Question 1

Service Charge

Accepted Answer

Q: Our 33 private residents have three different rates of service charge which historically have been based on the outdated rateable values. We have wrestled and wrestled trying to find out and reconcile how this ever occurred as all the flats are the same and are all Band “B” for Council Tax purposes. The lease is specific in the Sixth Schedule that the service charge means the proportion the net rateable value of the demised premises bears to the total net rateable value of all the flats. We are attempting to equalise subject to the 100 per cent agreement of our residents as it is unfair that some pay more than others. However, my specific question is that one resident, knowing only too well what we are trying to achieve, has now paid his service charge less £18.57. He is on the middle rate and should pay £435.40 for the half year, whereas he thinks he should now pay the lower rare of £416.83. This person has been told that he is bound by the lease to settle the full service charge. This has never happened before over the 30 years I have been involved. We have given this particular resident until 31 January to pay in full then we will add interest, but whilst knowing this person he will probably still refuse. I guess that we can then apply by Money Claims of Line for the difference, including administration costs please? It would be for him to appeal to the LVT if he so wishes, but by then we would hope equalisation by all would have been agreed & a variation sought. Any advice will be very welcome please. FPRA Hon Consultant Roger Hardwick replies: It is indeed irritating for all concerned when the leases on a development are encumbered with a service charge proportion which is based on domestic rateable values, which were abolished on 1 April 1990. I shall assume, for the purposes of my advice, that your member has managed to obtain rateable values for each of the flats and garages (from its local authority, or VOA, or the local water authority, or possibly old rate books stored in a record office/library/archives), as at 31 March 1990; and has applied those rates for the purpose of apportioning the service charge between the flats and garages on the estate. The Council take rate would be irrelevant. I would think the only way your member could guarantee an equal apportionment of the service charges in the block, would be to arrange for each leaseholder to enter into a deed of variation in respect of the lease of their flat, to modify Paragraph 1(2) of the Sixth Schedule, by the removal of "the proportion the net rateable of the Demised premises bears to the net rateable value of all the flats and garages on the Estate", and substitution of the words "a one thirty third proportion" (or whatever split is agreed). An application to vary the leases under s.35 of the Landlord & Tenant Act 1987 (where the lease “fails to make satisfactory provision”, e.g. with respect to the “computation of service charges”) probably wouldn’t work in the light of Morgan v Fletcher (s.32(2)(f) only applies were the total costs do not add up to 100% - it is not within the tribunal's jurisdiction to vary service charge proportions which are deemed unfair or inequitable in some way, and where the percentages do not add up to 100% the tribunal are likely to take the line of minimal intervention, e.g. grossing up, as opposed to a completely new method). An application to vary all of the leases in the block under s.37 of the 1987 Act might work, if your member could secure the cooperation of 75 per cent (including the freeholder) with no more than 10 per cent opposing, but even then there is no guarantee. It is, essentially, a matter for the tribunal’s discretion. Were anyone to oppose the reapportionment, the tribunal may be wary of interfering with the contractual bargain between the parties, on the basis that some leaseholders would be worse off, and when those leaseholders bought their leases they will not have expected their proportion to increase. If nobody opposed the application, I would think the prospects of the application succeeding would be higher. The alternative would be an application to court, to essentially re-write the relevant provision in the lease on the grounds that due to a change in circumstances (the abolition of domestic rateable values), the original contractual bargain has been fundamentally altered and can no longer realistically be applied (see, e.g. Pole v Feinberg and Furlonger v Lalatta). Although I am sure it would make an interesting case, that would be a risky and potentially costly application, and not one which I would recommend. Turning to your member’s questions about enforcement action (again, I shall assume that the leaseholder in question is, in fact, paying an incorrect amount):

A money claim can be made for a liquidated sum, or debt, which is due under the lease. In the county court, the claim can be prepared and issued online under CPR 7.2 and CPR PD 7E (money claim online). If the lessee does not file an acknowledgement of service or defence, judgment in default can be entered under CPR Pt 12. If a defence is filed but it is considered that the defendant has no real prospect of succeeding at trial, an application for a summary judgment can be made under CPR Pt 24.

The downsides are that if the lessee defends the action, it could lead to your member incurring significant costs, which it would not be able to recover under CPR Pt 44 (the claim being under the “small claims track”). The lessee may also ask for the matter to be transferred to the FTT, resulting in further delays and further costs.

If your member owns the freehold, it may be able to use a judgment / FTT determination (including a default judgment) as a springboard to a forfeiture action against the lessee (obtaining a final determination from a court or tribunal is a necessary pre-condition of serving a notice before forfeiture, unless the lessee admits that the sum is owing – s.81, Housing Act 1996, as amended). However, forfeiture will not be available unless the outstanding amount (excluding costs) is more than £350 or has been payable for more than three years (s.167, Commonhold & Leasehold Reform Act 2002).

If your member owns the freehold, it may be able to rely on Clause 2(11) to recover any costs it incurs in connection with court proceedings to recover the debt (on the grounds that those proceedings are a necessary pre-condition to serving a s.146 notice – see Freeholders of 69 Marina v Oram), and that will be so despite the action being a small claim (Chaplair Ltd v Kumari); however, that will not apply if the total outstanding sum is less than £350 (unless it has been payable for more than three years), because in those circumstances forfeiture is not available as a remedy (see Barratt v Robinson, which is currently under appeal, to be heard by the Court of Appeal later in the year).

I cannot see that there is any other right for the management company to recovers it costs directly from the defaulting leaseholder, under the terms of the lease; however, one option may be for the company to exercise its power to pass additional estate rules and regulations under Para.14 of the First Schedule; namely, a rule that any leaseholder in breach of a term of their lease must indemnify the management company against any reasonable fees incurred by the management company in taking action in connection with that breach.

I cannot see that there is any right to recover the cost of legal expenses as a service charge.

[submitted March 2016]

Question 2

Service Charge

Accepted Answer

Q: Our 33 private residents have three different rates of service charge which historically have been based on the outdated rateable values. We have wrestled and wrestled trying to find out and reconcile how this ever occurred as all the flats are the same and are all Band “B” for Council Tax purposes. The lease is specific in the Sixth Schedule that the service charge means the proportion the net rateable value of the demised premises bears to the total net rateable value of all the flats. We are attempting to equalise subject to the 100 per cent agreement of our residents as it is unfair that some pay more than others. However, my specific question is that one resident, knowing only too well what we are trying to achieve, has now paid his service charge less £18.57. He is on the middle rate and should pay £435.40 for the half year, whereas he thinks he should now pay the lower rare of £416.83. This person has been told that he is bound by the lease to settle the full service charge. This has never happened before over the 30 years I have been involved. We have given this particular resident until 31 January to pay in full then we will add interest, but whilst knowing this person he will probably still refuse. I guess that we can then apply by Money Claims of Line for the difference, including administration costs please? It would be for him to appeal to the LVT if he so wishes, but by then we would hope equalisation by all would have been agreed & a variation sought. Any advice will be very welcome please. FPRA Hon Consultant Roger Hardwick replies: It is indeed irritating for all concerned when the leases on a development are encumbered with a service charge proportion which is based on domestic rateable values, which were abolished on 1 April 1990. I shall assume, for the purposes of my advice, that your member has managed to obtain rateable values for each of the flats and garages (from its local authority, or VOA, or the local water authority, or possibly old rate books stored in a record office/library/archives), as at 31 March 1990; and has applied those rates for the purpose of apportioning the service charge between the flats and garages on the estate. The Council take rate would be irrelevant. I would think the only way your member could guarantee an equal apportionment of the service charges in the block, would be to arrange for each leaseholder to enter into a deed of variation in respect of the lease of their flat, to modify Paragraph 1(2) of the Sixth Schedule, by the removal of "the proportion the net rateable of the Demised premises bears to the net rateable value of all the flats and garages on the Estate", and substitution of the words "a one thirty third proportion" (or whatever split is agreed). An application to vary the leases under s.35 of the Landlord & Tenant Act 1987 (where the lease “fails to make satisfactory provision”, e.g. with respect to the “computation of service charges”) probably wouldn’t work in the light of Morgan v Fletcher (s.32(2)(f) only applies were the total costs do not add up to 100% - it is not within the tribunal's jurisdiction to vary service charge proportions which are deemed unfair or inequitable in some way, and where the percentages do not add up to 100% the tribunal are likely to take the line of minimal intervention, e.g. grossing up, as opposed to a completely new method). An application to vary all of the leases in the block under s.37 of the 1987 Act might work, if your member could secure the cooperation of 75 per cent (including the freeholder) with no more than 10 per cent opposing, but even then there is no guarantee. It is, essentially, a matter for the tribunal’s discretion. Were anyone to oppose the reapportionment, the tribunal may be wary of interfering with the contractual bargain between the parties, on the basis that some leaseholders would be worse off, and when those leaseholders bought their leases they will not have expected their proportion to increase. If nobody opposed the application, I would think the prospects of the application succeeding would be higher. The alternative would be an application to court, to essentially re-write the relevant provision in the lease on the grounds that due to a change in circumstances (the abolition of domestic rateable values), the original contractual bargain has been fundamentally altered and can no longer realistically be applied (see, e.g. Pole v Feinberg and Furlonger v Lalatta). Although I am sure it would make an interesting case, that would be a risky and potentially costly application, and not one which I would recommend. Turning to your member’s questions about enforcement action (again, I shall assume that the leaseholder in question is, in fact, paying an incorrect amount):

A money claim can be made for a liquidated sum, or debt, which is due under the lease. In the county court, the claim can be prepared and issued online under CPR 7.2 and CPR PD 7E (money claim online). If the lessee does not file an acknowledgement of service or defence, judgment in default can be entered under CPR Pt 12. If a defence is filed but it is considered that the defendant has no real prospect of succeeding at trial, an application for a summary judgment can be made under CPR Pt 24.

The downsides are that if the lessee defends the action, it could lead to your member incurring significant costs, which it would not be able to recover under CPR Pt 44 (the claim being under the “small claims track”). The lessee may also ask for the matter to be transferred to the FTT, resulting in further delays and further costs.

If your member owns the freehold, it may be able to use a judgment / FTT determination (including a default judgment) as a springboard to a forfeiture action against the lessee (obtaining a final determination from a court or tribunal is a necessary pre-condition of serving a notice before forfeiture, unless the lessee admits that the sum is owing – s.81, Housing Act 1996, as amended). However, forfeiture will not be available unless the outstanding amount (excluding costs) is more than £350 or has been payable for more than three years (s.167, Commonhold & Leasehold Reform Act 2002).

If your member owns the freehold, it may be able to rely on Clause 2(11) to recover any costs it incurs in connection with court proceedings to recover the debt (on the grounds that those proceedings are a necessary pre-condition to serving a s.146 notice – see Freeholders of 69 Marina v Oram), and that will be so despite the action being a small claim (Chaplair Ltd v Kumari); however, that will not apply if the total outstanding sum is less than £350 (unless it has been payable for more than three years), because in those circumstances forfeiture is not available as a remedy (see Barratt v Robinson, which is currently under appeal, to be heard by the Court of Appeal later in the year).

I cannot see that there is any other right for the management company to recovers it costs directly from the defaulting leaseholder, under the terms of the lease; however, one option may be for the company to exercise its power to pass additional estate rules and regulations under Para.14 of the First Schedule; namely, a rule that any leaseholder in breach of a term of their lease must indemnify the management company against any reasonable fees incurred by the management company in taking action in connection with that breach.

I cannot see that there is any right to recover the cost of legal expenses as a service charge.

[submitted March 2016]

Service Charge

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