London Borough of Southwark v Proktor [2016]:

Whether a service charge demand was invalidated by the omission of the costs of major works

The background

The Respondent tenant occupied a property of which the local authority Appellant was the freeholder. Under the lease, the Appellant was entitled to make interim demands of service charges based on a reasonable estimate of the works to be undertaken and the costs payable for the forthcoming year.

A service charge demand for 2012/13 was made; the Appellant expected at the time of making the demand that some major works may be required but did not include an estimate of the costs for these within the demand.

The Respondent argued that the service charge demand was deemed to be invalid as a result of the omission of the anticipated costs of major works.

The law

The earlier case of London Borough of Southwark v Woelke [2013] considered a similar issue under a lease with identical terms. Following that decision, which stated that demands of the freeholder failed to comply with the terms of the lease and were therefore invalid, the First-tier Tribunal agreed with the Respondent that the service charge demand was invalidated by the omission. In Woelke, the FTT held that:

“If the appellant reasonably anticipates that its expenditure will include expenditure on major works…it is required to include that expenditure in its estimate. The omission of such expenditure is not consistent with the contract.”

The Appellant took the matter to the Upper Tribunal.

The decision

The UT disagreed with the FTT, which it concluded had not taken into consideration the following further statement in the Woelke decision:

“In normal circumstances…the only practical consequence of a failure to take account of major works in the estimate would be that the appellant would not be entitled to collect advance payments from the leaseholders which included any contribution towards the costs of those works.”

The UT held that the validity or otherwise of a demand must be immediately apparent and not dependent on future events, such as whether or not major works are undertaken. If the FTT’s decision was upheld, a decision must then be reached on the certainty of the Appellant’s intention to carry out works and the UT held that this was not right. The appeal was therefore allowed.

JB Leitch comments on the decision:

“The Proktor case provides useful guidance on the application of Woelke. The FTT did not consider the clarification of the decision, resulting in determination that the service charge demand remained valid (and the arrears demanded payable). Landlords are nevertheless advised to consider when estimating service charges all anticipated major works, but they can be reassured by Proktor that their omission does not bar them from demanding such costs in the future.”