Service charges on account without certification

Whether sums demanded on account of service charge were reasonable.

The background

In Wigmore Homes (UK) Ltd v Spembly Works Residents Association Ltd [2018], the property consisted of a converted factory comprising 33 residential flats.  A residents’ association was the landlord. The leaseholder held the long leases of 13 flats at the property.

The landlord served demands for interim service charges on account over a number of years which were not settled by the leaseholder. At the First-tier Tribunal, the sums demanded were found to be payable, so the leaseholder appealed to the Upper Tribunal. The leaseholder argued that the landlord had not served certificates when making demands and that certificates were required under the service charge mechanism of the lease. In particular, the leaseholder was to pay a ‘fair and reasonable’ amount on account and to pay the balance on receipt of ‘the Certificate’. The absence of certificates, the leaseholder argued, made the sums demanded unreasonable.

The decision

The Upper Tribunal considered s.19(2) of the Landlord and Tenant Act 1985, which states that where a service charge is payable on account (that is, before service charge costs are incurred by the landlord), the leaseholder is liable only to pay an amount which is reasonable. In this case, the Court allowed the leaseholder’s appeal and found that, as the landlord had failed to comply with the terms of the lease relating to provision of certificates, the sums demanded were not reasonable.

It is for the landlord to prove that its demands are reasonable, supported by evidence. Certificates were required to justify the sums, and therefore without this evidence the service charge on account could not be proven to meet the requirements of s.19(2). In this case, the sums demanded as interim payments were twice as much as the actual costs incurred, and the Upper Tribunal reduced them by 50% for 6 out of 7 years.

Advice and action for landlords

This case highlights the importance of following service charge mechanisms in leases.  Service charge provisions are crucial to landlords, enabling them to recover the costs of managing a property; failure to follow the set procedure for service charge demands will leave a landlord exposed to reasonableness and liability claims which could otherwise be easily avoided.

It is recommended that landlords regularly review their lease terms and ensure that the necessary processes are in place to meet all requirements set out, including required dates, evidence, notice provisions and addresses for service.