Gateway (Leeds) Management Ltd v (1) Naghash (2) Shamsizadeh  UKUT 333 (LC)
If a head leaseholder, or managing company passes on as a service charge, rent charged by a freeholder for property in order to provide services, does this amount to a variable service charge for the purposes of s.18 Landlord and Tenant Act 1985, and so only payable if the rent costs were reasonably incurred and if the services or works to which they relate were of a reasonable standard?
The respondents were leaseholders on a development. The appellant was a party to the leases as a management company responsible for providing certain services to the building, with a power to provide others. The management company had decided to provide a gym and concierge service and these fell under the service charge provisions.
In order to provide the gym and an office for the concierge, the management company had taken two leases from the freeholder of the development, under which rent was payable, at a rate that increased over time by terms set out in the leases. The managing company sought to pass the costs of the rent on to the leaseholders. The leaseholders objected on the basis the costs were unreasonably high. The First Tier Tribunal (PC) agreed and reduced the charges by 50%
The management company appealed to the Upper Tribunal on the basis that these were not variable service charges and so fell outside the FTT’s powers. It also argued that the FTT focussed its attention inappropriately on whether the charges for the gym, CCTV and concierge office were expensive, rather than whether the costs had been reasonably incurred.
The Upper Tribunal found that the rents where part of the cost of providing the services. Further, whether a service charge was variable was not predicated on whether the costs to the landlord were fixed at any specific point. The leases provided for rent increases and were short leases, so the cost would vary in the future.
On the consideration of the charges being ‘reasonably incurred’, the FTT had clearly borne in mind whether the charges were reasonable for what was being obtained. It was a robust and rough and ready approach, but in the absence of comparative evidence, justified. Another reduction of 20% in the cost of CCTV was entirely merited given that it “was clearly based on the evidence of the landlord’s own managing agent that the equipment leasing agreement which the appellants had inherited from the developer obliged the appellants to pay a sum which was greater than was justified – it was “a way for a developer to defray their construction costs by passing these costs into the tenants.” Faced with that evidence the F-tT could not fail to be satisfied that the charge had not been reasonably incurred and was more than the reasonable cost of providing the CCTV service.”.
Appeal dismissed and a section 20C order made to prevent recovery of the appellants costs under the leases.