Cannon v 38 Lambs Conduit LLP [2016]:

Whether legal costs can be recovered under service charge

The background

The respondent was the freeholder of a building within which the appellants held a long 99-year lease of a maisonette across the first, second and third floors. The lease was granted at a premium, reserving a ground rent of £250 per annum. The ground and basement floors were occupied by a commercial tenant.

The appellants contested the service charge apportionment, which was allocated as 40% to the commercial tenant and 60% to the appellants, on the basis of floor area and insurance contributions, as well as challenging the reasonableness of the charges in 2013, 2014 and 2015. They questioned the floor area apportionment and felt that the insurance contributions should be higher for a commercial tenant where risks were greater.

The parties reached agreement on all but a number of specific areas prior to the case going before the Court, which included whether the appellants could be required to pay half of the surveyor’s fees and whether legal fees could be recovered under the terms of the lease.

The FTT held that the landlord’s legal costs, in the sum of £16,000, were not recoverable as an administration charge under the lease because it had not made valid demands which complied with the requirements of statute. The appellants challenged whether the FTT had jurisdiction to make such a ruling.

The law

Under s.47 of The Landlord and Tenant Act 1987, service charge is not due unless it has been correctly demanded, with the service charge demand containing all of the information required. S.27A of The Landlord and Tenant Act 1985 allows a party to make an application to the FTT for determination as to service charge payable.

S.27A allows for parties to resolve service charge disputes simply, via referral to the FTT. In this case, the Court was asked to decide whether the service charge was payable and, if so, by whom, when and how much.

S.47 requires a landlord to ensure that a tenant receives name and address in writing as part of a valid service charge demand and enforcement; it is within the power of the FTT to decide that a service charge may be due, but not before a valid demand has been served by the landlord.

The Upper Tribunal referenced Arnold v Britton in its decision, citing the principle that service charge clauses do not attract any special interpretation; they should be interpreted as every other provision in the lease. Specifically:

“…the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be…”

The landlord argued that its costs were recoverable under the service charge, citing the lease term:

“To pay to the Lessor…a fair proportion…of the expenses (including Architects’ and Surveyors’ fees) and outgoings incurred by the Lessor…”

The FTT held that the landlord’s legal costs were recoverable from the tenants under the service charge. The tenants appealed.

The decision

The Upper Tribunal held that, where service charge is deemed due, the tenant remains liable even where the landlord has not served a valid service charge demand.

Considering the facts of the case, the Upper Tribunal decided that legal costs were not recoverable by the landlord through the service charge, although surveyor’s fees could be claimed. It was not sufficiently clear to the UT that the parties had intended through the lease wording that legal costs could be recoverable under the service charge.

J B Leitch’s Phil Parkinson comments on the decision:

“The decision in Cannon makes it clear that, even where landlords fail to serve a valid service charge demand, this is not a sufficient defence for the tenant in refusing to pay it. Landlords are nevertheless urged to ensure that service charge demands meet the requirements of the Landlord and Tenant Act 1987. Cannon is another useful authority on lease interpretation; if it is not expressly stipulated that legal costs can be recovered under a service charge, the Courts will interpret the provisions strictly.”