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Service charges: Assessing the nature of service charge payments made under a management order (Chaun-Hui and others v K Group Holdings Inc – 2019)

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Where a management order is made in respect of a property and service charge arrears accrued whilst the order is in place, can the arrears be assigned to a maintenance trustee and that trustee then take steps to recover arrears from lessees?

The background

In Chaun-Hui and others v K Group Holdings Inc [2019], units in a mixed-use block were held by tripartite leases, the parties to which were the head lessor, a maintenance trustee and the lessees. The block was in a poor state of repair and management and service charges were in dispute for many years.

A manager was appointed to manage the property under a management order which ended in 2013. Lessees continued not to pay service charge, and considerable arrears accrued during the term of the order. When the appointment ended, service charge arrears were assigned by the manager to a maintenance trustee, who was then able to pursue the lessees for payment of arrears. A claim was issued in 2016 for arrears amounting to over £1m.

At the First-tier Tribunal, the Court found that the deed of assignment was valid and the maintenance trustee could pursue lessees for the arrears. The lessees appealed.

The decision

The Upper Tribunal dismissed the lessees’ appeal, finding that the maintenance trustee was entitled to pursue lessees for the accrued arrears of service charge.

The UT considered whether an assignment of service charge arrears accrued under a management order was possible. The Court found that service charges fell within the Landlord and Tenant Act 1985, in that service charges are paid under the lease for as long as they are recovered under the management order; they are not viewed any differently purely by virtue of being recovered under the management order.

The management order did not mean that lessees were no longer bound by lease covenants, and covenants remained in force including the requirement for the payment of service charges. Regarding the assignment of the arrears, the UT held that this was not in fact necessary as the ability for the maintenance trustee to recover arrears was only suspended by the management order rather than extinguished entirely.

Advice and action

The accrual of such a significant amount of service charge arrears meant that this case was of critical importance to the maintenance trustee.

Managing agents in particular will note this outcome, finding that where a management order is in place, service charge arrears accrued under it are still recoverable by a trustee following termination of the order. Further, arrears do not necessarily need to be assigned formally by a deed of assignment as they will survive the order’s termination.

The Upper Tribunal dismissed the lessees’ appeal, finding that the maintenance trustee was entitled to pursue lessees for the accrued arrears of service charge. Lease covenants remained in force whilst the management order was in place, including the lessees’ obligation to pay service charges.

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