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14 May 2013

At your service? The thorny issue of service charges

As the housing rental boom continues, Sarah McLoughlin, senior associate in the property litigation team, looks at the thorny issue of service charges and highlights two recent court cases.

An estimated 8.5 million people now rent their home as they struggle to save enough money to get onto the housing ladder.

Rents are on an upward spiral and most tenants also face digging deep into their pockets to pay for service charges.

These are covered by the Landlord and Tenant Act 1985, Section 20, which says there is a requirement for the landlord to consult on any “major works” to be undertaken on a property, where each tenant would have to pay £250 or more.

If the landlord fails to undertake the consultation, then the tenant’s contribution can be capped at £250. This is in order to ensure that the tenants obtain reasonable value for money and can, if necessary, seek an alternative contractor.  As two recent examples demonstrate however, the process can be anything but straightforward.

The first concerned landlord Daejan Investments, which undertook major works worth just under £280,000 to five flats in Queens Mansion, Muswell Hill, London.

The five long leasehold flat owners claimed the landlord had failed to comply with the consultation requirements and was not entitled to legal dispensation from adhering to them.

The case went before the Leasehold Valuation Tribunal (LVT), the Upper Tribunal and the Court of Appeal, who all agreed with the flat owners and limited their liability to just £250 per flat.

But when the long-running case reached the Supreme Court in March, by a majority of three to two, the court overruled the previous decisions, allowing the landlord’s appeal and granting Daejan dispensation from the major works consultation requirements.

As some consolation for the tenants, the Supreme Court reduced the amount the landlord was seeking by £50,000 and ordered Daejan to pay the leaseholders’ legal costs in relation to the proceedings before the LVT.

The end result was that each flat owner would have a bill of £46,000, which the court said was a “fair decision” because it put the flat owners in the same position as they would have been if the consultation requirements had been satisfied.

The judgment was delivered by Lord Neuberger, who said the correct legal test was: “Would the flat owners suffer any relevant prejudice, and if so, what relevant prejudice, as a result of the landlord’s failure to comply with the requirements?”

Welcoming the clarification, Sarah said: “This was an important case because the landlord had only failed to consult on one part of the three stage process and was looking to recover a substantial sum of money.

“The judgment has given greater clarity on the test to be applied by the LVT in terms of whether or not a tenant has suffered prejudice as a result of the landlord not following the consultation requirements.

“Instead of being an ‘all or nothing’ solution, this allows a degree of flexibility and enables the LVT to take a more common sense approach in considering the actual outcome and impact on the tenants. It can also impose conditions which allow the landlord to dispense with the consultation requirements.”

Acknowledging that tenants may find the outcome disappointing, Sarah says landlords are likely to be relieved.  Although in this case there was a clear victory for the landlord, when service charges are challenged in the courts, the outcome may well be different.

When a caravan site in Cornwall was taken over by new owners, they proposed substantial improvement works be carried out and, after these were completed, caravan owners on the site found their service charges were doubled as a result of the cost of the works.

They took the landlord to the High Court and at the heart of the argument was whether or not the improvement programme was considered “qualifying works” for the purpose of the relevant law. The landlord argued the improvements were a series of works, which would not have required a consultation process, as opposed to a single programme.

The judge agreed with the caravan owners, saying he considered that the legislation should be seen as offering protection and that the £250 should be seen as an annual limit. The landlord was therefore liable for the additional costs over £250 for each caravan owner.

Sarah said: “The judge’s view was that the qualifying works should be added together and treated as one programme, which would mean the landlord consulting with tenants or, in this case, caravan owners.

“Previously landlords and managing agents have been able to undertake qualifying works, such as routine repairs and maintenance, on a project-by-project basis, with no need to trigger the consultation process.

“While this is seen as a victory for those faced with paying the service charge, the consequence may be that some minor repair works will be postponed for fear the cost will escalate and it will be the landlord who has to pay.”

Overall, she says, the two examples demonstrate just how difficult the issue of service charges can be for both landlords and tenants alike.
“Whichever side you are on, it makes sense to seek professional legal advice to make sure you know exactly where you stand,” she concluded.

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