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Thomas Homes Ltd v MacGregor [2016]

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Service charge apportionments between estate tenants

The background

The respondent tenant occupied a flat under a long lease at a low ground rent, granted by the appellant landlord. The property itself is a listed building, a former hospital converted into 130 residential units with a large communal hall. The units comprise 39 social housing flats and 91 privately-let flats, of which the respondent occupied one.

Service charges for social housing tenants were limited; no provision was made at planning stage as to how any shortfall was to be made up to account for the difference in capped service charge against the cost to the appellant of delivering such services. In order to raise sufficient revenue, the appellant therefore charged more to the non-social housing tenants than they would done if the service charge was calculated evenly across all units.

The respondent made an application to the First-tier Tribunal in respect of service charges for years 2013, 2014 and 2015, during which the landlord demanded a total of £6,400.60 across the three years. If the service charge values charged to all non-social housing units were added together, the court arrived at a service charge recovery figure of 3000%; the appellant could therefore theoretically recover from tenants 30 times more than the amount it incurred in delivering the services.

The basis of the respondent’s claim was that residents of non-social housing units were subsidising those in the social housing element of the development. Further, service charges were calculated on the basis of numbers of bedroom per unit, which was inequitable given that the communal hallway contained no bedrooms but nevertheless required maintenance. The claim also consisted of a number of issues relating to specific apportionments and matters relating to units which previously constituted social housing but had since become privately-owned.

The FTT noted that the lease had been poorly drafted, and concluded that there was no implied term to suggest that the respondent should subsidise through overpayment the residents of social housing units. The FTT therefore held that service charges were not reasonable and must be recalculated to exclude any subsidy to social housing tenants.

The appellant took the appeal to Upper Tribunal.

The law

The Upper Tribunal considered carefully the terms of the lease and its construction, and dismissed the decision of the FTT.

The UT noted that the FTT’s decision should have been based on the sums payable in respect of the three years in dispute, during which no demands for final payment were made; only ‘on account’ payments had been demanded. Further, the FTT did not consider the terminology of the lease itself but instead considered the effects of any express or implied terms to state that non-social housing tenants should subsidise tenants of social housing units.

The parties were clear in their intentions in the drafting of the lease; the appellant did not, however, conclude each service charge year with a balancing final payment. The UT therefore considered whether the final account sums for each of the three years in dispute could be deemed ‘reasonable’.

The decision

The UT allowed the appellant’s appeal, concluding that the sums demanded by way of account for the three years in question were reasonable and due by the respondent. Referencing s.19(2) of the Landlord and Tenant Act 1985, the court held that ‘reasonable’ sums were payable, regardless of specific percentages set out in the lease. Overpayment of 3000% would become an issue on the balancing of payments. Under these proceedings, the UT was asked only to consider the ‘on account’ payments.

Both parties agreed that the lease contained a drafting error, but the UT declined to reach a judgment on any matters other than the amounts payable, if any, by the respondent; it acknowledged that the parties may seek to vary the leases in future as a result of the drafting error, but that this issue would not be considered under the current proceedings.

JB Leitch’s Phil Parkinson comments on the decision:

“The Upper Tribunal’s decision in Thomas Homes v MacGregor provides interesting guidance for landlords. A key issue here is the calculation of service charge apportionments on the set-up of estates; landlords must consider carefully how they will apportion service charge based not only on floor area but also considering social housing caps and other features unique to each development. There exists a requirement for apportionments to be reasonable, and a court will look to the lease terms for construction of the parties’ intentions even where a term may be commercially biased in one party’s favour. Landlords are advised to work closely with solicitors on estate management at the outset, ensuring that service charge terms are fair and clear at the grant of occupational leases.”

The court acknowledged that the sums it ordered to be payable were nevertheless still only ‘on account’ sums; a final account for each of the service charge years had not been prepared and the UT assumed that this would follow in the future.

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