Last year we wrote about the Avon Ground Rents case. This concerned the reasonableness of major works contributions that were demanded in advance, but where the cost of these works would be covered in the future by a third-party payment.
We return to this case for a brief update, as the Court of Appeal has dismissed the freeholder’s appeal and upheld the Upper Tribunal’s decision in favour of the leaseholders.
As a quick reminder, the case concerned a mixed-use development built in 2008 and acquired by Avon Ground Rents in 2015. Not long after buying the building, the freeholder found serious water leaks, with a repair cost of close to £300,000.
The building was still under warranty, and NHBC had indicated it would cover the costs of the repairs.
The freeholder meanwhile had to pay for the works upfront and issued service charge demands of up to £6,200 to all leaseholders. The freeholder planned to repay the monies to the service charge account when they were recovered from NHBC.
The FTT however determined that whilst the costs were reasonable, the service charge contributions should be reduced to zero, as the NHBC had indicated it would cover all costs. This decision was upheld in the Upper Tribunal, as Jonathan Watts explained here.
The Avon case has just been to the Court of Appeal, which upheld the UT decision that the freeholder could not make service charge demands in advance for the repair costs that would be covered by the NHBC warranty.
At Brady Solicitors we are regularly asked for advice by our managing agent and RMC clients on how to recover the costs of major works, and when and how any of these costs can be demanded in advance.
Where works can be carried out at no costs to the leaseholder, such as under guarantee, then it is unlikely to be seen as reasonable to demand an advance contribution.
In this case however, the freeholder did have to bear an upfront cost, albeit one that would be ultimately repaid.
The Avon case confirms that, where a third-party has indicated it will cover the repair costs, then it is not reasonable to issue a demand in advance through the service charge. In the absence of confirmation that repair costs will be recoverable, it may still be reasonable to demand service charges in advance. Each case will depend on its own facts.
The Court of Appeal decision is clearly good common sense, but it has the potential to cause cash flow problems for RMCs who may lack the funds to tide them over until a repayment is received from the NHBC.
Whilst there may be situations where the lease allows reserve funds to be used to cover a shortfall pending a payment from a third party, Avon v Cowley is a reminder of the importance of an effective maintenance programme and having sufficient funds to cover emergency works.
Freeholders should also pay particular attention to this case. The FTT only needed to be satisfied that it was highly likely the repairs would be covered by the NHBC policy rather than a definite commitment to pay thus placing the burden to finance the repairs squarely on the freeholder in the first instance.
For advice on how to fund major works and what sums can, and cannot, be demanded in advance, talk to the specialist property management solicitors at Brady Solicitors.
Read more detail about Avon Ground Rents v Cowley here, on the Nearly Legal blog.