Morshead Mansions Ltd v Leon Di Marco  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.