Section 19 (1) (a) of the Landlord and Tenant Act 1985 (LTA 1985) states that service charges are payable “only to the extent that they are reasonably incurred”. This means that a Landlord should take steps to ensure that costs incurred are on items reasonably required and then only at a level that is reasonable.

Section 19 (2) of the LTA 1985 states 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 adjustment shall be made by repayment, reduction or subsequent charges or otherwise”.here 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 adjustment shall be made by repayment, reduction or subsequent charges or otherwise”.

So, I hear you ask, “What is the definition of reasonably incurred”?

The LTA 1985 rather unhelpfully offers no guidance as to what it means for a service charge to be ‘reasonably incurred‘! This makes it difficult for Landlords, Leaseholders and importantly the courts/tribunals to determine a Section 19 (1) (a) challenge against service charges. Having said that, if you have a lot of time, guidance on what it means for a service charge to be reasonably incurred can be found in a very large collection of case law from the upper courts and tribunals.

Avon Ground Rents v Cowley [2018] UKUT 92 (LC)

An example of reasonableness was discussed in the above case where the Upper Tribunal determined the reasonableness of advance service charge demands under section 19(2) of the LTA 1985 in circumstances where the Landlord’s relevant costs were likely to be repaid under a National House Building Council (NHBC) warranty.

Facts of the case

• The development, The Interchange, is a mixed use development on basement, ground and four upper floors situated around a central courtyard.  The building is let to a variety of Leaseholders on terms requiring them to contribute through a service charge to its repair and maintenance.

• The Interchange was covered by an NHBC warranty.

• A leak was discovered in the courtyard which was a result of a failure in a waterproof membrane.

• The Landlord commenced the statutory consultation procedure in respect of the costs of repair of the membrane.

• During this process, one of the Leaseholders suggested that the Landlord seek payment under the building’s NHBC warranty.

• NHBC seemed to accept liability under the policy and proposed to cover the service charge liability of the Leaseholders in full, although crucially, no final agreement was reached.

• Irrespective of the above, the Landlord demanded the full amount of the costs of the works from the Leaseholders.

• The Leaseholders disputed liability for up front payment of these costs on the basis that the Landlord was likely to recover from the NHBC in full. A determination of the dispute was therefore sought from the First Tier Tribunal (FTT) that the relevant costs of repairing the membrane were reasonable and recoverable from the Leaseholders in advance.

The FTT’s Decision

The FTT held that the works proposed were reasonable and recoverable through the service charge, a correct interpretation of the lease terms which required payment on account. However, it found that the costs would be recouped via the NHBC and thus that no contributions by the residential Leaseholders could be demanded.

Decision on Appeal

The FTT’s decision was upheld by the Upper Tribunal on appeal. Whilst the amount required for the works was recoverable from the Leaseholders as a matter of contract, section 19(2) of the 1985 Act meant that the Tribunal was entitled to consider other matters, such as the fact that it was likely that the Landlord would be reimbursed for the costs incurred by other means.

In this case, NHBC’s liability has been admitted and the FTT was entitled to conclude that the sums would be paid by NHBC within a reasonable period of time. Accordingly, it was not reasonable for the Landlord to require the Leaseholders to pay in advance.

This is an interesting illustration of the application of section 19(2) of the LTA 1985 where payment may be received from a third party, if not questionable when the reality of the position is considered further (see below). Whether an advance payment is reasonable will always depend on the circumstances of each case. Accordingly, when demanding advance payment, be that for major works or supply a budget for the year, consideration will need to be given to the reasonableness of each cost.

It is relevant that whilst NHBC had accepted liability there was at the time of the appeal no indication from NHBC as to the level of payment that they would make or when.  During which time, the relevant works are unlikely to be carried out, in circumstances in which the Leaseholders are not obliged to pay for works, serving as a detriment to both the Landlord and Leaseholders.

Should you have any questions in relation to the above, then please do not hesitate to contact Kevin Lever on Kevin.Lever@kdllaw.com or 01435 897 297. 

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