CHAPTER ONE – THE CONSTRUCTION OF THE SERVICE CHARGE CLAUSE
Introduction
The drafting of a service charge clause is paramount. Even though residential service charges are subject to statutory controls, the service charge clause still needs to be appropriately drafted. A Court will look at the wording of the lease as a starting point for dealing with most disputes. In addition, a badly drafted service charge clause can lead to numerous disputes regarding interpretation which could be avoided.
The main elements of a service charge clause
The main elements of a service charge clause should be as follows: –
-
A definition of the services to be carried out.
-
Details of the landlord’s obligation to provide the services.
-
Details of the tenant’s obligation to contribute to the costs of providing those services.
-
The mechanics of the service charge.
Defining the services
This is usually firstly a list of services which the landlord must provide for the communal areas of the property and secondly a list of services which the landlord can but is not obliged to provide.
The services specified will depend on what is applicable to the particular property, but it should be as detailed a list as possible and aim to cover all the services that could be provided.
The lease may also contain a sweeper clause. The purpose of a sweeper clause is to effectively cover any additional services the landlord may provide which are not specified in the list of services contained in the main service charge clause.
Practitioners should be wary of the inclusion and drafting of sweeper clauses and aim to restrict the clause to being tied to the categories of services that they have specified in the main clause. Sweeper clauses are construed quite restrictively, and there is no guarantee that the inclusion of a sweeper clause will allow the landlord to recover costs for any services that become necessary, or they decide to carry out that are outside of the those provided for.
Relevant Cases
Fluor Daniel Properties Limited v Shortlands Investments Limited [2001]
Provided that sweeper clauses shouldn’t be used to try and recover service charges for a service which the landlord has simply failed to provide for in the service charge clause in error.
Boldmark Limited v Cohan and another [1986]
It was held that the landlords attempt to claim interest that was incurred as a result of borrowing to finance the provision of services was not recoverable under a sweeper clause that provided for recovery of service charges for general administration and management of the property.
Landlord’s obligation to provide the services
It is crucial that a service charge clause sets out that the landlord is obliged to carry out the services detailed. If not, a tenant is potentially left living in a property where the common areas may fall into disrepair.
There is sometimes an obligation on a landlord to carry out some services and then a clause that sets out the services the landlord can provide if they choose. In respect of the latter the tenant will be under an obligation to pay for those services if carried out, but the landlord does not have to carry out those services.
The clause can set out that the landlord’s obligation to carry out the works are conditional on the tenant paying the service charge due. However, practitioners should be aware that this may not be enforceable if other tenant have paid their service charge contributions. In addition, a Court is likely to be reluctant to allow a landlord to withhold services which are considered essential (Yorkbrook Investments Limited -v- Batten [1986])
Tenant’s obligation to contribute to the service charge
This clause should state that the tenant is obliged to pay for the services set out and
deal with the below.
The apportionment of the service charge.
The apportionment of service charges between the tenant is usually one of the following:
-
By way of fixed proportions. This method provides certainty. However, it is quite inflexible and can be unfair if the building is later developed/extended. If the fixed proportion is a percentage, tenants should also be wary as if any of the flats in the property are not let, they are likely to have to pay a higher sum towards the service charges unless provision has been specifically made for this occurrence.
-
The tenant is asked to pay a fair proportion. This method of apportionment is likely to lead to disputes because what is ‘fair’ is open for interpretation. What a landlord and tenant consider to be a fair proportion is likely to differ.
-
By reference to floor areas. Although to a degree this method seems fairer it can sometimes be difficult to calculate.
-
By reference to rateable value. Again, this seems one of the fairer methods but can cause problems if the property is a new build and no rateable values have been set or in cases where there have been any improvements to the property.
As can be seen from the above, specifying how service charges are to be apportioned is a difficult task. Disputes can arise no matter which method is used, and all practitioners can do is try and choose the method which appears to be the most fair and reasonable for the particular property.
Relevant case
Aviva Investors Ground Rent GP Ltd and another v Williams and others [2021]
A tenant’s lease required them to pay service charges that was stated to be a fixed percentage of a proportion to be reasonably determined by the landlord. The Court of Appeal held that section 27A (6) of the Act rendered the landlord’s discretion void. The discretion was transferred to the First Tier Tribunal to determine the proportion of the service charge.
How tenants are to pay the service charges
The service charge clause needs to set out how the tenant is to pay the service charges. The usual way is for the tenant to make quarterly payments on account during each service charge year.
The clause should also provide for any additional sums that may become due at the year-end due to a shortfall once the service charge accounts have been finalised or any surplus of funds at the year end.
The Mechanics of the Service Charge
For any workable service charge clause there needs to be provision for the following: –
-
The Service charge year – the tenant needs to know the period for the service charge accounts are to be prepared.
-
Provision for the statement of account to be prepared. This needs to set out who is to prepare the statement and who is to certify the statement. It is important that the landlord then follows this requirement to avoid the statement of account being invalid and providing a defence to the payment of the service charges that have arisen.
-
A timetable for preparing the service charge accounts. This can just be a requirement for the landlord to provide the accounts as soon as reasonably possible if the landlord is concerned about being tied down to a strict period. The important thing for landlords to note is that there shouldn’t be excessive delay and a period of approx. 4 months after the end of the service charge year is usually deemed reasonable.
-
How any disputes regarding the service charges are to be dealt with. This will normally set out if there is to be a referral to a third party.
The Court’s interpretation of a Service Charge Clause
A Court is unlikely to imply a term into a service charge clause or construe the express terms of a service charge clause in a different way to take into consideration commercial sense or to remedy the fact that a party has signed up to a bad deal.
Relevant cases
Arnold v Britton [2005]
The lease contained a service charge clause which provided for a fixed annual charge of £90 for the first year of the term and it was to increase each subsequent year by 10% on a £1 basis. This meant that in 2072, the tenants would be liable to pay a service charge for over £550,000. The tenants argued this could not have been what was intended. The court held that the service charge clause was clear, and it was not for the Court to step in and imply a term to prevent the tenant from having to pay the contractual terms due. The fact it was a really bad deal for the tenants was irrelevant in interpreting the clause.
Marks & Spencers Plc v BMP Paribas Securities Trust Company (Jersey) Limited [2015]
The lease contained a break clause which had a pre-condition that there should be no rent arrears. The tenant exercised their right under the break to terminate the lease on 24 January 2012. The rent was due on the usual quarter dates and the tenant paid the full quarters rent on 25 December 2011 in order to comply with the pre-condition that there should be no rent arrears. The tenant then requested the overpayment of rent for the period after the lease was terminated from 25 January 2012 to 24 March 2012. It was held that the landlord did not have to refund the overpayment for when the tenant was no longer in occupation as there was no express obligation for the landlord to do so.
Summary
The drafting of the service charge clauses is crucial to ensure that the provision of services and payment for those services runs smoothly. Neither party is likely to be able to imply a term into the service charge clause at a later date because they were unsure of the meaning and/or have realised they have signed up to a bad deal. Nor is a landlord likely to be able to claim service charges for services which they have omitted from the drafting in error.