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Service charges: following the contractual process for recovery

View profile for Roger Hardwick
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My colleagues, my clients, and possibly even my family are, I expect, tired of me repeating the phrase “read the lease”.  That does not make it any less correct.

In a very recent decision: Clacy v Sanchez [2015] UKUT 0387 (LC), the Upper Tribunal (Lands Chamber) considered the contractual procedures for the recovery of service charges, which fall to be observed under the terms of a lease.

We saw the importance of following the contractual mechanism for recovery in Southwark L.B. v Woelke [2013] UKUT 0349 (LC), where the landlord had billed service charges for major works separately from routine or annually reoccurring service charges. Those demands were found to be invalid, because the lease did not permit the cost of major works to be recovered in that manner. It should be noted that, unless the lease provides that “time is of the essence” with respect to the performance of a particular provision, it will (most likely) be possible for the landlord or management company to retrospectively correct the error by re-serving valid demands.

Another example of the importance of the contractual machinery would be a lease which only provides for the recovery of a particular item of expenditure as a service charge once the cost has been incurred. In the absence of an express right to recover an interim payment (usually based on an amount provided for in an estimate or budget), no interim payment may be recovered (Daitches v Blue Lake Investments [1985] 2 E.G.L.R. 67).

Procedural arguments also frequently arise in practice where the lease requires year-end accounts, budgets or service charge demands to include certain information, or follow a particular form. Commonly, the lease will require that accounts are “certified” or (less commonly, perhaps) “audited”.  Faced with a demand for service charges which follow, say, accounts which are not certified in accordance with the lease, a well informed leaseholder might argue that the certification amounts to a “condition precedent” (i.e. a contractual pre-condition to recovery), rendering the demand for service charges invalid (and, hence, not payable).

Clacy v Sanchez is a salient reminder that, even where the lease provides for certification, it will not necessarily be the case that such certification is a pre-condition to recovery. It will always depend on the wording that is used, and the facts and circumstances of the case. This case concerned a block of four flats, let on long leases which provided that “the amount of the service charge shall be ascertained and certified annually by the Certificate”. The Upper Tribunal found that this was not a contractual pre-condition to the recovery of a service charge for two reasons. Firstly, the Certificate was expressly stated to be “without prejudice” to the lessee’s liability to pay. Secondly, the Certificate had only had to be provided if requested by the lessee.

Further, it was common ground that for some 19 years the assumption had been made by the leaseholders that there was no requirement to obtain certification before making a demand. That meant that the leaseholders were “estopped by convention” from asserting (or, alternatively, that they had waived their right to assert) that certification was a pre-condition to their liability.

Nonetheless, as ever, the safest (and most likely least expensive) course of action remains to ensure that the terms of the lease are strictly adhered to.

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