Service Charges: JB Leitch successfully represents landlord in application to assess reasonableness of service charge

JB Leitch successfully represented the landlord in this case, defending an application by leaseholders for assessment of reasonableness and payability of service charges at a residential block of premium apartments in London.

The background

The owners of a luxury apartment at a block in central London had established an ‘unrecognised residents association’ although this did not formally represent all leaseholders.

The subject property comprised a purpose-built block of 235 flats, together with a separate block comprising 55 social housing units leased to a limited company, which were then sublet to occupiers.

The applicants, together with other leaseholders, had brought previous applications to challenge service charge accounts. The first had been unsuccessful, and a settlement was reached in the second. The present application challenged the service charges payable for 2014-2020, and payability of sums demanded for the 2021 service charge year. The applicants submitted the application with a schedule noting 55 ‘co-applicants’, although no evidence was presented that authorised the applicant to act on their behalf. The applicant sought:

1. Variation of the lease to allow the residents association to jointly agree insurance matters and appointment of managing agents;
2. Refunds of excessive insurance premiums to all those who had paid service charge; and
3. Responses to 31 queries in respect of service charge accounts from 2014-2020.

Under the leases, the landlord was obliged to manage the block and keep it in a proper state of repair. The FTT did not have jurisdiction to audit the landlord’s service charge accounts. Costs queried by the applicant included insurance costs, estate costs, concierge costs, water costs, works costs to repair damp, cleaning and reserve funds.

Leases for the main block are in similar terms and contain service charge provisions, splitting charges into groups such as Estate Costs, Block Costs, Car Park Costs and so on. The FTT considered each head of claim in its judgment.

The decision

The First-tier Tribunal found in favour of the landlord throughout, concluding that service charges demanded for service charge years 2014-2020 were reasonable and payable.

Taking each point in turn:

1. Insurance costs: The FTT found that the landlord was entitled to retain its insurance broker and was not obliged to consider others, as argued by the applicant, to adequately test the market. Insurance costs had been determined by a previous Tribunal in earlier proceedings and a settlement agreed in respect of years 2014-15 and 2017-19. In the present case the court found that the applicant was not able to challenge costs for these years further, and he could challenge only years 2020 and 2021.
2. Insurance commissions: The Tribunal found that the 5% commission paid was not unreasonable; the applicants presented no evidence that commission was above market norms or that premiums were unreasonably high.
3. Reinstatement costs: The landlord, acting by its agents, acted reasonably in relying upon reinstatement valuations by two firms of surveyors. Valuations differed, and the reinstatement valuation in 2020 was lower than that advised in 2016. Insurance premiums were therefore reduced as a result of the lower valuation, benefiting the leaseholders. The applicant could not challenge further the insurance premiums resulting from reinstatement valuations, having already been determined in earlier proceedings, and both valuations were justified in evidence presented by the landlord. It was reasonable for the valuations to be relied upon.
4. Damper replacement costs: Fire dampers throughout the building required replacement and upgrading, having exceeded their estimated life of 10-15 years. The costs of works would exceed £250 per apartment, requiring the landlord to follow the statutory service charge consultation procedure, and a Notice of Intention was duly served. The landlord’s agent liaised with the residents association and provided information as requested. Works were essential to the safety of the building and commenced in June 2021.

In assessing the applicants’ lease, the landlord is entitled to recover costs of damper replacement works through service charge. The Tribunal found the sums charged in respect of these works to be reasonable and payable; the works were properly carried out, quotes had been obtained from three contractors and the works were completed to a good standard. Works were urgent, and dispensation was granted in respect of the statutory consultation requirements.

5. Accounting errors: The applicants listed a number of ‘accounting errors’ in its heads of claim. The Tribunal does not enjoy jurisdiction to audit service charge accounts, instead relying on evidence presented by the Financial Controller of the landlord’s agent as to how service charge accounts were prepared. The applicant did not present details of specific service charge sums it wished to challenge, and the landlord had responded to any points which had been challenged. Sums would be payable through service charge.
6. Costs incurred in respect of fire precautions, employment of a property manager and outsourced cleaning costs were considered by the Tribunal to be reasonable and payable. Little or no evidence had been presented by the applicants to indicate that services could be procured at lower cost.

Advice and action for landlords

JB Leitch is pleased to have delivered this satisfactory conclusion for our client. It is clear from the Tribunal’s decision that costs incurred by the landlord were reasonable and payable in all respects.

Procedurally, this decision highlights the importance of leaseholders obtaining and engaging legal advisors during Tribunal proceedings. The applicants’ heads of claim were not sufficiently supported by evidence throughout, and in some cases – such as consideration of insurance and reinstatement costs – could not be challenged at all as a result of prior Tribunal decisions. Legal representation may have prevented the need for considerable case preparation and court hearing time on both sides.