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Service Charges: Assessing reasonableness of service charges demanded following earlier overpayments

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Where tenants had overpaid service charges in previous years, were sums demanded by the landlord reasonable or was it required to set off overpayments against anticipated expenditure?

The background

In Brett and another v Harlow Court Ltd [2022], the appellant leaseholders owned a long lease of a flat situated within a block of 18 other flats, all let on long leases. The respondent landlord company, owned by leaseholders of the flats, owned the freehold of the building. New leases were granted to leaseholders by the landlord company for extended terms of 999 years in 2014, but lease terms were otherwise in the same form as original leases held prior to 2014.

The appellants covenanted in their lease to pay a percentage of the landlord’s annual maintenance costs, calculated at 1/18th (or 5.56%). Costs were to comprise expenditure ‘incurred or to be incurred by’ the landlord in carrying out maintenance services at the block, or as a ‘forward payment’ for any possible larger expenditure in future years. Service charges were paid in advance twice a year, and sums demanded were to comprise an amount determined as ‘a fair and reasonable interim payment’ by the landlord’s surveyor, with a reconciliation at the end of the year. Leaseholders were also obliged to pay a proportion of the administration costs and professional fees of Harlow Court Ltd.

Two service charge demands were made by the landlord each year for £800, with an amount used for repayment of costs incurred and the remainder allocated to a reserve fund. Over time, the reserve fund accumulated a healthy balance. However, after 2014 the £800 sum became insufficient to cover the costs incurred. No balancing payment was demanded of the leaseholders, but instead the landlord took the deficit from the reserve fund.

The appellants made a series of applications in 2018, 2019 and 2020 as to their liability to pay the service charges demanded. The First-tier Tribunal had decided in these applications that administration costs and other fees could not be recovered through the maintenance charge.

The appellants sold their flat in June 2020. In error, the full service charge sum for the year had been demanded; this was rectified and a revised demand for one instalment issued in March 2020.

In their third application, made in September 2020, the FTT was asked to determine liability for service charges over the years 2018-19, 2019-20 and 2020-21. The FTT decided that it could not determine whether sums demanded in those years were reasonable, concluding that any excess would not be owed to the appellants in any event as they had since sold their lease. The FTT only considered the payment on account demanded in March 2020 which had been paid before the sale was completed.

The FTT found that a surplus of £2,590 in the 2019-20 service charge year should have been set off against the 2020-21 annual budget, reducing the amount payable by the appellants by £71.95. The appellants appealed to the Upper Tribunal.

The decision

The Upper Tribunal dismissed the appeal, upholding the FTT’s decision that the amount payable by the appellants reduced by £71.95 and that any application for a return of overpaid sums must be pursued in the County Court rather than in the FTT.

In considering whether demands were unreasonable as a result of previous overpayments, the FTT had acted reasonably in concluding that the costs incurred should be reimbursed by the leaseholders through the service charge and in its decision that funds collected had been allocated appropriately, with no significant surplus funds available which could be set off against the sums demanded. Sums demanded were appropriate to the expenditure anticipated, and the leaseholders would not be expected to pay any more than the amount needed by the landlord to deliver the services. The sum demanded had been reasonable.

The UT also considered the FTT’s approach to determining how any surplus funds should be treated. The appellants had argued that overpayments of sums in advance should be returned to them and not allocated to a reserve fund. Referencing s.19(2) of the Landlord and Tenant Act 1985, the UT held that the FTT was unable to order repayment of overpaid sums and the appeal on this ground was therefore dismissed. Any claim for repayment of overpaid sums should be pursued by the appellants through the County Court.

Advice and action for landlords

This is a helpful decision for landlords in considering the FTT’s approach and jurisdiction to overpayments of service charges.

Although leaseholders had made overpayments in previous years which contributed to a reserve fund, the landlord was not required to set off service charge demands against significant reserve funds held, nor against any anticipated expenditure for the coming year. Such funds had been allocated appropriately and only a nominal reduction in the sum demanded, reflecting the small surplus of £2,590 in the immediately preceding service charge year, was necessary.

Further, any claim for repayment of overpaid sums must be made in the County Court by the appellants, as the FTT did not enjoy jurisdiction to make such an order.

The Upper Tribunal dismissed the appeal. The amount payable by the appellants reduced by only £71.95 as sums demanded had been appropriate, and any claim for a return of overpaid sums must be pursued in the County Court.

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