Recovery of service charges

United Kingdom

Where you are the freeholder of a mixed-use building, which has a number of tenants and subtenants, is it necessary for you to comply with the statutory provisions designed to protect residential tenants relating to prior consultation before you submit service charge accounts to your tenants? This was the issue that came before the Central London County Court where it was held that unless the legislative regime was followed, there may be difficulties in recovering service charges where the premises include residential dwellings.

Section 20 of the Landlord and Tenant Act 1985 (as amended by the Landlord and Tenant Act 1987) relates to dwellings and lays down a special procedure that must be followed where the proposed works cost more than £1000. The procedure require the tenants to be served with a notice describing the works, accompanied by at least two estimates (one from a person wholly unconnected with the landlord) on which the tenants are invited to comment. Any sum above £1000 will be irrecoverable by the landlord unless he follows these rules except where he can satisfy the court that the landlord acted reasonably. This may be where work is required as a matter of urgency.

The case of Heron Maple House Limited -v- Central Estates Limited [2002] 13 EG 102 highlights the problems that may be faced by intermediate landlords who hold a lease of mixed use premises, but who underlet residential areas. Do the section 20 requirements flow through the various derivative interests? Heron Maple owns the freehold of Maple House in Tottenham Court Road. The building incorporates retail, office, residential and commercial accommodation. Central Estates holds a headlease of certain parts of the building including the plant room, lifts and lift shaft, the flats and hallways and stairways giving access to them and the roof. Central Estates granted an underlease to Camden London Borough Council of the same premises. In turn, Camden granted various tenancies to individual occupier tenants.

The leases to Central Estates and Camden contains relatively conventional service charge arrangements. In 1999 Heron Maple carried out substantial works and sought recovery of some £17000. The consultation provisions of section 20 had not been followed by either Heron Maple or Central Estates. Heron Maple argued that this was unnecessary as section 20 only relates to service charges payable by a tenant of a dwelling and this did not include Central Estates or Camden whose premises included other areas of the building. Judge Roger Cooke held that there was nothing in the Act that requires a tenant of a dwelling to be in actual occupation and that in relation to any individual flat/dwelling both Central Estates and Camden are the tenant of that dwelling. That requires the section 20 procedures to be followed all the way down the chain of tenants.

The practical consequences of this are that if you are the landlord of a mixed-use building that contains some residential areas, it is more than likely that you will need to follow the section 20 procedures if you intend to recover through the service charge costs for works exceeding £1000. This will be the case whatever the provisions of the service charge in the headlease which may be of both commercial and residential premises. If you hope to recover expenses through a service charge where there is a layer of tenancies of premises including dwellings, you will need to comply with section 20 or potentially be out of pocket.

Although this decision is only from the County Court, it is likely that it will have some considerable persuasive force. It is also not known whether this decision is being appealed.

For further information please contact Caroline Potter at [email protected] or on +44(0)207 367 2721.