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An update on service charge and financial hardship

Can a Leaseholder dispute service charge on the grounds of financial hardship?

A commentary on the decision in Garside and another v RFYC Limited and another [2011] UKUT 367 (LC) by Ranjeet Johal.

This case looks at whether the financial impact of major works on lessees can be a material consideration when deciding whether the costs are “reasonably incurred” for the purposes of Section 19(1)(a) of the Landlord and Tenant Act 1985 (LTA 1985).

The block of flats – the subject of the dispute – was in a state of neglect and had historically had little maintenance work carried out. A manager had been appointed to deal with the issue and arrange for works to be carried out. He added the figure of £100,000 to the 2009 service charge and then a further £538,012 to the 2010 service charge in order to carry out the required works. Two leaseholders of a block of flats applied to the Leasehold Valuation Tribunal (LVT) for a determination that the service charge demanded were unreasonably incurred. However, the LVT held that these sums had been reasonably incurred. The leaseholders appealed to the Upper Tribunal (Lands Chamber) and the matter was heard before Her Honour Judge Robinson.

The LVT had decided that the ability of individual leaseholders to pay for required works was not covered by the Act and that Section 19 of the Act related to the reasonableness of the works themselves and their costs, rather than the ability of the leaseholders to pay for them.

The leaseholders argued before the Tribunal that although the works were necessary, it was not appropriate to carry the bulk of them out in one go. The works should be spread over the course of time, thus also spreading out the cost.

The manager argued that if the financial position of each leaseholder had to be taken into account, an unworkable duty would be imposed on the lessor, and they would have to make potentially controversial decisions as to the acceptable levels of hardship suffered by the lessees.

HHJ Robinson first considered the question of reasonableness. In particular, she considered the matter of Veena SA v Cheong [2003] 1 ELGR 175 where it was held that the question is not just the reasonableness of the costs, but whether they are reasonably incurred, “that is to say whether the action taken in incurring the costs and the amount of those costs were both reasonable”. HHJ Robinson also looked at the decision in Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180, in which Lord Bingham said of the word reasonable that “the expression should be given a broad, common sense meaning in this context as in others”.

Based on this, HHJ Robinson applied a broad common sense meaning to the word reasonableness and found that the financial impact of major works on lessees through service charge is capable of being a material consideration when determining whether costs are reasonably incurred for the purposes of Section 19(1)(a) of the Act. The matter was subsequently referred back to the LVT for determination.

Usefully, HHJ Robinson provided guidance for the LVT in making future determinations in similar circumstances. In particular, the LVT should consider:

• The amount of service charge being demanded with regard to the nature and location of the property, and compared with the amount demanded in previous years;
• A lessee’s personal circumstances when a case of hardship is presented. However, the weight of such an argument should be considered against the strength of the evidence presented by the lessee;
• Whether the works could be phased, and the costs spread over a longer period of time;
• The importance of the works, including the degree of disrepair and urgency of the works;
• The views of all of the lessees rather than one or two. All of the lessees views must be considered and a decision reached taking into account all of them, together with the other relevant considerations;
• The extent of any increase in costs of the works if carried out in phases as opposed to in one go.

This is an important decision as the financial impact of major works on leaseholders can now be taken as a material factor when considering whether the costs of the works are reasonably incurred. This creates a problem for landlords, who must now take into account the financial circumstances of an individual leaseholder when deciding whether or not to go ahead with major works. However, it is important that landlords do not look at the financial circumstances of one leaseholder in isolation. They must look at the circumstances of all of the leaseholders before making a decision.

It is important to bear in mind that liability to pay service charges cannot be avoided simply on the grounds of hardship. If the works are reasonably required at that particular time, are carried out at a reasonable cost and to a reasonable standard, the costs of doing so are recoverable from the leaseholder under their lease.

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