London Borough of Southwark v Clark [2015]

Upper Tribunal applies strict interpretation of lease terms

The Background

The Appellant, the London Borough of Southwark, was the landlord of 43A Naylor Road, London. The Respondent was assigned the lease of the property from her father.

Prior to the assignment, in October 2006, an estimated demand for service charges for major works was sent to the Respondent’s father but never paid. A credit note and notice, headed ‘Final Account Notification and Summary’ and dated 16 May 2013, was sent to the Respondent demanding the sum of £8,562.66 (with a credit note issued in the sum of £3,960.74 as the major works cost less than estimated in October 2006). Again, the sum was not paid by the Respondent.

The Law

The case was transferred to the First-Tier Tribunal which determined that there was no financial liability owed from the Respondent to the Appellant. Referring to section 23(1) Landlord and Tenant (Covenants) Act 1995, the FTT held that, as the assignment had been completed and the interim demand made, the Respondent had no liability to pay service charges owed by her father under the lease covenants. Section 23(1) states as follows:

“Where as a result of an assignment a person becomes, by virtue of this Act, bound by or entitled to the benefit of a covenant, he shall not by virtue of this Act have any liability or rights under the covenant in relation to any time falling before the assignment.”

The Appellant appealed the FTT’s decision.

On examination of the lease provisions, the Tenant covenants to pay service charge. It is provided that if the amount paid in advance in respect of service charge exceeds the actual sum due, any overpayment is credited against the next year’s service charge estimate. The UT felt that the FTT proceeded incorrectly on a misinterpretation of the 1995 Act.

The Decision

The UT allowed the appeal. It held that the FTT misapplied the relevant provisions of the 1995 Act; the UT stated that section 23(1) does not limit the Respondent’s liability to pay the service charge sums demanded. Indeed, the Respondent had herself received a demand following assignment of the lease to her.

Where the calculation of the service charge is a two-stage process (namely an interim payment and a balancing payment or credit at the end of the service charge year), the liability to pay is also a two-stage process. An interim payment was sought from Mr Clarke, and unpaid, and the final account was produced post-assignment to the Respondent.

The UT held that a valid demand was served upon the Respondent and £6,734.10 was owed to the Appellant.

JB Leitch’s Stuart Miles comments on the decision:

“The Upper Tribunal has strictly interpreted the lease terms here, to ensure that liability to pay the full major works bill remains with the assignee despite the estimated demand for the major works having been sent to the assignor before the assignment of the lease. The Upper Tribunal has clearly identified that liability to pay the major works bill was part of a two-stage process, the second stage of liability arising upon service of the final account of the major works.

As the landlord sought recovery of the final account sum from the assignee, she was responsible for payment of the full final major works bill and could not seek protection under section 23(1) of the Landlord and Tenant (Covenants) Act 1995 in respect of the portion of the estimate that went to the assignor. Tenants will therefore have to be careful when taking an assignment of the lease to ensure that they fully investigate its mechanics and what liabilities are still to be finally accounted for.”