Service charges – something for nothing?

Stephen Liddle analyses the ability of a landlord to claim for pure overheads in the management of its leasehold estate.

Can landlords in the case of Right to Buy long leaseholds recover for purely management overheads in circumstances where services are not actually provided to the tenant against whom such claim is made? 

In Waverley Borough Council v Kamal Arya [2013] UKUT 0501 (LC) the Upper Tribunal (Lands Chamber) held that they could not.

The central issue was whether Waverley Borough Council (‘WBC’) could recover, as a service charge, costs which were unrelated to actual expenditure on the building or common parts ie for pure overheads in the management of their leasehold estate.

Mr Arya’s property was one of four self-contained flats within a single block with no common parts. The lease was for 125 years at a ground rent of £10 which had been granted pursuant to the Housing Act 1980. Mr Arya (an assignee of the term) had brought an application before the LVT under section 27A of the Landlord and Tenant Act 1985 for a determination of his liability to pay certain management charges as an element of WBC’s claimed service charges.

The LVT found against WBC on the footing that they were unable to recover for pure overheads (to which there was no explicit reference in the lease) in managing their leasehold estate ie for expenditure which was not associated with the execution of physical work on the block under the terms of the lease. WBC duly appealed to the Upper Tribunal (Lands Chamber) which also found against WBC.

WBC sought to recover flat rate charges from each of their long leaseholds (£30pa after 2004 rising to £35pa after 2007-08) as a contribution towards their overheads in managing their estate of 408 long leaseholds. There was a further claim for a flat rate charge of £17.50 covering WBC’s administration of their block policy which fell within the terms of the lease and is not material for present purposes as Mr Arya was found liable for such sum (which he admitted was reasonable) which clearly fell within the terms of his lease.

Mr Arya disputed that the remaining flat rate charges were justified. With minor exceptions, no other charges were made by WBC for services provided during the relevant periods as no services had actually been provided. For instance, no repairs had been carried out on the structure of the block in which Mr Arya lived, nor to any of the installations therein for which WBC was liable.

This article raises two issues:

(a) Is it possible for a landlord in WBC’s position to claim for pure overheads in the management of its leasehold estate?

(b) Future considerations in the wake of the decision of the Upper Tribunal in WBC’s case.

General Principles

Martin Rodger QC, Deputy President of the Lands Chamber reviewed the following relevant authorities:

• London Borough of Brent v Hamilton (2006) LRX/51/2005
• Wembley National Stadium Ltd v Wembley (London) Ltd [2008] 1 P&CR 3
• Norwich City Council v Marshall (2008) LRX/114/2007
• Palley v London Borough of Camden [2010] UKUT 469 (LC)
• London Borough of Southwark v Paul …[2013] UKUT 0375 (LC)

He concluded as follows:

“[30] It is clear from these authorities that, in principle, the costs incurred by a local authority (or by any other landlord) in arranging for the provision of services, and managing their delivery, is properly regarded as part of the cost of providing the service which may be recovered from its tenants through an appropriately framed service charge covenant. The same is true of the overhead costs incurred in connection with the management and provision of services. In both cases it is necessary to respect any limits which the parties may have imposed on the categories of expenditure to which the service charge may relate (as in Norwich).

[31] In relation to overheads and indirect costs it will also be necessary to consider, as a question of fact, whether the relationship between the costs sought to be recovered and the services to which they are said to relate is sufficiently close to fall within the terms of the lease. The further from actual compliance with the landlord's obligations the incurring of the cost or expense lies, the more difficult it may be to treat it as part of the cost of compliance. The language of some leases may permit a more generous attribution of indirect costs to the service charge than that of others.”

He also considered South Tyneside Council v Hudson [2012] UKUT 247 (LC) in relation to the apportionment of costs incurred by the Council in managing all of its tenanted and leasehold housing stock through a management company. He noted at [34] of his judgment that:

“……The council's standard lease expressly permitted it to recover the costs of managing the building of which the demised premises formed part, whereas its approach to apportionment made each leaseholder responsible for an equal share in the cost of managing every building in its residential portfolio. The Tribunal found nothing impermissible in that approach…..”.

Therefore, in principle, administrative and management costs can be claimed even if the function is not carried out by the Council itself.

So what did the lease say in WBC’s case?

The Fourth Schedule to Mr Arya’s lease contained the tenant’s covenants, the material parts of which read as follows:

“(3) To pay to the Council by way of additional rent a yearly sum equal to a proportionate part (calculated as mentioned below) of the costs, expenses and outgoings which the Council have incurred in the period of 12 months up to the preceding 1 April in each year in the repair, maintenance and renewal of the building of which the flat forms part and the provision of services undertaken by the Council (whether or not the tenant actually utilises those services) and of insuring the building subject to the following terms:

(a) The additional rent will be determined by a certificate (referred to below as “the certificate”) signed by an officer of the Council appointed for this purpose acting as an expert and not as an arbitrator each year as soon after the end of the Council's financial year as is practicable

(b) A copy of the certificate for each financial year will be supplied by the Council to the tenant on written request and without charge

(c) The certificate will contain a summary of the expenditure incurred by the Council during the 12 months up to the preceding 1 April in the year to which it relates together with a summary of the relevant details forming the basis of the additional rent and the certificate (or a certified copy of the certificate) will be conclusive evidence for the purposes of this Lease of the matters to which it refers

(d) The yearly amount of the additional rent payable by the tenant will be calculated by dividing the total of the certified expenditure incurred by the Council in the year to which the certificate relates by the number of flats in the building on which the expenditure has been incurred.”

Further covenants existed within the terms of the lease at paragraph (7) which allowed WBC to charge Mr Arya for specific services but these were not relevant on the appeal.

Is it possible for a landlord in WBC’s position to claim for pure overheads in the management of its leasehold estate?

No says the Upper Tribunal as paragraph (3) of the Fourth Schedule contained explicit directions as to the calculation of the service charge. It was held that this “apparently comprehensive set of provisions governing the calculation of service charges” rightly permitted an assumption that all of the terms by which the parties agreed to be bound had been included. In particular, the construction of paragraph (3) and sub-section (3)(d) made direct reference to the building itself when considering the calculation of the additional rent. Furthermore, paragraph (3) above was intended to cover a proportionate part of “costs, expenses and outgoings which the Council have incurred”. On the basis that it was not disputed by the parties that these expenses included, as a matter of course, administration costs and overheads, no additional term could be implied to the effect that the tenant must make a reasonable contribution towards WBC’s costs in administering its leasehold estate, beyond that already specified.

The Upper Tribunal attached weight to the fact that the phrase “costs, expenses and outgoings” in paragraph (3) related to three distinct categories of expenditure within a single sentence, namely:

1. The repair, maintenance and renewal of the building of which the flat formed part;
2. The provision of services undertaken by the council (whether or not the tenant actually uses those services); and,
3. Insuring the building.

The first and last of these three items referred directly to the block whereas, in Mr Arya’s case, there had been no such expenditure. The second item appeared, on its face, to be more generalised and it was argued by WBC was not expressly confined to the provision of services on Mr Arya’s block. Significantly, the calculation required to determine the “proportionate part” payable at paragraph (3) by reference to paragraph (3)(d) was linked expressly to the building itself and therefore the four dwellings therein. Without some over-arching consideration of apportionment across WBC’s leasehold estate – see South Tyneside Council v Hudson – the lease failed to provide certainty as to what Mr Arya should pay as representing his share of the second category, even though the Upper Tribunal accepted that some means of apportioning costs was likely to have been intended given the 125 year term of the lease.

In the event the Upper Tribunal held that within the second category of expenditure above “(whether or not the tenant actually utilises those services)” must refer to services provided to that tenant in that building as opposed to services which were rendered for the benefit of others living elsewhere. In other words, if no services were provided to the block in which Mr Arya lived during the relevant period then no service charge became payable. This meant that he was not liable to contribute to WBC’s overhead or indirect costs for managing their overall leasehold estate.

Future considerations in the wake of the decision of the Upper Tribunal in WBC’s case

Opportunities?

Not all of this is bad news for a local authority in WBC’s position, but perhaps action is more effective than inaction. Many authorities provide services for tenants on a basis which makes no distinction between long leaseholders and other classes of tenant. It is acceptable to charge for the delivery of a specific service to an individual tenant and WBC was able to do so in the case of insurance and would have been able to do so in the case of works carried out on the block in which Mr Arya lived. It would, however, be possible to offer long leasehold tenants a menu of services which, if taken up, would trigger the imposition of a charge at market or a lesser rate or even an annual flat rate charge. Such services might include:

• dealing with requests for information from lenders/sellers/buyers;
• dealing with requests from leaseholders for consent to alterations;
• dealing with disputes between neighbours;
• basic core services of record keeping, calculating service charges, sending out invoices and dealing with queries or providing periodic information or advice.

In fact, WBC chose to limit the sums it sought to recover from its long leasehold tenants whereas the actual cost in terms of staff time and other overheads devoted to managing their leasehold estate was accepted to be considerably greater than the sum it wanted to recover (as an element of the annual service charge) by way of a flat rate management charge.

Perhaps a model which encourages long leaseholders to buy into to a range of services which might be provided by the authority might make business sense? If a leaseholder chose to subscribe to certain services on an annual basis (perhaps through monthly payments) then the authority would deliver those services for a flat rate or perhaps even for free. However, for those leaseholders who do not choose to buy in yet later on, for instance, choose to seek the authority’s assistance when they come to sell their flat or re-mortgage, then a market-rate might be charged to meet the service demanded.

It is likely that there are other leases in standard form which, on the basis of their specific construction, may be vulnerable to effective legal challenge by tenants. Until 2011 WBC had not been so challenged, yet some of the earlier long leaseholds granted under the Right to Buy from the 1980s may very well be wholly inadequate to enable landlords to recover for pure management unconnected with physical works carried out under the terms of the lease. The financial consequences arising either from potential reimbursement of charges already levied for which there was no legal basis under the lease or, conversely, which might yet give rise to a fresh stream of income for hard-pressed authorities need to be recognised.

Stephen Liddle is a pupil barrister at 12 College Place, Southampton, and can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it.. Waverley Borough Council was represented in this matter by William Webster, also of 12 College Place. William can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..