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26/07/2010

What is a service charge?

In two joined appeals to the Lands Chamber of the Upper Tribunal brought by Southern Housing Group Ltd and Family Housing Association (Wales) Ltd ([2010] UKUT 237 (LC) – not yet available via the tribunal’s website or on bailii), the tribunal considered whether, on construction of the relevant leases, a payment was a service charge within the meaning of s18 of the Landlord and Tenant Act 1985. In both cases the LVT had held that the charge was a service charge (in favour of the tenant).

As readers will know, if a charge is a s18 service charge, then numerous provisions intended to protect tenants will bite, including the requirement that any such charge is reasonable (in s19 of the Act) but s18 does not cover all charges that are payable by a tenant to a landlord, it provides:

(1) In the following provisions of this Act “service charge” means 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 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.

In the Welsh case clause 1.1 of the tenant’s lease stated:

You agree to pay the following charges to the Association weekly in advance at the commencement and throughout the period of the tenancy subject to 1.2 below.

There then followed a table of charges, one entry of which was headed “Service Charges” against a value of £8.27. Clause 1.6 allowed the landlord to vary the service charge once every six months by giving 4 weeks written notice to the tenant.

So far then the charge appears to be one that is set by the landlord, rather than varying with costs incurred by the landlord.

In Home Group Ltd v Lewis (LRX/176/2006) the Lands Tribunal had considered a lease where the tenant’s payment for service charges could be varied in this way. In practice the level of charges was set based on the actual costs incurred, subject to consultation with the tenants, but there was no requirement in the lease that it should be set in that way.
Judge Huskinson held that such a charge was not a “service charge” within the meaning of s18. Home Group Ltd was followed by the Lands Tribunal in Chand v Calmore Area Housing Ltd (LRX/170/2007).

The landlords’ appeals were made on the ground, relying on those earlier authorities, that the charges did not vary with the relevant costs and so were not service charges.

Unfortunately for the landlord in the Welsh case, its lease also stated (at clause 1.8) that:

The Association will seek to recover through Service Charges only its actual expenditure incurred in providing services, equipment and furniture plus an administration fee. Where services are provided to a number of premises the Association may apportion the charge.

That was, in the Upper Tribunal’s view, fatal to the landlord’s case. Clause 1.8 limits what the landlord may recover as a service charge. S.18(1)(b) only requires that a service charge “may” vary with the relevant costs so the fact that the landlord need not increase the service charge if there were an increase in costs is irrelevant since it might do so. Home Group and Chand were quite different cases because in those cases the lease did not contain any particular provision as to how the rent or service charge would be calculated.

Southern Housing’s case was, if anything, worse since, in addition to a detailed explanation of how the service charge might be calculated (relative to costs incurred) the lease stated:

Our service charges are subject to the provisions of the Landlord and Tenant Act 1985 (as amended from time to time)…

Followed by some more detail about consultation and tenant’s rights. Moral: if you don’t want legislative provisions to apply to your lease – don’t say they do.

I cannot say I am entirely surprised about the outcome of the case, but it is interesting in that it emphasizes the importance of the word “may” in s18(1)(b).

1 Comment

  1. Marcin

    Although, if “may” is doing the work that the tribunal thinks it does, then surely the previous cases would have been decided differently, as a landlord who may vary his service charge at his own discretion “may” vary it according to his costs?

    Reply

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