Service charges that are beyond reasonableness

The message: The test of reasonableness allows the law to be flexible, but also creates considerable uncertainty.

The case: The Upper Tribunal has determined whether or not it is reasonable to take into account the financial position of residential lessees before spending money on major works (Garside and Anson v RFYC and Maunder Taylor, 12.09.11).

Under the Landlord and Tenant Act 1985, service charges can only be recovered from residential tenants if they are reasonably incurred and the work is of a reasonable standard.

Where a charge is payable on account, no greater amount than is reasonable can be demanded in advance.

The appellants in this case are lessees of flats in the Frognall Estate on Finchley Road in north-west London. They challenged demands for advance payments for works in the 2009 and 2010 service charge years. The Frognall Estate comprises five blocks with 54 flats and commercial premises at ground level.

It has suffered from a historic lack of maintenance and Maunder Taylor was appointed as manager to arrange the outstanding works.

Taylor estimated that £100,000 should be added to the service charge in 2009 for the works and, after a detailed specification, a further £538,012 was added to the proposed service charge for 2010.

The appellants’ held that it was unreasonable for them to have to pay for the costs of works in bulk and that, to begin with, only the most urgent works should be undertaken so the cost of all the works could be spread. They claimed many of the lessees could not afford to pay for all the works if they were carried out at the same time and would have to sell their flats.

The first hearing at the Leasehold Valuation Tribunal found that the question of the reasonableness of the costs did not require consideration of the ability to pay and it was reasonable for lessees to pay all sums in advance.

At the Upper Tribunal, the appellants argued that there were two questions in determining whether service charge costs were reasonable: first, was the action being taken reasonable; and second, were the costs reasonable?

They contended that there was no restriction on the factors that can be taken into account when judging reasonableness and, in line with previous cases, argued for a broad, commonsense meaning and flexible approach that takes into account all relevant circumstances.

The respondents argued that the legislation did not intend to require landlords to make enquiries into the means of their lessees. If landlords had to consider the financial impact and balance the needs of different lessees, some of which would want repairs carried out urgently, it would create an unworkable burden.

The Upper Tribunal noted that there was nothing unusual about spreading service charge costs and, in fact, the respondents had put off non-urgent works.

Rather than having to enquire about their lessees’ financial position, landlords should have regard to charges in previous years and seek to maintain some consistency. In this case, the sum demanded for 2010 was 10 times the 2007 charge and five times the 2009 charge.

Given that leases generally provide for sinking or reserve funds to seek to spread the costs, and that lessees cannot be expected to meet substantial service charge fluctuations, the Upper Tribunal held that the spreading of costs was a factor to be taken into account when deciding reasonableness.

The concept of reasonableness allows the law to respond appropriately to each case on its own facts. In this case, the financial impact on lessees was a consideration a landlord has to take into account in undertaking major works.

Problems can be limited by good management and by building up reserve funds but even these may be inadequate. Nevertheless, landlords need to take into account the lessees’ interests.

Summing up: Garside and Anson v RFYC and Maunder Taylor

• Residents claimed the large sum added to the service charge was unfair.
• The court said lessees should not be faced with big fluctuations like this.
• Landlords should work out reasonableness based on charges in previous years

First seen in Property Week, 14 October 2011.