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Construction of the lease
Statutory control - reasonableness
Service charge demands
Administration charges
Summary of leaseholder's rights
Insurance
Managing agents
Reserve funds
The 18-month rule
Consultation of tenants
Compromise of service charge dispute
Legal costs
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Managing agents

Enforcement of service charges by managing agents

Cinnamon Ltd v Morgan
[2001] EWCA Civ 1616

A management company entitled to collect service charges is a landlord within the meaning of s18(2) of the Landlord and Tenant Act 1985 (see s30) so that the charges must be reasonable etc. Chadwick LJ at paras 15 and 16:
    "There is, I think, some circularity in the definitions of "service charge", "relevant costs" and "landlord" respectively contained in sections 18(1), 18(2) and 30 of the Act. "Service charge" means an amount which varies according to the relevant costs; "relevant costs" are costs incurred by the landlord; and "landlord" includes any person who has a right to enforce payment of a service charge. So, in order to know whether a person (other than the lessor under the lease) is a landlord, it must be ascertained whether the charge, payment of which that person is entitled to enforce, is a service charge; and, in order to know whether the charge is a service charge, it is necessary to know whether it varies according to relevant costs - that is to say, costs incurred by the landlord. But it seems to me sufficiently plain that the legislature intended that a person who has a right under a lease to enforce a charge for services, repairs and maintenance which varies according to the costs incurred by that person in providing those services under that lease is a "landlord" for the purposes of the Act relating to service charges. I am satisfied, therefore, that service charges capable of being enforced by a management company, which vary according to the costs actually incurred by the management company, are intended to be within the scope of Part I of the Act; and, in particular, within the provisions as to reasonableness which are included in section 19."

When charges payable as shareholder, s18 doesn't apply

Morshead Mansions Ltd v Di Marco
[2008] EWCA Civ 1371

Summary

In this case a management company controlled by tenants sued one of the tenants for non-payment of a sum due under the Articles of the company. The tenant argued that the sum claimed was a service charge in disguise and that he ought to have the protection of the Landlord and Tenant Act 1985. The recorder found that it was a service charge within s18 of the 1985 Act and disallowed the claim on the basis that it was an impermissible attempt to circumvent the statutory provisions. The Court of Appeal disagreed and overturned his decision.

Facts

The management company had written the following to each tenant. There had obviously been trouble before and you might think that the letter was almost asking for trouble:
    “There is almost no defence to a claim in proceedings for debts owed under the Company's Articles of Association … Conversely, by comparison, the opportunities to avoid or delay payment of a service charge available to a member qua leaseholder are almost limitless.
    In the light of the past deliberate obstruction of the Company's repair programme …it would be remiss of the Directors to fail …to take every possible step available that would mitigate the consequences were the Company to face yet further opposition to the achievement of its objectives, the most important of which is to restore and then maintain the building in a state of repair…”

Decision

The Court of Appeal agreed. Mummery LJ said that the tenant’s arguments paid:
    “… insufficient regard to the crucial legal distinction between the liability of a tenant to the landlord under a lease containing service charge provisions, and the liability of the member of a company, in which all the tenants are shareholders, to the company under separate contracts made in and pursuant to the Articles to establish and recover contributions to a Recovery Fund. The two kinds of legal relationship can co-exist between the same parties, but they are different relationships incurred in different capacities and they give rise to different enforceable legal obligations. A defence to one of the claims is not necessarily available as a defence to the other legally separate claim.”

Comment

One should not, however, assume that this is an easy avoidance device to circumvent the 1985 Act as Mummery LJ went on to say:
    “This appeal is concerned only with the question of law whether Morshead is entitled under Article 16 and pursuant to the resolutions to be paid the money which it claims from Mr Di Marco as a member of the company. The judge did not decide and was not asked to decide whether section 18 applied to Mr Di Marco as a tenant. He was not deciding whether Morshead could avoid altogether the statutory protection which Mr Di Marco might enjoy as tenant if he were sued under the provisions of the lease or if he invoked the terms of the lease and the statutory provisions in his capacity as tenant. Whether Morshead, as landlord, is or was entitled to levy a charge or charges against him, as tenant, in the amount specified in its letter to him dated 21 December 2006 is a separate matter with which we are not concerned on this appeal. Nor are we concerned in these proceedings with any question whether the directors of the company or its managing agents may properly use money raised from Mr Di Marco pursuant to the Article 16 resolutions in payment of the sums alleged to be due from him as a member, if they are not due from him as a tenant."

Managing agents’ fees

Construction of the lease

“It is perfectly clear that if an individual landlord wants to do that and to recover the costs from the lessee, he must include explicit provisions in his lease” (per Lord Justice Cumming-Bruce in Embassy Court Residents' Association Limited v Lipman (1984) 271 EG 545).

In Norwich City Council v Marshall, unreported, Lands Tribunal LRX/114/2007, the costs of management reasonably incurred for the specific services which the landlord was obliged to provide under the terms of the lease were recoverable as service charges but not the costs of dealing with breaches of covenants, enforcements action, repair orders and permission applications.

Statutory control

Managing agents’ fees recoverable as service charges under residential leases are subject to the test of reasonableness in the LTA 1985, s.19.

Appointment of managing agents

A company owned by the landlord can act as the managing agent provided the arrangement is not a sham (Skilleter v Charles [1992] 1 EGLR 73.

Consultation on appointment

There is no general requirement that tenants be consulted in relation to the appointment and employment of managing agents. The consultation requirements in the LTA 1985, ss.20 and s.20ZA may, however, apply.

A recognised tenants’ association can require the landlord to consult the association in relation to the appointment and employment of managing agents under the LTA 1985, ss.29 and 30B.

Level of fees

RICS publish a Code of Practice in Service Charges in Commercial Property and a Service Charge Residential Management Code at www.rics.org/site/scripts/downloads.aspx?categoryID=455

The residential code recommends the use of fixed fees as opposed to fees as a percentage of outgoings or income but both are common. It also sets out what work should be covered by a basic fee. A fee is likely to be reasonable if it is in line with what other managing might properly charge for management, excluding rent collection.

If the managing agents have not actually charged the landlord and/or are not entitled to charge the landlord under the terms of their contract, it is unlikely to be found that such costs have been “reasonably incurred”.

If the services provided by a managing agent are not of a reasonable standard, a tribunal is likely to make a deduction from the cost. A tenant may apply for the appointment of manager under s.24(2)(2)(ac) if a managing agent breaches the RICS code.

Reasonableness of fees – PFI contract

Lewisham LBC v Rey-Ordieres
[2013] UKUT 14 (LC)

Summary

The contractual rates provided for in a PFI contract are strongly persuasive as to the reasonableness of service charges, but this is not conclusive for the purposes of the Landlord and Tenant Act 1985, s.19(1)(a).

Facts

A company had entered into a management agreement under the Private Finance Initiative to refurbish, manage and maintain the landlord’s housing stock, which included a number of properties held on long leases. The reasonableness of the professional fees (26%) and management fees (10%) charged under the PFI contract were challenged by leaseholders who had acquired their leasehold interests pursuant to the right to buy legislation. The majority of the issues on the appeal were fact specific but one issue was of wider significance and is referred to here.

Citation

The President: :
    “... the terms of an agreement such as the one relied on here can only be strongly persuasive as to reasonableness. They are not conclusive for the purposes of the application of s.19(1)(a).”



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