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19/09/2021

When a specified sum is a variable service charge.

Aly & Anor v Wickham & Anor (2021) EW Misc 12 (CC)

This was an appeal to a Circuit Judge from a first instance decision on a money claim for unpaid service charges for holiday lodges.

The lease provided (so far as relevant) that the lessee must pay:

by way of further and additional rent a service charge in consideration of the Lessors covenants hereinafter contained payable equally in advance on the 1st January in each year such charge being the greater of either:-

(a) The sum of TWO HUNDRED AND FIFTY POUNDS (£250.00) per annum or if greater the sum of £250.00 multiplied by the index of retail prices maintained by HM Government on the 31st October immediately preceding the end of such period and divided by the amount of the said index on 1st January 2003 (such figure being 178.4( or

(b) A sum which shall be one twentieth of the sum calculated in accordance with the Fourth Schedule hereto, and payable in accordance therewith

The fourth schedule provided, pretty straightforwardly, for a year end account, for any excess of actual costs over the advance charge to be paid by the lessee, and for any surplus to be credited to the lessee’s account and set off against the next year’s advance charge,

The freeholder had demanded payments of £398.70 – being £250 plus RPI and then brought a claim when the amounts were not paid by some leaseholders.

The freeholder argued that this was a fixed charge and that therefore sections 18 to 30 Landlord and Tenant Act 1985 dd not apply, and the Court had no jurisdiction to consider the reasonableness of the charges. The District Judge at first instance accepted this and made money judgements for the £398.70. The leaseholders appealed.

The first issue was on the construction of the lease. The leaseholders argued that if there was an excess at year end, that had to be set against the £250 plus RPI demand at (a), not just the one twentieth alternative at (b). The freeholder argued that (a) was fixed and definite, so they could charge £250 plus RPI whatever the actual year end costs.

The Circuit Judge found for the appellants.

The respondents however say that the fourth schedule cannot affect paragraph (a) of the second reddendum, as that schedule concerns only the calculation of the sum under paragraph (b).  But paragraph 1 of that schedule plainly is not confined to the sum calculated under paragraph (b) of the second reddendum. Moreover, the respondents accept that balances will be held to the credit of the service charge exceeding the floor. But that means that they accept that they will reduce paragraph (b) of the second reddendum. I can see no good reason why they should not also reduce paragraph (a), if that is the higher sum of the two.  I also do not see any reason why the use of the word “or” instead of “and” in part 2 of the reddendum should change the result of the analysis. On the contrary it seems perfectly consistent with it.

The second issue was whether the charge was a variable service charge and so falling under section 18-30 Landlord and Tenant Act 1985, as being a charge “the whole or part of which varies or may vary according to the relevant costs”.

The Court was referred to Re Southern Housing Group Limited (2011) L&TR 7 (our note) and The Anchor Trust v Waby [2018] UKUT 370 (LC), both decisions on when a charge could be considered as fixed. Waby addressed the situation of an initial charge, increased annually against an inflation index. The Upper Tribunal in that case had found the first year was a variable service charge, but there after it become fixed.

The freeholder argued that Waby meant that each year that their demand was £250 plus RPI, it was fixed, but variable if one twentieth of the costs.

The Circuit Judge did not accept that.

I accept that Waby shows that a charge may satisfy the statutory test in one year but not in another. However, in that case that was because the formula itself changed after the first year. Here the formula does not change. There is only one estimated service charge, to be demanded in advance, and the amount of it is calculated by reference to actual expenditure on services (paragraph (b)), albeit subject to a ‘floor’ below which (as a demand for payment in advance) it cannot go. That tells us nothing about what happens when the figures for the year are in, and the actual service charge can be calculated and compared to the estimate. What happens then is dealt with by paragraphs 1 and 2 of the fourth schedule. Section 18(1)(b) does not require that the charge must vary according to the relevant costs. It requires only that it “may vary” (emphasis supplied). And the Southern Housing Group case shows that, even if the variation occurs only because the landlord chooses to make it, nevertheless that charge “may vary” for this purpose.

The present case is in fact stronger than that, because, unlike the landlord’s express power in that case, here it is not within the landlord’s control as to whether the costs of complying with his covenants do or do not exceed the ‘floor’. For example, a blockage in the sewers may necessitate expensive works of repair (see clause 5(2)(b)). In my judgment, the judge below fell once more into error on this point. This is clearly a case where the service charge “may vary according to the relevant costs”. As a result, sections 18-30 of the 1985 Act apply.

And finally, this was not an academic appeal, even if the leaseholders did have to pay the £398.70

First of all, if the appellants’ view of the lease is correct (as I have held), any balance in their favour under paragraph 2 of the fourth schedule will go to reduce the amount of estimated service charge sought on the next 1 January, even if it is based on the £250 plus RPI in paragraph (a) of the second part of the reddendum. That is a benefit to them. Secondly, the appeal has resulted in the service charges (including the estimated service charge) being held to be subject to sections 18 to 30 of the 1985 Act, which imposes a requirement of reasonableness. That too is a benefit to them. This has not been an academic appeal.

Appeal allowed.

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts.

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