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Whether service charges were reasonable where services are provided by a landlord who assumes responsibility (Adriatic Land 1 (GR3) Ltd v Miller and others – 2019

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Where the freeholder of a property advises lessees that it is assuming responsibility from the management company for the delivery of services, and subsequently makes a demand for payment of incurred expenditure, at which point do monies become due to the landlord and are the charges reasonable or payable?

The background

In Adriatic Land 1 (GR3) Ltd v Miller and others [2019], all leases at a block of flats were entered into between the freeholder landlord, a management company and individual lessees. The management company covenanted to provide services and lease covenants stated that lessees were liable to pay for any expenditure incurred.

The management company went into liquidation following a dispute with a third party. Adriatic, after becoming aware of the management company going into liquidation, stepped in to take over management of the services pursuant to a ‘step-in’ clause within the leases. Adriatic later sent to the lessees a budget and demand for payment of service charge for the forthcoming service charge year.

The lessees brought a claim to determine the reasonableness and payability of the sums. The First-tier Tribunal found that the sums demanded were neither reasonable nor payable.

The decision

The Upper Tribunal held that service charges demanded were reasonable and payable to the freeholder from the point that it assumed responsibility for the delivery of management services. The freeholder took over performance of the company’s covenants following the liquidation of the company and it was not obliged to serve notice to lessees where the management company was not performing its covenants because of its insolvency.

The UT could not find any ambiguity to suggest that the intention of the leases was otherwise. Although the leases contained no express payment obligation to sit alongside, the matter was adequately dealt with elsewhere by requiring lessees to pay for work undertaken by the freeholder.

Advice and action

Landlords are advised to ensure that leases adequately provide for their ability to assume the delivery of services where a third party is failing to do so, or otherwise has entered into insolvency and is unable to perform its obligations under a lease.

This case is supportive in that where a landlord has stepped into the role of an insolvent management company, demands for sums incurred in carrying out management services are likely to be deemed to be payable, if the landlord can show that there is an appropriate mechanism contained within the lease that provides for expenditure being settled by the lessees.

The freeholder took over performance of management services following the liquidation of the management company, and the Upper Tribunal found that service charges demanded were reasonable and payable.

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