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Can a leaseholder be charged for the cost of refurbishing a flat which had been used for a resident manager but will be rented out by the landlord in the future for their own profit?

Reader’s E-mail:

Our Resident Manager left in May 2015. All residents agreed that we would have a visiting manger from then on. The managers flat was left in an appalling state by the departing manager. The Company owns the freehold of the ex-manager’s flat. We pay full repair maintenance to the Managing Company. The Managing Company now want to spend £11,118.00. on refurbishing the said flat. First they wanted the residents to pay all the costs of refurbishing the flat. When the residents did not agree with this as the Managing Company did not supervise their employee to keep the flat in a reasonable condition. The Managing Company have now agreed to pay half of the cost. As we now do not have a resident manager, is it fair that we have to pay half of the cost when the Managing Company intend to let the flat. They quote that when the work is completed there will be no further costs to the residents for the upkeep of the flat. I personally do not think that we should pay anything for the upgrade of the flat to enable the Managing Company can get a higher rental, with no benefit to the residents. The flats are retirement accommodation for the over 60’s. I myself am 89 years old, and have lived in my flat for the last 17 years. Thank you.

Reply from Service Charge Dispute Guide

1. If a court or tribunal were to assess this situation there are two questions they would be likely to consider relevant to the issue of whether the Management Company, who we understand to be the party who has the right to charge you a service charge, is entitled to charge the leaseholders of your building for the cost of refurbishing the flat:

i. Do they authority under the terms of your lease, and those of the other residents, to include these costs as a service charge?

ii. Are the costs ‘reasonably incurred’ for the purposes of section 19(1)(a) of the Landlord and Tenant Act 1985?

2. The answer to your query depends of the wording of your lease, the amount you are charged, and other details of the situation. From the description in your e-mail there appears to be general rule in law which decides the case either way without a careful consideration of these two questions.

Issue i: Authority to Charge

3. It is an established principle in law (Gilje v Charlegrove Securities Ltd [2002] 1 EGLR 41) that a landlord may only charge a leaseholder for something if they can point to a clear provision in a lease entitling them to make that charge. Moreover there is no presumption in law that every cost a landlord incurs will be recoverable from a leaseholder (Rapid Results College Ltd v Angell [1986] 1 EGLR 53).

4. The first question then to be answered by your landlord is which provision in your lease do they intend to rely upon a basis for charging you for these costs? Does your lease specifically state that you must pay for the cost of refurbishing the flat?

5. Supposing that your lease does not include such a provision, your landlord might seek to rely on a provision in your lease which entitles them to recharge the cost of providing a service, such as a full time manager.

6. The Upper Tribunal of the Lands Chamber considered the proposition that the cost of providing a facility for staff might be part of the cost of providing a service in the case of Gateway (Leeds) Management Ltd v (1) Naghash (2) Shamsizadeh [2015] UKUT 333 (LC). In this case the Upper Tribunal decided that rent payable for a concierge office was chargeable under the terms of the lease concerned, because the concierge office was used in relation to the provision of a service towards which the lease required the leaseholders to contribute.

7. The situation you describe is not so clear cut as the situation described in the Gateway (Leeds) Management Ltd case.

i. On the one hand the flat had been used for the purposes of providing a service (that of a manager) and this would be a point in favour of your landlord’s legal entitlement to recharge the costs of refurbishment to you.

ii. However, on the other hand there may be some questionable aspects to the interpretation of such a provision allowing the charges to be raised in these circumstances:

a) The intention is no longer to use the flat as residence for a manager. The refurbishment is therefore not connected with the provision of an ongoing service. The costs are to purported to be those of making good damage done by a former employee. Should not the cost of repairing the damages have been claimed back from that employee or from an insurance policy as opposed to that of a charge for service provision?

b) You have stated that you have opted not to have a resident manager in the future. If your lease does not oblige the landlord to provide a resident manager, does it oblige the leaseholders to pay for the cost of providing accommodation for one?

c) A charge of £11,118.00 sounds like a lot for clearing up after a messy tenant. It sounds like the flat is being improved not simply being repaired. Does your lease entitle the landlord to charge you for the cost of improvements, and indeed the cost of improving a part of the building which is not a common part?

8. The situation you describe raises a lot of questions. We suggest that you and the other residents put these questions to your landlord. Do please come back to us to let us know their response. There may be some useful case law we can direct you towards, and further information we can provide, once we know their answer.

Issue ii: Are the cost reasonably incurred?

9. Section 19(1)(a) of the Landlord and Tenant Act 1985 states that a service charge is payable to the extent that it is ‘reasonably incurred’. The legislation does not define what it means for a service charge to be ‘reasonably incurred’, however, the upper courts and tribunals (Forcelux v Sweetman [2001] 2 EGLR 173, Regent Management Limited v Jones [2010] UKUT 369 (LC) ) have decided that determining whether a cost is reasonably incurred involves two tests:

i. Whether the decision to incur the costs was a reasonable one.

ii. Whether costs are reasonable in amount.

10. In respect of this first test (whether the decision to incur the costs was a reasonable one) simply identifying that damage has been done by a resident manager does not, of itself, demonstrate that the decision to incur the costs of the subsequent refurbishment as a service charge is a reasonable one.

a) Firstly there is a question mark over whether the scheme of works to be undertaken goes no further than addressing the damage done. We note that in the case of Waaler v LB Hounslow [2015] UKUT 17 (LC) the Upper Tribunal ruled that as a general principle before undertaking works which went beyond simply maintaining a building in good repair a landlord is obliged to give consideration to the (a) cheaper alternatives and (b) the views and financial interests of the affected leaseholders.

b) Secondly, we wonder whether the landlord might not have reclaimed the cost of the refurbishment from an insurance policy or the employee who did the damage. In the case of Continental Property Ventures v White [2007] L&TR 4 the Lands Tribunal decided that a cost was not reasonably incurred if those costs could have been met by claiming on an insurance policy. It may well be open to a First Tier Tribunal to decide that a similar principle applies if the costs of making good damage to the flat could be recovered from the individual who did the damage.

c) Thirdly, if going forward you can make do with a visiting manager were the costs of providing a resident manager in themselves reasonable in the first place?

11. The second test (whether the service charge is reasonable amount) is question of whether the costs charged are normal for type of work undertaken in your area. Because the landlord intends only to bill the leaseholders 50% of the total cost this issue appears to fall away. If you were being charged the full amount and it turned out that a different contractor could do the work for a lot less then it would be open to a court or tribunal to reduce the amount rechargeable to a reasonable rate. At 50% of the estimated cost, the contractor would need to be charging more than double for you as leaseholders to achieve a reduction in what it is your landlord is charging you on this basis.

Click on the link to read more Reader’s Questions and Answers on Disputing a Service Charge