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Legal case: the largest ever service charges dispute

Legal matters

There are several options for landlords (freeholders) and leaseholders to structure leasing arrangements in multi-occupied buildings, one of which is a tenant’s management company. 

Right to Manage

Right to Manage (RTM) under Part 2, 1 of The Commonhold and Leasehold Reform Act 2002 is where tenants are given the right to collectively take over the management of the building from the freeholder – often when they are dissatisfied with the way the block is being managed – providing they can meet certain criteria: this way they can collectively run their own affairs and make their own decisions about the management and upkeep of their flats, including repairs, insurance, and the service charges levied on all the leaseholders.

The landlord's consent is not required, even if the landlord may be absent. It means all the lease holders via an RTM company formed by them gain full control, and when properly run this arrangement can theoretically save a considerable amount of money on property maintenance, grounds maintenance, repairs, management fees, insurance premiums, and it may even enhance the value of their properties – usually, flats.

The lease will likely contain provisions requiring the consent of the landlord (now the RTM) to which includes things like restrictions on sub-letting, assigning the lease and making alterations to the flats. Any such approvals then pass to the directors of the RTM company, the leaseholders themselves - or their representatives on the company board - although the company must keep the landlord (property owner) informed and give it notice.

89 Holland Park (Management) Limited v Dell & Dell

Such was the case in 89 Holland Park (Management) Limited v Dell & Dell, where the tenants were managing their own block via an RTM company, which in this case also was the owner of the block. 

This is a detached block in London divided into 5 flats. Each flat is held on a long-lease, the freehold being held by 89 Holland Park (Management) Ltd, a leasehold run company. When a dispute arose, said to be the largest ever UK residential service charge dispute, costs rose sharply. This case was between the Dells, leaseholders at flat 5 and the company.

Development plot

The building adjoined a plot of unused land over which the building has the benefit of certain restrictive covenants, chiefly that of restricting development of the land without the consent of the owner – the company.

Back in 2012 the land was acquired by architect Sophie Hicks. She sought to develop it and create a modern residential building with a ‘glass cube’ entrance at street level. Subsequently, the development was resisted by the management company. This entailed escalating costs, legal and professional fees and those costs involved in contesting the planning rights.

Under the terms of the individual leases were various obligations on the landlord to repair and maintain the property as was usual in these cases – usually worded as “in good tenantable repair.” Also, there was a corresponding right to recover monies from the leaseholders (tenants) under the service charge.

Mr and Mrs Dell, who were tenants at flat 5, had been concerned, along with the other tenants, about the likely impact of the architect Sophie Hicks’ plans. These plans also involved an underground development and what was described as a “glowing glass box” entrance hall.

With the support of all the tenants, the landlord took steps to resist the granting of planning permission, and brought proceedings against the developer architect to enforce the restrictive covenant. 

As time went by, when Mr and Mrs Dell had been living abroad, and as the proposed development would not be visible from their flat, they had changed their mind and no longer wanted to oppose the scheme or supported the ongoing litigation.

The litigation

Having committed itself to the litigation and the costs associated with that, the company was looking to recover the costs one way or another. The claim was won, the development was prevented but not all its costs were recovered from the defendant. The balance outstanding, some £2.7 million, was claimed from the tenants themselves through the service charge, involving a bill of more than £430,000 for each flat.

Refused payment

Mr and Mrs Dell refused to pay and brought proceedings in the First Tier Tribunal (FTT). In the case they argued that the litigation costs were not recoverable under the lease, and also that the amount of money being claimed was not reasonable.

The First Tier Tribunal found against Mr & Mrs Dell in favour of the landlord. But the decision was overturned when the couple appealed to the Upper Tribunal. The Tribunal agreed with the Dells that these costs fell outside the scope of the service charge provisions in the lease. The landlord then appealed to the Court of Appeal.

The Court of Appeal decision

The landlord appealed on the ground that the Upper Tribunal’s interpretation of the provisions was wrong and unduly narrow. It argued that a provision in the lease permitted recovery of costs under a definition of general expenditure: the lease stated:

“General Expenditure means the total expenditure - incurred by the Lessor in any Accounting Period in carrying out her obligations under Clause 4(4) of this Lease and any other costs and expenses reasonably and properly incurred in connection with the Building including without prejudice to the generality of the foregoing…”

The court, in arriving at a decision, cited the Arnold v Britton [2015] case where the Supreme Court had confirmed that a contract should be read with regard to:

“what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” basically using commercial common sense to provide a “useful cross-check”.

The service charge clauses

A couple of key phrases in two of the service charge clauses in the tenants’ leases spelled out where the expenditure had to fall: “for the proper maintenance safety and administration of the building” and, “for the proper maintenance safety amenity and administration of the building”. 

Taking this, the Court of Appeal decided it meant that only those costs of maintaining and running the building, and keeping it safe, applied. Using the word “amenity” meant not the general attractiveness of views from it, but the amenity of using the building itself.

By spending money on litigation, the landlord’s aim was preventing the development because it thought its appearance would detract from the value of the block, not in any way to maintain the building or keep it safe. So, the ruling came back that its costs fell outside the service charge provisions.

A key principle with service charges is that a landlord can only recover those costs through the service charges where it is itself under an obligation to carry out that service. So, while a landlord is able to recover the cost of litigation related to its responsibilities under the lease, for example, if it needed to pursue a claim against a building company for shoddy repair work, in this case the pursuit of a planning and restrictive covenant dispute was outside those permitted.

On that basis, the landlord could not recover its litigation costs from the Dells.

How far can a general “sweeper clause” go?

This case is a reminder to both landlords and tenants that commercial lease clauses of whatever nature need to be very specific. If the tenants had expected the landlord to pursue litigation in respect of an adjacent building site, in this case the site was in existence when the leases were signed, for all tenants to see, the leases would have needed to have had an express obligation to that effect. 

Commercial contracts hinge on every word, interpreted usually at face value by the courts. Great care is therefore needed when negotiating and drawing up leases, and a good deal of legal expertise is required on this.