Service charge: The recoverability of professional fees and ancillary expenses under the service charge
The recoverability of professional fees and ancillary expenses under the service charge
In Chiswick Village Residents Ltd v Southey , a building contained 280 flats let on long leases by the freeholder, one of which was held by the respondent.
Amongst other issues, the respondent brought a claim in the First-tier Tribunal for the determination of specific service charges in respect of:
- professional fees of £64,962 incurred by the freeholder in opposing applications for planning permission made by the tenant of the roof space leaseholder. The respondent’s application concerned his liability to pay the sum, but not the reasonableness of the sum stated.
- the respondent’s AGMs, including premises hire and advice, and directors’ liability insurance premiums, amounting to £7,605.
Under the lease, the respondent covenanted to pay a ‘Maintenance Contribution’ in a proportionate sum of 0.3602%. The freeholder was entitled to recover expenses incurred in keeping the building insured, effecting liability insurance for the freeholder against third parties and against other risks as the freeholder saw fit. Legal and other costs incurred in the recovery of the maintenance contribution, and in the management of the building, enforcement of covenants and incidental to the general administration and management of the property are also recoverable under the lease terms.
The FTT found that a proportion of the expenses relating to planning permission applications was recoverable; however, the FTT thereby assessed the reasonableness of the sum, and the appellant appealed on the basis that the FTT had determined a matter which was not before it (reasonableness, rather than liability for the whole sum).
Further, the FTT found that the corporate expenses identified above were not ‘service charges’ and were not therefore recoverable. Insurance premiums were also irrecoverable as the policies taken out were in respect of individuals and not the freeholder itself.
On appeal, the Upper Tribunal found that the FTT had determined a matter not before it in assessing reasonableness, and therefore allowed the appeal on this issue.
Considering the terms of the lease itself, the insurance premiums were found to be recoverable through the service charge, as insurance could be obtained to cover liabilities of both the freeholder and others.
Finally, in respect of corporate expenses, the UT concluded that the property could not be managed properly if the freeholder business was not also appropriately managed. Again, this appeal succeeded and the expenses could be recovered by the freeholder.
Advice and action for landlords
This case provides helpful reassurance for landlords, particularly those owned by leaseholders with no income-producing assets.
The principle followed by the court in Southey concludes that, in order to properly manage the property, the company must also be properly managed. This allowed for the recovery of expenses incurred in the proper management of the organisation, including corporate expenses for AGMs, advice in relation to those meetings and insurance premiums. Clearly however, landlords are advised to ensure that all such expenses are reasonable and proportionate.
The Upper Tribunal allowed the freeholder’s appeal and the recovery of expenses through the service charge, concluding that the property could not be managed properly if the freeholder business was not also appropriately managed.