Knapper v Francis [2017]:

Assessment of reasonableness in on-account residential service charges

The background

The case was brought by the members of Point Curlew Tenants Association against the owners of Atlantic Bays Holiday Park in Cornwall; membership of the Association comprised the tenants of holiday chalets at the Holiday Park.

Leases for the chalets were granted in a standard form, and each tenant covenanted to pay service charges. On-account payments were to be made at the start of a service charge year, and service charges were defined as “a fair and equitable proportion of the aggregate of the sums actually expended on services provided by the Landlord”. The balancing provisions made no provision for circumstances where an amount paid by a tenant exceeded the eventual sum ‘actually expended’.

Payments demanded on-account by the landlord included the proposed employment of a site manager and a refurbishment of the children’s play area. Neither sum was expended during the relevant service charge year.

The Association brought proceedings in the First-tier Tribunal in order to determine the reasonableness of the charges demanded. The FTT did so, advising that any sums not actually incurred should be ignored for the purposes of assessing reasonableness.

The law

The Association took the case to appeal in the Upper Tribunal. The UT considered s.19 of the Landlord and Tenant Act 1985 which states that a landlord cannot recover more than is reasonable when claiming service charges. Costs will be taken into account when determining the amounts payable by a tenant insofar as they are reasonably incurred, and, where incurred for the provision of services or carrying out of works, only if those services or works are of a reasonable standard.

S.19 continues to state that where charges are payable before costs are incurred, only the reasonable amount is payable and, after costs have been incurred, adjustment can be made by way of repayment, reduction or subsequent charges (or any other agreed method).

In its decision, the FTT looked firstly at the provisions of the leases, which clearly required the tenants to pay sums the landlord reasonably requires on account. The FTT further identified that reasonable sums were payable under the LTA 1985; tenants were not required to pay more than was reasonable.

The UT assessed the reasonableness in sums demanded on-account before being incurred, addressing whether it needed to take into account facts which were not known at the date of the demand and sums which were not incurred during the service charge year.

The decision

The Upper Tribunal dismissed the appeal. It did not consider that facts becoming known after the service charge demands had been made turned what were reasonable sums into unreasonable sums. What was payable, or not payable, turned on the facts available at the date of the demand and, according to the FTT and the UT, it was reasonable for the landlord to demand sums in respect of the site manager and playground refurbishment.

The UT agreed with the landlord that s.19 of the LTA 1985 allowed a landlord to take into account unknown matters when setting its budget and determining a reasonable sum to be paid on-account. At the date it was demanding on-account payments, the landlord reasonably anticipated that it required the sums demanded to meet its costs in delivering services. The sums were therefore payable, despite expenditure not having been incurred.

In terms of the requirement to make reasonable adjustment, the FTT did not have appropriate jurisdiction to reach a decision on this element. The UT declined to make any direction on the basis that further decisions were yet to be reached on related proceedings connected to service charges incurred in earlier years. Nevertheless, the landlord was entitled only to sums it reasonably requires.

JB Leitch comments on the decision:

“This case is a helpful authority for landlords making demands for on-account service charge payments. Where anticipated costs are not incurred, this does not automatically make demands unreasonable and, as the UT confirmed, it is an important aspect of property management to be able to make on-account demands prior to incurring the costs of services.”