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Service Charges

Law and Practice

FROM £58.50

This book is a best-selling guide to the legal framework in which service charges operate.

This new edition has been substantially revised to take account of over 30 new LVT cases, the new RICS Code of Practice for Service Charges in Commercial Property, as well as new material on Energy Efficiency Certificates, Display Energy Certificates and green leases.

 The concise and easily understood commentary is supported by specimen service charge clauses, model accounts, notices and certificates making this book an invaluable and immensely practical guide to this difficult subject.
  • Preface
  • Table of Cases
  • Table of Statutes
  • Table of Statutory Instruments
  • Table of Abbreviations
  • Chapter 1
     Matters Applicable to Commercial and Residential Leases
  • Chapter 2
     Special Rules for Residential Lettings
  • Chapter 3
     Value Added Tax
  • Chapter 4
     Reserve Funds and Sinking Funds
  • Chapter 5
     Service Charges: Freehold and Commonhold Properties
  • Chapter 6
     Statutory Obligations
  • Chapter 7
     Commercial Codes of Practice
  • Appendix 1
     Specimen Service Charge Clauses
  • Appendix 2
     Specimen Notices, Demands, Accounts and Certificates
  • Appendix 3
     Extracts from Legislation
  • Index
"a clearly written and well produced practical guide"

“an invaluable and very practical guide to this often difficult and problematic subject”

"This book on service charges does much to uncomplicate a very fraught subject....here in handy paperback format, is a reliable and wuthoritative source of guidance on management practice with respect to service charges and to related tax and accountancy matters....indispensible volume....excels as a research tool as well as guide..."
for the review in full click here
 Phillip Taylor MBE and ELizabeth Taylor of Richmond Green Chambers
Service charges are almost invariably the subject of conflict between those who arrange the expenditure and those who are ultimately called upon to pay for it. Some twenty-seven years ago, the Report of the Committee of Inquiry on the Management of Privately Owned Blocks of Flats (DoE, 1985) (‘the Nugee Report’) revealed an almost universal holding of grievances by tenants of flats about the conduct of the management of their blocks of flats and the amount of service charges. Mutual mistrust, lack of proper consultation by landlords and managing agents, and failure to take proper account of the tenants’ views seemed rife in both the residential and the commercial spheres. The position has hardly changed over the years.

In the residential sector, successive Governments have legislated to alleviate this problem, by imposing a statutory regime for residential service charges and by enabling residential flat owners to buy the freeholds of their blocks or to take over management from the landlord.

 Similar grievances are expressed by commercial tenants whose service charges can often add considerably to their businesses’ occupancy costs. While bad management is all too common in many cases problems arise simply because the parties fail to recognise each other’s legitimate requirements.

A guide to good practice called ‘Service Charges in Commercial Properties’ was published by the Royal Institution of Chartered Surveyors on behalf of seven property industry bodies, stating that its purposes were to encourage a good working relationship and to secure co- operation between owners and occupiers through consultation and communication. That was elevated to the status of an RICS Code of Practice in 2007 and an updated and modernised new edition was issued in 2011. It sets out best practice to be observed by chartered surveyors who manage property and administer service charges.

In practice a distinction can be drawn between those multi-occupied properties which are let at market rents and those which are sold on long leases (or, as in the case of some office, industrial or warehouse units, sold freehold). In the former cases, the landlord’s rental income growth and capital value will usually depend upon the continuing quality of the buildings (in addition to their location and other market factors), whereas in the latter cases the ground rents (if any) are either fixed for many years or escalate on a basis usually unrelated to the state of the buildings. Landlords in the former cases have a financial stake in the maintenance and improvement of their buildings, while the interest of landlords in the latter cases may wane once all the flats or units comprised in the development have been sold, except perhaps where they hope to make a profit from the provision of services – a usually unattainable and unlawful desire, and undesirable except for a fair management fee.

 Tenants, on the other hand, might be expected to have an interest in the proper maintenance of their buildings, irrespective of whether they are paying market rents under short- or medium-term leases, or ground rents under long leases. Office, light industrial and warehousing tenants require their premises and accessways to be kept in repair in order not to endanger or disrupt their processes or the flow of their goods. Office tenants expect their buildings to be maintained both for the proper
 functioning of their businesses or professions and to present a quality appearance to their customers or clients. Generally neither want the premises improved at their expense. Flat-owners are normally keen to have their blocks well maintained and in theory ought to be willing to pay for them, where appropriate, to be improved to preserve the asset value of their flats. However, in all cases there needs to be a balance between cost and benefit.

 These factors ought to mean that there should be a good deal of common ground between the interests of landlords and tenants. However, the cost of repairing and servicing buildings is a major independent consideration for both landlords and tenants and it can impact on potential rent levels. Institutional landlords usually try to insist that lettings of commercial properties should be on clear leases, under which the tenants not only pay a full market rent, but also meet the entire costs involved in maintaining, servicing and renewing the properties. Until recently, these clear leases were the norm rather than the exception, and inclusive rents were rare save in the case of short residential lettings or very short commercial lettings. Tenants who used to be asked to pay relatively low contributions towards a limited range of services are now usually required to pay for roof renewals, the replacement of plant and equipment and other heads of expenditure which were at one time traditionally met by their landlords. The situation today is not so clear-cut since many commercial tenants are now taking shorter term leases than used to be prevalent and frequently ask for capped service charges or for limitations to be placed on the costs which can be included.

 Commercial tenants justifiably view their rents, service charges, general rates and water charges as a package of costs for the occupation of their premises, and take the total into account when viewing their overheads or production costs; an excessively high level of service charge can lead to a reduced level of market rent. Flat-owners have found that flats which are liable to constant, high service charges are not only expensive to run, but also suffer a reduction in their resale value, except in the most prestigious locations. It is, therefore, understandable that tenants of both commercial and residential properties are generally keen to minimise their service charge liabilities by opposing expenditure which they consider is unnecessary or premature and, in many cases, they fail to take account of their own longer-term interests as well as the interests of their landlords.

 The position has been exacerbated by successive governments passing legislation, both aimed at green issues and at health and safety, which has had the effect of increasing the cost of maintaining and operating buildings. In the past, such legislation usually empowered a court to direct how the costs should be allocated between landlords and tenants if it was not dealt with by the leases, but such provisions are usually omitted from modern legislation. In many cases this creates uncertainty,

particularly where the new statutory obligations were unforeseen when the leases were drafted and are not directly affressed by the lease clauses.

 This book sets out to summarise the current state of the law on service charges as at 1 January 2012, and to give guidance on management practice and on related tax and accountancy matters. Brian Slater, Chartered Tax Adviser, tax principal at Finers Stephens Innocent, has contributed detailed notes on VAT and on the taxation problems of service charges. Suggestions for drafting service charge clauses are also included.

 The scheme of this book is to deal first with matters which are common to both residential and commercial property (Chapter 1) and then to deal specifically with matters which only affect residential property (Chapter 2), before going back to matters of a special nature, covering VAT (Chapter 3), sinking and reserve funds (Chapter 4), the special rules relating to freehold and commonhold properties (Chapter 5), the position relating to costs incurred in complying with statutory obligations (Chapter 6) and a reference to relevant codes of practice (Chapter 7).
 Much of the case-law that we cite comes from disputes relating to residential property because that is the area most litigated, but the common law principles laid down in the cases apply generally to all types of leased property.

 However, the statute law on service charges mainly applies to residential property but not to commercial premises.

These distinctions are drawn out in the text.
 PHILIP FREEDMAN CBE, QC                                           ERIC SHAPIRO BSc, FRICS, IRRV,

Mishcon de Reya                                                                         Chesterton Humberts
 London WC1 London W1
 1 January 2012
1.4.2 Repair

 The word ‘repair’ has been defined as the rectifying of damage or deterioration, that is ‘the putting back into good condition of something that, having been in good condition, has fallen into bad condition’ (per Lord Evershed MR in Day v Harland and Wolff Ltd [1953] 2 All ER 387), or ‘making good damage so as to leave the subject so far as possible as though it had not been damaged’ (per Atkin LJ in Anstruther-Gough-Calthorpe v McOscar [1924] 1 KB 716). These definitions of repair have been cited with approval by the Court of Appeal in Quick v Taff-Ely District Council [1985] 3 All ER 321 and Post Office v Aquarius Properties Ltd (1987) 54 P&CR 61.

Words similar to ‘repair’, such as ‘amend’, ‘maintain’, ‘uphold’, etc, will generally be interpreted as the same as ‘repair’: Halliard Property Co Ltd v Nicholas Clarke Investments Ltd (1984) 269 EG 1257, per French J, and Fluor Daniel Properties Ltd v Shortlands Investment Ltd [2001] EGCS 8, ChD (see 1.10.2).
 Even if an item is plainly out of repair by virtue of having been damaged or having deteriorated compared with its previous condition, nevertheless there are limits to the remedial work falling within the scope of ‘repair’:

(1) the nature and standard of repair is to be determined by reference to the class and character of the property at the date on which the lease was granted, so that upgrading (unless an unavoidable result of remedying the disrepair – for example, the replacement of broken Victorian sanitary fittings with currently available modern fittings) falls outside repair; thus, the ‘repair’ of heating and air conditioning plant means keeping it in working order so that it performs as it did when it was installed, not to the standard now expected of new plant (Ultraworth v General Accident (2000) EGCS 19, Tech & Constr Court);

(2) the word ‘repair’ may not be apt to cover work which would be effectively an alteration to the whole or substantially the whole of the structure of the building, or which would produce a building of a wholly different character to that which had been let, or which would cost an amount which is out of proportion to the previous value of the building and would substantially enhance the value and life span of the building: McDougall v Easington District Council (1989) 58 P&CR 201, CA (summarising the effect of a number of earlier authorities including the landmark decision in Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1979] 1 All ER 929).
 Often the distinction between ‘repair’ and ‘improvement’ is very fine and hard to draw (see 1.4.8). In some cases the issue of ‘reasonableness’ is invoked in determining whether proposed work is or goes beyond repair (see 1.10.2).
 If the landlord’s duty is to ‘keep’ in repair, as is commonly required under modern leases, this requires him to prevent disrepair from occurring and would therefore appear to encompass preventive work where disrepair is imminent (British Telecommunications plc v Sun Life Assurance Society plc [1995] 2 EGLR 44, CA; see 1.4.11). This effectively requires a landlord to arrange regular inspections of the property to ensure that those parts for which the landlord is responsible are always in repair.

Occasionally, it is unclear whether a certain element of the building is repairable by the tenant or by the landlord. This may occur where the definition of the extent of the tenant’s demise is imprecise. It may, Matters Applicable to Commercial and Residential Leases 17 alternatively, be unclear whether certain proposed work is within the meaning of ‘repair’ or other such expression used in the service charge clause, as discussed at 1.4.3 to 1.4.8. In such cases, it may be prudent for the landlord to apply to the court for a declaration on the issue, as in Reston Ltd v Hudson [1990] 2 EGLR 51, ChD (see 1.4.3). As to the costs of such an application, see 1.6.5.

Often the service charge will be stated to cover the costs of repairing or redecorating ‘when necessary’. If this is disputed, the court or tribunal can consider whether work was ‘necessary’ or was premature and outside the scope of the charge (see Burge v Dome Developments Ltd [2007]
 LON/00AU/LSC/2006/0157, LVT).

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