The Reasonableness of On-account Residential Service Charge
The reasonableness of on-account residential service charge payments is determined at the time the demand is made. Adjustments should be made post-budget and pre-demand but there is no requirement for landlords to adjust on-accounts payments after the event, even where the budgeted costs were not incurred.
This was the decision reached in the case of Knapper v Francis (2017) UKUT 0003 (LC) and is yet another decision involving the owners of Atlantic Bays Holiday Park in St Merryn, Cornwall and the Point Curlew Tenants Association which gave us the infamous decision in Phillips v Francis.
The simple facts are that there were included in the on-account demand sums which were not actually incurred during the relevant service charge year. The Association applied for determination of the reasonableness of the on-account service charge sums. The FTT decided that it should ignore the fact that part of the anticipated expenditure had not been incurred by the time it made its determination and the Association appealed to the Upper Tribunal which dismissed the appeal.
The Upper Tribunal decided that the landlord had reasonably considered on the payment date that it required the sum demanded on-account to meet the proposed expenditure and that the amount was no greater than was reasonable. The reasonable sum required to be paid did not become unreasonable retrospectively because not all of the expenditure had been incurred. S.19 (2) of the Landlord and Tenant Act 1985 provides that were a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is payable and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction, subsequent charges or otherwise. The UT held that these latter words did not confer on the FTT jurisdiction to direct repayment of any sum which was collected in advance which exceeded the expenditure actually incurred. The FTT’s jurisdiction under s.27A LTA 1985 was limited to determining the amount that was payable as a service charge and did not go beyond that. The lease normally in any event provides what will happen in these circumstances.
The Upper Tribunal commented that “The ability of a landlord to collect funds in advance of expenditure is an important part of most service charge schemes and is for the benefit of both parties. It ought not to be undermined and Parliament is likely to have intended that the statutory protection afforded by section 19(2) should do no more than protect leaseholders from unreasonable demands”.
However that is not the end of the matter as there is no reason why s.19(2) should not modify the contractual obligation by reference to circumstances known at quarterly or half yearly payment dates (if any). In such cases it could be that the fact that money had not been spent could cause a sum which appeared reasonable on first payment to appear less reasonable. This means that landlords may be required to re-consider their budgets before on-account payment dates and means that landlords will have to be on their toes and alive to this possibility and adjust payment demands in these circumstances if appropriate.