Landlord and tenant - service charge

In Leonora Investment Company Ltd v Mott Macdonald Ltd, the tenant had separate leases of four floors in a thirteen storey building. Each lease provided that the tenant would pay a fair proportion of the service charge costs for each service charge year. The proportion was to be assessed by the landlord or its surveyor, according to a reasonable and proper basis of apportionment from time to time.

The tenant made the usual quarterly payments on account based on an estimate of service charge costs for that year. The lease provided that, at the end of the service charge year, the landlord would prepare a statement of the actual service charge costs. If this resulted in an overpayment having been made by the tenant, this would be credited to the tenant. If the end of year statement resulted in a deficit, this would be demanded from the tenant.

The landlord prepared a statement at the end of the service charge year ending 24 December 2002. However, an item of expenditure was erroneously omitted. On 15 January 2003, the landlord wrote to the tenant requesting an additional payment to cover this expenditure.

The tenant argued that the landlord was only entitled to raise one balancing statement and that therefore it had discharged its obligations to pay the service charge for the relevant year. It also argued that the additional demand from the landlord did not comply with the lease because it did not incorporate a revised statement of total costs and because it did not give the breakdown of the amount payable for each of the tenant's four leases.

The court found that, on the terms of the lease, the landlord was not restricted to the service of just one balancing statement. However, to be valid under the lease, the new demand should have included a revised statement of total service charge costs for the service charge year in question and should have set out the proportion payable by the tenant under each of its leases. The lease's requirements that the proportion was to be fair and was to be made on a reasonable and proper basis were for the tenant's protection, to enable the tenant to challenge an alleged liability which it considered was not fair, reasonable or proper.

Things to consider

In Universities Superannuation Scheme v Marks & Spencer Plc, a landlord was allowed to re-open service charge statements on the basis that the proportion payable by the tenant had been under-calculated. This case differs from the Marks & Spencer case because here the landlord was seeking to revise the amount of the total costs, rather than the proportion of those costs which was payable by the tenant. Although both cases are of assistance to landlords, whether a landlord may revise an end of year service charge statement will always depend on the wording of the lease.

Where the lease lays down pre-conditions which must be fulfilled before the service charge is payable by the tenant, these must be adhered to. Landlords and managing agents should examine the service charge provisions in leases carefully and ensure that any demands issued comply.

This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.

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