Avgarski v Alphabet Square Management Company Limited [2016]

Retrospective calculation of service charge

The background

The appellant tenants held a lease of a flat, one of 33 on an estate where units varied in floor area. The tenants, under the terms of their lease, were required to pay ‘a fair and proper proportion…of the Service Charge’.

The landlord had historically calculated the service charge and apportioned it evenly amongst the 33 units, regardless of their size. The tenants brought the action to the First-tier Tribunal, arguing that an even apportionment could not be considered a ‘fair and proper proportion’. They suggested that contributions could be calculated either on floor area, or split both by floor area and allocated to different sections of the estate.

The law

The FTT decided that the latter formula was most suited; the service charge was to be calculated by floor area and with specific reference to different parts of the estate, including other residential blocks and the car parking area.

The FTT also held that the landlord did not need to historically recalculate the service charge for the two prior years that the tenants had been in occupation. The FTT granted the tenants permission to appeal this aspect of the decision.

The decision

The Upper Tribunal held that the FTT was wrong to conclude that backdating the recalculation of the tenants’ contributions would be ‘an administrative nightmare’. There was no evidence to support this claim.

The UT concluded that an evenly-split apportionment could not be considered a ‘fair and proper proportion’ of the service charge, and that this applied throughout the term of the tenants’ lease; the contributions could therefore be backdated to 1^st April 2010.

The landlord was ordered to recalculate the service charge retrospectively and credit the tenants accordingly where there has been an overpayment; little sympathy was shown by the UT to the landlord’s argument that there may be other claims in respect of the building, and that it may be unable to recover shortfall from tenants who were calculated to have underpaid. This could not be the fault of the tenants in this case.

J B Leitch’s Phil Parkinson comments on the decision:

“This case is a useful authority for landlords and surveyors when calculating service charge apportionments in developments where units vary in size. Apportionments must be fair, and that includes calculation by reference to floor area. The Upper Tribunal has made a clear decision to allow the recalculated charge to be backdated, which could prove incredibly costly where tenants have been in occupation for some time.”