This section of our Case Law Library looks at cases related to the application of:
- Section 19 (1) (a) of the Landlord and Tenant Act 1985 which states that service charges are payable “only to the extent that they are reasonably incurred”
- and, Section 19 (1) (b) of the Landlord and Tenant Act 1985 which states that that a landlord can only charge for services or works that are carried out to a “reasonable standard“.
Meaning of the Term ‘reasonably incurred’:
In this case, at paragraph 10 of the decision, the Upper Tribunal gives explicit guidance on the manner in which Section 19 (1) (a) of the Landlord and Tenant Act 1985 should be applied to a consideration of whether the cost of repairs to a roof had been reasonably incurred: “The question is whether the decision to recover the roofs was a reasonable one in all the circumstances, even if other reasonable decisions could also be taken.”
This case sets out the way in which a Tribunal should assess whether a service charge has been ‘reasonably incurred’. It also demonstrates that for a Leaseholder to win a reduction in their Service Charges on the basis that they are unreasonable, they must first demonstrate that the Landlord did not have good reasons for the decisions they made in incurring in the costs. Furthermore, the Upper Tribunal decided that a Landlord who does not pick the best possible option for the management of a property may still be deemed to have acted reasonably in the circumstances, and the Service Charge reasonably incurred.
Value for Money:
Forcelux v Sweetman  2 EGLR 173
In this case it was decided that determining whether a service charge is reasonably incurred involves looking at two issues: 1. whether the decision to incur the costs was reasonable and 2. whether the Landlord had properly tested the market when procuring works and services. The Lands Tribunal also decided that the Law does not require a Landlord to select the cheapest possible price available.
In this case the Lands Tribunal stated that in order for comparative data (such as alternative quotes) to be useful evidence in determining whether Service Charge costs are reasonably they must be made on a ‘like-for-like’ basis.
This case shows that a Leaseholder can challenge the reasonableness of costs included in a Service Charge, particularly for Major Works, on the basis that these costs are above a level typical which for the time when the costs were incurred and the circumstances the works were carried out. It also shows that this challenge can be made even if a contract for work has been let following a competitive tendering process.
Standard of Work or Services:
In this case, the Lands Tribunal decided that determining whether the requirement for works or services to be of a ‘reasonable standard’ has been met is in fact a test of value for money. The requirement under Section 19 (1) (b) is that the cost charged to a Leaseholder be proportionate the level of works and services provided to a reasonable standard, not that the Service Charge be reduced to zero if there is some badness or defect in the works or services provided.
Decision by the Upper Tribunal that in cases where there is not sufficient evidence to calculate precisely the precise to be made in respect deductions of each item of work carried out an LVT is entitled to adopt a ‘global’ percentage deduction across all categories of work to reflect deficiencies in their standard.
In this case the Upper Tribunal considered whether a promise to fix known defects in the Major Works which had been carried out satisfied the requirements of Section 19 of the Landlord and Tenant Act 1985, which states that a Service Charge is only payable to the extent that the works or services are carried out to a ‘reasonable standard’. The Tribunal decided it was not and that the Leaseholders were entitled to a deduction in their bills in respect of the defects in the works.
Burden of Proof:
In this case the Lands Tribunal decided that if a leaseholder can provide sufficient evidence to suggest that costs were not incurred, but formed part of a service charge demand, then the burden of proof lies with the landlord to provide evidence that these costs were actually incurred.
This is an interesting case where the Upper Tribunal of the Lands Chamber decided, as a point of Law, that there is no reason why the financial impact of a Service Charge bill cannot be considered a relevant factor in determining whether a Service Charge has been ‘reasonably incurred’. The Tribunal’s view was that the affordability of Major Works in relation to scheduling of works over time should be balanced against other considerations such as the urgency of the works in question, or whether doing the works in smaller lots would increase the overall cost.
The relationship between the Requirements of a Lease and reasonableness:
In this case the Land Tribunal decided that if a Lease allows for a type of cost to recharged, that does not automatically mean that the amount which is charged is reasonable.
Reasonableness of Estimated Charges:
The Tribunal decided that estimated or ‘on account’ Service Charge payments were only payable to the extent that the amount demand would be ‘reasonably incurred’, with the proviso that a Landlord has a broad discretion in determining how to fulfil their obligations under the terms of a Lease.
Reasonableness of a Management Fee
Case where the Upper Tribunal decided that it was reasonable for the Local Authority to charge all Leaseholders within its housing stock a management fee of the same amount, and that this amount could be calculated on the basis of the annual global charge the Local Authority was invoiced for each year by the Arms Length Management Organisation (ALMO) which was acting as managing agent for the property.
In this case the Upper Tribunal considered the reasonableness of a Service Charge for fees from consultants, contractors and the Landlord’s own management fees in relation to a Major Works project. In decided on the question of reasonableness the Tribunal carefully considered the constituent parts of the total fee (added to the cost of the works) in respect of what services were actually supplied, who carried them out and whether the rate charged fell within the range of normal market rates.
In this case the Upper Tribunal decided that the wording of the leases concerned did not allow the Tribunal appointed manager of the property to include a fee of £300 in the service charge for the preparation of Section 20 notices because this function was already included as item for which the lease allowed a fixed 10% charged to be added to the contract sum in respect of the works.
Reasonableness of Insurance Premiums:
In this case the Upper Tribunal decided that in order for the amount of an insurance premium to be ‘reasonably incurred’ under Section 19 of the Landlord and Tenant Act 1985 a landlord must either (1) have negotiated the contract at ‘arms length‘ in the ‘market‘ or (2) prove the amount charged is representative of the market rate. There is no requirement for a Landlord to find the cheapest available quote.
In this case the Upper Tribunal considered whether it was reasonable for the Landlord to include the cost of insurance against terrorism in the Service Charge. In determining an answer to this question the Upper Tribunal considered the wording of the Lease and the RICS code of practice.
Situations where Guarantees and Insurance might have funded costs incurred by a Landlord:
The Lands Tribunal decided that costs could not be ‘reasonably incurred’ if it had been possible that the works could have been carried out at no charge, for instance because of the protection of insurance or guarantee, unless the Landlord can provide good reasons for choosing to pay for the works rather than making a claim against such insurance or guarantee.
In this case the Leaseholders challenged the Service Charge for roof repairs on the basis that the Management Company had a duty of case to make a claim against the company which constructed the building because of defects in the way the roof was built. The Upper Tribunal decided that no such duty of care could exist because the Management Company had no right in law to make a claim of this kind against the company which constructed the building and that the Service Charge could not be disputed on this basis.
Reasonableness of using Companies Connected to the Landlord to undertake work or provide services:
The Lands Tribunal decided that there was nothing wrong, in principle, with companies connected to the Landlord providing works and services, the cost of which is charged through a Service Charge, so long as the agreement to provide services or works is not a “sham”.