Service Charge: Assessment of proper and reasonable costs, and claiming for legal proceedings under service charge (Eshraghi and others v 7/9 Avenue Road (London House) Ltd – 2020)

A range of issues arose in relation to the recovery by a landlord through service charge of costs including legal costs and management fees, First-tier Tribunal jurisdiction and the FTT’s approach to consideration of service charge recoverability.

The background

Eshraghi and others v 7/9 Avenue Road (London House) Ltd [2020] concerned a block of flats in London, of which the respondent was the landlord and the appellants leaseholders of three of the building’s flats. The landlord company was owned by all bar one of the leaseholders in the building. Flats were let on long leases, granted in the 1970s and each contained a covenant by leaseholders to pay a proportion of the landlord’s costs in respect of repair, maintenance, insurance and provision of other services defined in the lease. Leaseholders further covenanted to pay all costs, charges and expenses incurred by the landlord in respect of any s.146 Notice to commence forfeiture proceedings or any notices relating to disrepair, including legal and surveyors’ fees.

The landlord company had engaged in three sets of proceedings with leaseholders, the first in the High Court concerning appointment of company directors, a repair dispute and recovery of service charge arrears in respect of one flat. The leaseholders applied to the First-tier Tribunal under s.27A of the Landlord and Tenant Act 1985 for determination as to the reasonableness of service charges demanded, in particular the funding by the landlord of High Court proceedings through the service charge and the payment of other costs including accountants, managing agents and consultancy.

The FTT, following an earlier Upper Tribunal judgment, held that it did not have jurisdiction to consider a breach of trust claim (as opposed to a payability of service charge claim). It further concluded that recovery of legal fees in the second and third cases fell within what a reasonable person would have understood the parties to mean when agreeing the lease terms.

The FTT found the leaseholders to be unsuccessful in its claim and did not reduce or remove the leaseholders’ responsibility for payment of the sums through service charge, save for a small £193.00 sum which the landlord agreed was not payable. The leaseholders had not provided evidence to demonstrate that the sums were unreasonable or the services provided to a poor standard. The leaseholders appealed.

The decision

The Upper Tribunal considered four key issues, deciding each in turn.

1. Whether the FTT enjoyed jurisdiction to consider the recovery of High Court legal fees through service charge

Appeal allowed in favour of the leaseholders on this issue. The FTT’s approach to this point had been too narrow. S.27A is wide, requiring consideration of the terms of the lease and the nature of the cost in question, and it was found that the FTT did have jurisdiction to consider this point. Costs of the High Court dispute fell into two separate parts, those incurred before 26 October 2016, a key date in the dispute, and those afterwards. Although there was no agreed breakdown of the costs of the High Court dispute, the UT found that costs incurred before that date were recoverable through service charge. Costs incurred afterwards were not.

2. Whether legal costs incurred in the second and third cases were recoverable

Decided in favour of the landlord, finding that costs of these proceedings were recoverable through service charge. Good estate management included the recovery of service charges and legal proceedings were recoverable for this. The repair dispute was more complex, but the landlord’s actions had been proper and reasonable and for the benefit of the building or in the interests of good estate management.

3. Whether advice, accountancy, secretarial and other corporate costs were recoverable

The UT found that certain sums of accountancy costs should be deducted from the service charge accounts in 2016 and 2017, the landlord having earlier conceded this point and then withdrawn its statement to such effect. The landlord was not permitted to withdraw the statement, referencing s.27A(4)(a) of the Landlord and Tenant Act 1985 and the statute’s aim to limit disputes. As the landlord had benefited from legal representation throughout, its statement had clearly been considered.

4. Whether the FTT had dealt sufficiently with the claim regarding management fees

Other than a small deduction, the UT found in the landlord’s favour on this point and management fees were held to be recoverable. The FTT had taken the correct approach in considering whether management fees claimed were unreasonable; the landlord had not been required to choose the cheapest quote, and just because services were available at a lower rate elsewhere, the landlord was not obliged to accept these.

Advice and action

A detailed case which addresses a number of issues, there are some useful learning points to be gained from the UT’s judgment. The FTT is at liberty to reach a judgment in considering whether litigation costs are recoverable from the service charge, and where legal costs are incurred by the landlord in the interests of good estate management, again these costs are recoverable where actions taken are proper and reasonable.

Where a party makes a statement conceding a point which it then attempts to withdraw, the court will refer to s.27A of the LTA 1985 and its decision to permit the withdrawal will consider the purpose of the statute to minimise disputes and promote resolution where possible. If that party has received legal advice throughout, it can be assumed that the concession was made on a considered basis and the court is not obliged to permit withdrawal to allow further litigation to commence. Finally, although management fees could have been reduced by choosing a lower quote, there is no requirement for a landlord to only choose the cheapest rate for services and, provided fees are still within a reasonable range expected for the services provided, the landlord may opt for a higher quote and recover such fees from leaseholders.