When Is A Service Charge Not A Service Charge?

The Anchor Trust v Waby [2018] UKUT 370 (LC)

No, this is not a joke with a silly answer, but an important question for those living in properties subject to a service charge.

As we all know, tenants are given wide-ranging protection with regard to service charges under sections 18 – 30 of the Landlord and Tenant Act 1985. In particular, the charges levied have to be ‘reasonable’ and the First Tier Tribunal, Property Chamber has jurisdiction to determine what is ‘reasonable’.  This case involved retirement flats  near York. Under the leases of the flats, the flat owners were, amongst other matters, required to pay the landlord’s costs of management. Did the Tribunal have jurisdiction to determine whether the costs charged were ‘reasonable’?

The relevant statutory provision is as follows:

18.— Meaning of “service charge” and “relevant costs”.

(1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent—

           (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management, and

           (b) the whole or part of which varies or may vary according to the relevant costs .

So management costs are expressly mentioned in s.18 (1)(a)  but in order within the definition of ‘service charge’ to enable the Tribunal to be able to determine whether the charge is ‘reasonable’, s. 18 (1)(b) also has to be complied with i.e. the amount charged to the flat owners has to vary according to the relevant costs.

The relevant provision of the leases in this case was as follows:

“The fees and disbursements paid to any managing agents appointed by the Lessor in respect of the Estate or a reasonable allowance to the Lessor in respect of its own management costs.  With effect from 1 January 1995 and on every subsequent 1 January there shall be added to the fees or allowance for the year ended 31 December 1994 such percentage as is equal to the percentage increase in the figure at which the Index of Retail Prices stands on the 1 January in each year over the figure which the Index stood on the 1 January 1994.”

The issue in the case was that the flat owners claimed that the landlord had used the wrong index to calculate the management costs. Since it took over management in 2005, Anchor had not used the retail prices index, as required by the lease, but had increased the charge annually by reference to a calculation provided by the Housing Corporation for use in adjusting the cost of services provided to occupiers of affordable housing.

The whole provision may seem strange, but Martin Rodger QC, the Deputy President of the Lands Chamber, thought that its use was understandable:

It is not difficult to see why this unusual hybrid should have been attractive to the parties.  This is retirement housing likely to be occupied by leaseholders on fixed incomes, and the lease includes indications that the parties wanted to avoid fluctuations in charges from one year to the next.  Because it was a new development the cost of management, especially if undertaken in-house by the Lessor rather than by an agent, may have been difficult to predict with any confidence.  The expedient of waiting until the first full year’s costs were known before fixing the charge for future years might have been regarded as more attractive than speculating about what those costs might be or allowing the charge for management to vary from year to year depending on the cost of providing the service.

But now that a dispute had arisen over the management costs did the Tribunal have jurisdiction to determine it? Was it within the statutory definition of ‘service charge’?

Martin Rodger QC continued as follows:

Whatever the reason for the parties agreeing that the allowance for management costs should be ascertained in this way, it seems to me to be clear that, in the first full year at least, the charge for management was a service charge within the meaning of section 18(1). 

…  After the first year the allowance for management ceased to be variable by reference to the cost of providing the service.  With effect from 1 January 1995 the charge varied annually by reference to the Index of Retail Prices.  …

 Can a charge for a particular service be a service charge one year, and not a service charge the next? …  In this case it is the first year’s charge which was variable by reference to relevant costs, and therefore a service charge, but the following years were not.  The result, in my judgment, is that since 1995 the charges for management have not been service charges within the meaning of section 18 of the 1985 Act.             

Counsel for the flat owners had argued that a service charge should be regarded as a single sum and that it was sufficient that part of that single sum be capable of varying according to the relevant costs to enable the whole sum to be recognised as a service charge. This received short shrift:

I can see nothing in logic or language to require that an amount be treated as indivisible where in reality it is the aggregate of a number of smaller amounts; an amount payable does not cease to be an amount payable just because it is added to other amounts payable to produce a larger bill.  The aggregate sum includes each of its component parts. No difficulty is encountered in practice in examining the individual components (the relevant costs) to determine whether they were each reasonable incurred in the provision of a service of reasonable quality.  Tribunals perform that exercise every day.  Why then should the fact that one amount satisfies the requirement of section 18(1) in being capable of varying according to the relevant costs mean that another amount which does not have that characteristic must nevertheless be treated as falling with the statutory scheme of protection?

So beware, not all service charges are service charges within the protections given by the 1985 Act.

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