The title of this week’s Legal Update should come as no surprise to those of you responsible for the management of flats or developments. The following case of Wigmore Homes (UK) Limited -v- Spembly Works Residents Association Limited, resolved recently on appeal to the Upper Tribunal (“UT”), serves to reinforce how important compliance with the lease terms can be.

Background

The development in question was a block of 33 flats converted around the turn of the century from a former office building.  The development had a number of issues but not least that one leaseholder, who owned 13 flats (over one third of the development), was simply refusing to pay service charges since purchasing those flats in or about 2009.  As a result of that approach, the block was suffering in a number of ways due to the lack of funding.  The lessee owned landlord company had elected, for their own reasons, not to employ the services of a professional managing agent and thus was running the building to its best ability but not necessarily in accordance with the leases.

The leases were not unusual in that they required the leaseholders to pay service charges in advance based upon an estimate of anticipated annual expenditure.  It further required that the landlord must serve upon the leaseholders after the end of each financial year a “Certificate” accounting for all monies received and expenses incurred in each year and then, as a result, showing any surplus or deficit for that year and what was happening with that deficit/surplus.  You will, no doubt, have come across such provisions in the past.

In each year the landlord demanded the service charges based upon an anticipated expenditure for that period.  The budget included provision for works to be undertaken within that year.  At the end of the year (caused in part by the defendant leaseholder’s refusal to pay charges due on all of its 13 flats) the planned works to the block could not be undertaken due to lack of full funding.  Accordingly, there was, year on year, a significant surplus against the budget. 

There is of course nothing wrong with that outcome, save that the landlord failed to provide the Certificate required under the lease setting out the underspend.  This latter point was seized upon by the  leaseholder in its attempt to avoid liability for service charges entirely.

The issues in dispute

A claim for the arrears was eventually brought by the landlord against the lessee and, in the first instance, the First Tier Tribunal found that the budgeted service charges were indeed reasonable and that the leaseholder must make payment notwithstanding that it was accepted that no Certificate had been served for the relevant period. 

The leaseholder appealed to the UT on the basis that:-  

1. the sums demanded on account could not be reasonable for the purposes of s.19(2) Landlord and Tenant Act 1985 when no Certificate had been provided and thus the leaseholder could not possibly be said to have evidence to enable it to determine if the sums sought were reasonable, as there was no accounting in respect of over payments in previous years; and

2. the failure to provide a valid Certificate was a ‘condition precedent’ on the liability of the leaseholder to pay at all.  In other words, because the landlord had failed to serve the Certificate, the leaseholder should be exempt from payment of any service charges for the relevant period.

The decision of the Upper Tribunal

The second point, relating to the ‘condition precedent’ argument, was dismissed by the UT. 

The first point was upheld, however, with the UT finding that it was for the landlord to establish and evidence that the sums in its demands (and budgets) were reasonable.  To do this, the landlord needed to rely upon the accounting information required as part of the Certification process set out in the lease.  In failing to provide details of surpluses or, indeed, any Certificate the UT concluded that the leaseholder was prejudiced. 

In the event, the UT found that the sums claimed within the budgets could not be shown to be reasonable pursuant to section 19(2) and, noting that in most years the amount budgeted for was roughly twice the amount actually spent, it reduced the sums due from the leaseholder by 50% for six out of the seven years within the claim.

Lessons to be learned

The ruling, whilst probably technically correct, is somewhat harsh given that the reason for the 50% underspend each year results mainly from the single defendant leaseholder of over one third of the flats refusing to pay service charges. 

The moral of the story is however very simple.  Had the landlord complied with the lease and served the requisite Certificates at the relevant time, the likelihood is that the earlier and successful ruling against the leaseholder would have stood, enabling the landlord to have recovered all monies due.

The lesson learned is therefore that it is most important to check the lease to look for and record all procedural requirements of the individual leases and then ensure that those requirements are complied with fully to avoid the charging process being called into question at a later date. 

We are happy to advise on all procedural requirements in any leases. So if you are ever unsure as to the requirements in a lease, then do please feel free to seek out assistance.

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. 

Disclaimer

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