Service Charge: Whether service charges were payable where accounts were uncertified (Powell & Co Investments Ltd v Aleksandrova and another – 2021)

Where service charge accounts are uncertified as demanded by the lease provisions, are those charges still payable?

The background

In Powell & Co Investments Ltd v Aleksandrova and another [2021], five flats in a property were let to long leaseholders. The case in particular concerned Flat 3, the lease for which contained a standard service charge provision whereby the lessee was required to pay 18% of the landlord’s annual costs, expenses and outgoings incurred in connection with delivery of services to the property. Clause 3.2(ii) stated that “…(d) the liability of the Lessee under the provisions hereinbefore contained shall be certified by a Chartered Accountant to be appointed by the Lessor.”

The freeholder and respondents were engaged in a dispute in respect of service charges relating to the period from 2016 onwards. Accounts for 2019 had been provided but had been certified by the managing agent only. Further, 2020 accounts were certified by the freeholder’s director and stated that the managing agent had been responsible for production of the service charge certificate. The freeholder’s accountancy practice, ‘Z Group’, was named on the accountant’s report but had not been signed by any individual. The leaseholders made an application to the First-tier Tribunal to determine liability to pay the service charges demanded.

The FTT concluded that the service charge sums were not payable by the leaseholders because the accounts had not been certified by a Chartered Accountant in accordance with the provisions of the lease. The freeholder appealed to the Upper Tribunal.

The decision

The Upper Tribunal dismissed the appeal, concluding that the service charge report was deficient as it did not certify the liability of leaseholders as required by the lease.

The Tribunal considered whether the provisions in the lease required the service charges to be certified before they became payable. The freeholder argued that Z Group’s accounts were sufficient, given the simplicity of the report. The certificate was required to confirm the facts and outcomes of the report to demonstrate that the report had been given due consideration by a qualified person and confirmed to be accurate.

Rather than requiring the service charge accounts themselves to be certified, the lease made provision for leaseholders to pay any shortfall in service charges. However, the leaseholders’ liability in this respect was conditional on certification by a Chartered Accountant. The UT did not consider that the FTT was correct in its view that the lease required the accounts to be certified. The UT found that the report had failed to specify the leaseholders’ individual liability and there was no certificate presented to address this. Therefore, the sums were not payable until the accounts were certified by a Chartered Accountant, showing each leaseholder’s proportion, payments made on account and the shortfall to be recovered. Leaseholders would be required to pay the service charges demanded upon production of that document.

Advice and action

Landlords are advised to take care when making service charge demands and producing annual reports, ensuring that the provisions of the lease(s) are followed in their entirety to allow for prompt service charge recovery from leaseholders.

The UT in this case found that, although there was no requirement for the accounts themselves to be certified, the lease did require a certified statement of each leaseholder’s liability – a crucial difference which meant that the freeholder could not recover service charges until such statement was prepared and certified. Landlords unsure of the intricacies of service charge provisions, may wish to take legal advice to ensure full procedures may be followed.