The Gateway Leeds Management v Naghash [2015]

Practical knowledge of the property necessary

Background

The management company for this residential development paid rent to the landlord for the property’s gym and concierge office, along with a monthly fixed sum for a CCTV system, all of which were services the management company supplied to tenants under their leases.

The action was brought against the management company by two tenants who held long leases at the development, disputing the costs of these three specific items. The First Tier Tribunal’s (“FTT”) decision was appealed by the management company on the grounds that the costs were not service charges under the statutory definition and were therefore outside of the FTT’s jurisdiction.

The leases were in a standard form, reserving the right for the management company to charge tenants for the provision of the gym, office and CCTV. Tenants were required to reimburse the management company in respect of costs incurred in providing services as listed in the leases.

The provision of CCTV and the concierge office fell under the category of ‘security services’ within the leases’ definitions; however, the gym was not clearly defined and this was therefore assumed, and agreed by both parties, to come under the general sweep-up clause whereby the management company was ‘to carry out all such other services…in respect of the Estate Common Parts in the interest of good estate management…’.

The law

Landlords are not permitted to recover any more than is ‘reasonable’ in accordance with the Landlord and Tenant Act 1985. The Act also provides that to qualify as a ‘service charge’ under the statutory definition, the payment must be made in respect of services, repairs or maintenance and must be capable of variation, dependent on the expenditure incurred by a landlord or management company.

The management company’s argument centred on the definition of ‘service charge’, suggesting that the costs for the gym, office and CCTV were classed as rent rather than payments in respect of services, repairs or maintenance and that they did not vary according to the costs incurred by them; the gym and office costs varied according to RPI and the CCTV provision was a fixed sum.

The decision

The Upper Tribunal addressed two questions:

• Did the rent payments constitute payments for services; and
• Were the charges variable?

Although the management company was not obliged to provide a gym for the development, if it chose to do so it was able to recover its costs through the service charge. The fact that rent needed to be paid in respect of the gym premises did not result in the costs payable by the tenant forming a rental payment.

The UT held that, although the costs to the management company were fixed, the costs to the tenant were capable of being varied. The question was therefore not what the management company paid for the service, but what the tenant paid to the management company and whether this sum could be varied.

As, during the terms of the leases, the costs for the gym, office and CCTV would vary according to the rents payable and the cost of equipment supplied, it was held that the costs were variable and therefore fell under the definition of ‘service charge’.

JB Leitch’s Phil Parkinson comments:

“The Upper Tribunal decision in The Gateway provides a useful clarification on the definition of ‘service charge’ and how this is to be treated in respect of the provision of more unusual services, particularly those for which the landlord incurs a fixed charge for a period of time. The UT again shows that it is less concerned with technical arguments and the importance of clear lease drafting and knowledge of the subject property at the outset is also emphasised.”