What is a service charge?

Morshead Mansions Ltd v Leon Di Marco [2008] EWCA Civ 1371

Service charges. Much more interesting than tolerated trespassers. Honestly.

Sections 18 – 30 Landlord and Tenant Act 1985 contain a detailed regulatory framework for service charges in residential property. In broad terms, leaseholders can dispute their service charges if they are said to be unreasonable in some way. (For those of you who want a detailed discussion of this area, see Davey & Bates Leasehold Disputes, 2nd Edition, April 2008).

What, however, is a service charge? By s.18 of the 1995 Act, a service charge is “an amount payable by a tenant of a dwelling as part of or in addition to the rent (a) which is payable directly or indirectly for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management and (b) the whole or part of which varies or may vary according to the relevant costs.”

The company was the freehold owner of a residential property in Maida Vale. That property comprised some 104 flats. Mr Di Marco was a member of the appellant company and a leaseholder of a flat in the property, indeed, each flat owner had one share in the appellant company.

Mr Di Marco’s lease contained provisions for service charge computation in the normal way. The appellant company, pursuant to its Articles of Association, decided to establish a reserve fund to be used to defray the costs of the company in connection with its obligations towards the building. It compelled all members of the company (including Mr Di Marco) to make total payments of £4,000 towards this fund.

The company was quite clear that it had decided to take this route and not to levy the charges as a service charge in order to avoid delays and challenges to the service charge under ss 18-30 Landlord and Tenant Act 1985.

Mr Di Marco declined to pay these sums and, when the appellant company sued for the monies, contended that the charges were service charges within the meaning of s.18. His defence was successful in the county court and the company appealed.

The company contended that the charges could not be a service charge because:

(a) they were not payable by Mr Di Marco in his capacity as a tenant;

(b) rather, the charges were payable because of the company / member relationship, not because of the landlord / tenant relationship;

(c) the £4000 fee was not chargeable for services, repairs, maintenance etc, but could be used for any purpose, such as litigation costs;

(d) the costs did not vary according to the landlord’s costs of performing certain tasks, but were set by resolution of the company in a general meeting.

The Court of Appeal allowed the appeal. There was a distinction between charges payable by a tenant under a lease (which were likely to be service charges) and charges payable by a shareholder to a company. It did not matter that the landlord was the company or the tenant was a shareholder. The legal relationships were different and separate. The county court had erred in upholding the defence. The monies claimed were payable by Mr Di Marco in his capacity as a shareholder.

This is – to my mind – a sensible and manifestly correct decision. I confess to being slightly uncomfortable that the protections of ss 18-30 can be avoided in this manner, but, given the definition of “service charge” in s.18, this decision is right. It’ll be interesting to see if other lessee-owned freehold companies start taking this approach. It certainly seems to be quicker and easier than levying service charges.

About J

J is a barrister in London. He loves service charges and all things leasehold law related. He also likes beating rogue landlords and mortgage companies.
Posted in Housing law - All, Leasehold and shared ownership and tagged , , .

9 Comments

  1. It seems an odd case, on the facts as stated the tenant would appear to have had a perfectly good defence pursuant to s.16 of the Companies Act 1985. Yet another example of the regrettable necessity of employing a lawyer, though its odd no-body mentioned it.

    Clearly there is a moral lesson here for those involved in conveyancing leaseholds: look out for any term like this in the articles of association or any term of the lease that requires written assent to be given to payments of this kind. It would appear to permit a majority of leaseholders to decide to impose *any* financial payment on all leaseholders. Possibilities for abuse abound.

    @Justin: Given the clear and well understood provisions of the Companies Act, I doubt that any other freehold company will try this. They were lucky in this instance.

  2. @Francis But wouldn’t the recourse to s.16 only apply, as here, if the amendment to the articles/memorandum was after the date the person/tenant became a member?

    If a freehold management co. had these articles already, the tenant/shareholder appears to have no recourse on reasonableness of service charge (after all, none is payable on these facts – unless one can argue that the credit against payments to the Company fund constituted payment for s.18 purposes?)

  3. @NL Oh yes – but on the facts that appears to be the case. The tenant’s lease dates from prior to the resolution to include the payment provisions in the articles of association. It seems highly likely that s.16 would apply which is why I mentioned it.

    As you say, if these provision are in place before you become a member (by acquiring the leasehold) then you may be in difficulty. Hence my comment about conveyancing – its something to check for and think hard about.

  4. @Francis – the tenant did raise s.16 though (see para 29), and failed on that point. That is why I think other freehold companies might be tempted to try it.

  5. @J – yes and no. The tenant did raise s.16 but in respect of the resolution to levy the charge and not in respect of the articles themselves (if the judgment is to be relied on).

    Now s.16 only applies to changes to a company’s articles and not to resolutions made under them. So the tenant’s defence based on s.16 would fail because it was wrongly put. I suppose you could argue that a too general term in the articles would be a way of subverting the intention of s.16 but that was not argued.

    The court itself didn’t deal with that submission in the judgment so we don’t have any authority on the point in any case.

    The judge at first instance *may* have dealt with this point, but we can’t tell. From the way the case is described on appeal I suspect that the tenant made the same argument at first instance.

    My remarks about freehold companies stand – any such change to the articles could be robustly defended on s.16 grounds.

  6. Check out the LVT decision dated 16 February 2006.
    http://www.rpts.gov.uk/Files/2006/March/00000GBB.pdf

    Para 1: “Morshead Mansions is a block of 104 flats which has been the subject of a large number of decisions of this tribunal and the courts.”

    Para 10: “Morshead Mansions, however, is immensely, perhaps uniquely, diofficult to manage.”

    Given that background the only meaningful advice anybody, solicitor or otherwise, could give to a prospective purchaser would be buy somewhere else.

    Search the LVT site and bailii for “Morshead Mansions” and you will get a fuller flavour of this unfortunate location.

  7. As the lawyer who acted for Morshead Mansions Ltd (“MML”) in this case, perhaps I can assist with the point raised about s.16 of the Companies Act 1985. The reason why that section was of no assistance to Mr Di Marco was that MML, as formed in 1992, already had a precursor to the article which was later introduced by special res. in 1994 (ironically, on Mr Di Marco’s own requisition). Thus the new article did not increase the members’ liability to contribute to the company.

    This very question (whether there had been such an increase resulting from the alteration) was itself the subject of a judgment in earlier county court proceedings decided by HHJ Cooke.

    Therefore, it will not be possible to follow the MML route unless the relevant reversionary interest is transferred into a similarly constituted company or all lessees expressly assent in writing to the adoption of such an article.

    • Aha! That is very interesting and explains a lot and fortifies my conclusion that adopting the MML route will be difficult if leaseholders are astute to avoid it. Thanks Clive, its so much easier understanding appeals if you know about the hearing at first instance.

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