House with scaffolding Home | News & events | Legal updates | Getting service charge proportions right

Getting service charge proportions right

03 February 2010

When a residential development scheme is set up, input from the developers and prospective managing agents is essential so that service charge proportions are calculated fairly and set at the correct level.

What happens if it goes wrong?

The Landlord and Tenant Act 1987 confers a power on the Lease Valuation Tribunal (LVT) to vary a residential lease where the ‘lease fails to make satisfactory provision’ on certain items, including the computation of service charge payable under the lease.

In a recent case, Morgan v Fletcher & Others 2009, six tenants in a building of eight flats applied to the LVT to vary their leases because the total service charge proportions for the building amounted to 116% of the Landlord’s expenditure.

The landlord’s response was to amend the service charge provision for the other two flats in the building (one of which was owned by the landlord), thereby reducing the total service charge contributions for the building to 100% of its expenditure.

The LVT took the view that the service charge provisions, as varied by the landlord, were unsatisfactory as the service charge under some of the leases was more than 16 times that payable under the lease of the largest flat.

The LVT adjusted the leases of the six tenants to make the service charge proportionate under those leases and that amounted to 79.2% of the landlord’s total expenditure. The remainder of the service charge would need to be split between the tenants of the other two flats.

The landlord appealed and won. The court was sympathetic to the tenants but decided that the relevant legislation actually meant that a lease would only fail to make satisfactory provision if the total service charge recovery provided for more or less than 100% of the landlord’s expenditure.

The legislation was not intended to deal with service charge provisions where the total contribution amounted to 100%, but where tenants’ contributions were unfairly disproportionate.

This meant the court could not adjust the leases to rectify the unfair service charge proportions borne by the tenants.

This decision should not be seen as a get out of jail card for landlords in getting the service charge percentages wrong, provided they all add up to 100%. Rather, it highlights the difficulties in calculating fair service charge proportions especially when dealing with premises of different sizes and in larger estates where different parts get the benefit of different services.

It is in no one’s interests that tenants should feel aggrieved by what they perceive as an unfair service charge, and in new developments in particular it should be possible to avoid this. An essential element of doing so is a robust analysis of the service charge as early as possible in the scheme.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

Are any of the issues in this article giving you a headache? If so, we want to know

Name *

Comments*

The information you provide here will be used solely for the purposes of responding to your query for more information see our privacy policy.
 

Get in touch

Chris Dolan

Partner
T: 03700 86 6920
I: +44 (0)1489 61 6920
E: christopher.dolan@shoosmiths.co.uk