A service charge dispute addressed a number of issues, including whether legal costs incurred by the proceedings were recoverable under the service charge paid by lessees.
In Kensquare Ltd v Boakye , the appellant management company was the freeholder of property, within which the respondent held a long leasehold of a flat. The leaseholder was also a shareholder in the tenant-owned management company. The lease contained a provision requiring the leaseholder to pay a ‘Maintenance Contribution’, paid by two interim payments annually with a certification of service charges produced at the end of a service charge year. The freeholder was permitted, by the terms of the clause, to revise and adjust the Maintenance Contribution in an amount as it deems necessary considering any anticipated expenditure to be paid.
In a prior set of proceedings, the leaseholder made an application to determine whether the interim service charge demanded for the years 2011-2017 was reasonable and payable. The First-tier Tribunal concluded that they were payable, but the leaseholder did not pay the sums demanded and the freeholder subsequently served a s.146 notice to forfeit the lease. The leaseholder’s mortgagee paid the sums demanded.
Further service charge sums were demanded for 2018-2020, and the leaseholder brought the current application again to determine reasonableness and payability. The First-tier Tribunal concluded that lower sums were payable, and limited the recovery of legal fees to the service of the s.146 notice and not the recovery of fees paid in respect of the earlier proceedings. Legal fees for proceedings were not recoverable from the leaseholder through service charge. The freeholder appealed.
The Upper Tribunal allowed the freeholder’s appeal.
Interim service charges demanded were payable by the leaseholder. The intention of the lease’s wording was clear, and amounts could be revised by the freeholder. No notice of adjustment was required in addition to the interim service charge demands, and the tenant was to pay £180 for each instalment unless the landlord revised and adjusted the interim charges.
The lease allowed for the recovery of legal costs. The freeholder’s intention was clear, and the earlier proceedings had been undertaken in connection with the service of a s.146 notice. The FTT was to determine the amount of costs payable.
The freeholder’s legal costs for both the 2017 and 2019 proceedings were incurred in connection with the management of the building and were recoverable through the service charge. The lease stated that the maintenance charge included ‘The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the building.’ Considering the interpretation of wording, the UT found that the relevant purpose of the lease provision was the ‘management of the building’.
Advice and action for landlords
This case will be of comfort to landlords involved in legal proceedings in relation to reasonableness and payability of service charges, finding that legal costs incurred did fall under the ‘management of the building’ sufficiently to be recoverable.
However, landlords are advised to consider legal costs as a distinct cost centre within lease drafting, ensuring that wording is explicit in permitting the recovery of legal costs, albeit likely limited to ‘reasonably incurred’, through service charge.
The Upper Tribunal allowed the freeholder’s appeal. The freeholder’s legal costs for both the 2017 and 2019 proceedings were incurred in connection with the management of the building and were recoverable.