decisions before it, underscores the importance of reviewing the lease/transfer terms (before commencing RTM application but also) early on in the management of any development so that a clear understanding of what is and, importantly, what is not required/permitted can be ascertained.  That clear understanding will prevent errors being made and avoid significant and often irrecoverable costs from being incurred when incorrect charges are questioned.  If the managers of the block are aware prior to the need to incur an expense which is not going to fall within the service charge the manager has time to seek to raise funds outside of the service charge to enable that expense to be incurred without later dispute (see here information on the widely used Covenants Review Service offered by KDL Law).

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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