Poorly managed service charges are a frequent cause of disputes between landlords and tenants, owners and occupiers. Following the recent opening of the new Westfield Shopping Centre in London, the landlord proposed an increase in the service charge by 75%, enraging the tenants, including the Arcadia group. The Westfield increase is in order to cover costs including cleaning and marketing. However, when it comes to service charges, landlords are obliged to follow the procedure under the lease when it comes to the tenant’s liability to pay a service charge and a tenant is entitled to refuse to comply with any demands which are made in disregard of the stipulated procedure under the lease.

What are service charges?

Service charges are payments made by leaseholders to the landlord – the freeholder, or more usually a managing agent – for all the services they provide. These will include maintenance, repairs and buildings insurance, and could also include lifts, lighting, cleaning of common areas and gardening, as well as the costs of managing the property. Service charges are usually collected a year in advance, with any surplus repaid or shortfall collected at the end of the financial year.

Right to ask for more?

An important case decided in the Court of Appeal on 23 July 2008 has sounded a wake up call to landlords and their agents. Simply stated it means it is vitally important they fully follow the language of leases in order to recover service charges. Failure to do so led a landlord, Leonora Investment, losing a claim for £263,117 plus costs (Leonara Investment Co Ltd v Mott Mcdonald Ltd).

After redecorating the block, the landlord tried to claim a contribution by way of service charges to the costs it incurred in redecorating. The landlord served a demand separate to and in addition to the end of year statement and demand. The court held that the landlord was not entitled to claim this additional sum as the landlord had not followed the procedure prescribed under the lease in claiming the additional costs of redecorating.

Genuine mistake?

However, can a landlord serve an amended statement and demand if relevant expenditure is omitted from the year end statement, which the landlord is obliged to provide at the end of the year and which refers to the landlord’s total expenditure for that year? Despite the judgment in Leonara, a landlord can amend previous year end statements and demands to add expenditure omitted from them if the omission was a genuine error rather than a deliberate omission (Universities Superannuation Scheme Limited v Marks & Spencers Plc (1999). In the words of Tuckey LJ in Leonara, “Businessmen dealing with one another often make mistakes and there is no scope for saying that the provisions in this clause gave the landlord only one opportunity to get it right”.

What is best practice?

However, it is best practice for landlords to include relevant expenditure in year end statements and they should not be making a practice of claiming additional or exceptional expenditure in addition to standard expenditure. Furthermore, if a landlord does decide to serve an amended statement and demand for previous years, the courts have suggested that it can do only if it acts with reasonable expedition after discovering the error.

This reasoning applies to all leases, both commercial and residential. However with residential leases there are, of course, elaborate statutory provisions that also have to be observed. The Commonhold and Leasehold Reform Act 2002 introduced various new obligations on landlords in relation to service charges and administration charges which obligations have come into force on a piecemeal basis. One of the latest to come into force is the obligation on a landlord to give residential long leaseholders (a term of more than 21 years) prescribed information when making a demand for service and/or administration charges. From 1 October 2007 a landlord must supply long leaseholders with a summary of their rights and obligations relating to service and administration charges when sending out service and administration charge demands. A leaseholder may withhold the service or administration charge payment if a landlord fails to provide the summary with the demand.

For further information please contact Owen Rafferty or the Partner with whom you usually deal