It is one of the frustrations of the lawyer that, having drafted and negotiated the detail of a document such as a lease, all too often it then seems to be ignored by those who are supposed to be implementing its provisions. Nowhere is this more prevalent than in the area of service charges. As Leonora Investment Company Ltd v Mott Macdonald Ltd [2008] reminds us, this may ultimately affect the recoverability of expenditure, and attention should be paid to getting procedural matters right.
A FAMILIAR PATTERN
The case was concerned with four leases, each of one floor of an office block, let to the same tenant. The leases were identical for present purposes, and followed the familiar structure of quarterly on-account payments followed by a year-end balancing exercise.
The year-end procedure was for the landlord to send to the tenant a ‘statement of the actual service costs and service charge’, whereupon either the tenant should make a further payment, or the landlord should credit the tenant’s service charge account.
COMMON PARTS REDECORATION
As is perhaps not uncommon, with the expiry of the four leases looming the landlord took the opportunity to carry out some substantial works to the common parts, broadly in the nature of redecoration.
Shortly after the end of the service charge year, the landlord submitted an invoice relating to those works, not split between the four leases, and totalling £263,117.21. Within two weeks of submitting that invoice, the landlord sent out schedules of the actual service costs for that service charge year, excluding the common parts redecoration; these showed that the on-account payments had exceeded the actual costs, and therefore the schedule was accompanied by four credit notes.
SPECIAL TREATMENT
Why were these redecoration costs given special treatment? The explanation ventured by the landlord’s agent was:
‘…they were regarded as extra and outside the ‘normal’ service costs and we always intended to invoice for them separately’.
However, either they were within the categories of service costs and therefore chargeable via the service charge in the usual way, or they were not. If not, they should not have been invoiced at all; if they were, then the usual procedure should have been followed.
CORRECT PROCEDURE
The correct way to treat these costs would have been to include them in the schedules of service costs that they sent out. Had this been done, the service charge accounts would have shown a deficit, and instead of issuing credit notes the landlord would have issued four invoices, which the tenant would have clearly been obliged to pay. As it was, the failure to comply with the procedural provisions of the service charge meant that the sum invoiced was not payable.
AN UNTECHNICAL APPROACH
This may on the face of it seem unduly technical; if the expenditure was in principle chargeable to the tenants, why should it matter if a tenant receives one invoice and four credit notes, or four invoices? The answer is that mechanisms such as this are designed to give tenants the information they need to scrutinise the landlord’s expenditure, and the way it has been apportioned between all the tenancies within the property, and to check that the landlord’s record of the service charge account accords with their own. If information is given informally and piecemeal, it is more difficult for tenants to satisfy themselves that the correct sum is being demanded.
As it happens, the court’s approach was avowedly untechnical, and avoided the issue raised by counsel as to whether the procedural terms of the lease were conditions precedent to the obligation to pay, or mere mechanisms which need not necessarily be followed. In the words of Tuckey LJ:
‘I think the simple question is: what does the lease say has to happen before the tenant is obliged to pay service charge?’
He stressed that such provisions should not be seen as ‘procedural obstacle courses’, and indicated that it might not be impossible for the landlord to rectify the procedural errors, even at this late stage (five and a half years after the date of the invoice). So the landlord may yet recover its expenditure, although it is likely that the costs of these proceedings would exceed the sum at stake.
CONCLUSION
The lesson is clear and simple: when administering a service charge, landlords and their agents must go to the lease, find what procedure applies and follow it. If there is any doubt then of course they must seek advice, though usually the procedure is plain enough, as it was here. Tenants should not assume they can defeat service charges on minor technicalities, but if they find that non-compliance by landlords makes it more difficult for them to verify the amount due, then this case should encourage them to insist upon compliance so far as necessary for them to do so.
By Mark Shelton, associate, Cobbetts LLP. E-mail: mark.shelton@cobbetts.com.
For more information please visit www.cobbetts.com.
