Cheshire East

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Service charge machinery and clauses for recovery of costs

A Court of Appeal judgment provides guidance for residential and commercial landlords on how service charge machinery and clauses for the recovery of costs are to be construed. James Fieldsend and Edward Blakeney analyse the ruling.

On 22 November 2021 the Court of Appeal handed down their judgment in Kensquare Limited v Boakye [2021] EWCA Civ 1725.

The case concerned the machinery in a long residential lease for the payment of interim service charge demands, as well as clauses for the payment of legal costs following a previous set of proceedings before the First-tier Tribunal (Property Chamber) (“FTT”) in 2017.

Relevantly, the lease provided as follows:

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  • The interim service charge was fixed at £360 per annum unless “not less than one month prior to the commencement of that financial year” the landlord service a notice to increase that amount in line with anticipated expenditure.
  • The tenant had to pay legal costs incurred “for the purpose of or incidental to the preparation and service” of a s.146 notice.
  • A relevant cost for the purpose of service charges was “the cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building”.

In August 2019, the landlord served a notice purporting to increase the interim service charges for 2018 (where the service charge year had already ended) and 2019 (where the service charge year had already begun).

Edward succeeded before the FTT in disputing liability for 2018-2019 interim service charges as well as the legal costs from the 2017 proceedings. This was overturned by the Upper Tribunal. On appeal to the Court of Appeal there were four grounds, grouped into three issues:

  1. Was time of the essence for service of the notice increasing the interim service charge payment, and if not were there limits on when that notice could be served?
  2. Could legal costs incurred from the 2017 proceedings be recovered as costs “for the purpose of or incidental to” a s.146 notice?
  3. Could those same legal costs alternatively be put through the service charge as costs incurred “in connection with the management of the building”.

The Appeal was allowed on the first and third issue, and dismissed on the second issue:

  1. The nature and wording of the clause relating to increases in the interim service charge demand demonstrated that the parties intended it to be strictly complied with. That accorded with the phrase “not less than one month” before the service charge year, and also with the purpose of interim service charges which was to allow the tenant to budget and work out their liability at the start of a year. There was no prejudice to the landlord as they could still serve an end of year balancing charge. As a matter of general principle, the Court of Appeal considered that parties should more readily be taken to have intended that interim service charge requirements had to be strictly complied with.
  2. Although the lease pre-dated the statutory requirement for proceedings before a s.146 notice could be served, as a matter of construction the wording “for the purpose of” was wide enough to encompass proceedings before the FTT. The construction of a clause in each case was fact specific.
  3. The reference to “management” was to management services and not litigation, such that the cost of FTT proceedings could not be passed through the service charge machinery. Giving the clause an alternative construction would bring within the wording used something that did not belong there. The use of the phrase “in connection with” did not add anything to the meaning of the clause.

A number of matters canvassed in argument before the Court of Appeal were not addressed in the judgment, such that some questions remain unanswered. However, the judgment provides welcome clarity on the recovery of legal costs through leases as well as the construction of interim service charge provisions.

James Fieldsend and Edward Blakeney are barristers at Tanfield Chambers. They acted for the successful Appellant, Ms Boakye.

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