Lease interpretation and service charge disputes

The lease is generally the first port of call when trying to resolve a service charge dispute. Things get trickier when the lease terms are unclear – particularly if one or more of the parties have been working on the basis of their own interpretation.

This was the situation in the recent case of First Property Services Ltd v Ahmet, where a poorly drafted lease resulted in a tough (and expensive) outcome for the leaseholders on the wrong end of the drafting errors.

The property management experts at Brady Solicitors take a practical look at what happened, and explain what it means for managing agents, developers and leasehold owners.

First Property Services v Ahmet – what happened?

The case concerned a development – the Faulkner Estate – of 231 leasehold properties, built in the late 1990s and split across two different freeholders.

Laing Homes Ltd had the freehold interest in the majority of the properties – 218 of them – with Noel and Danielle Faulkner as the freehold owners of the remaining 13 properties.

Before developing their respective parts of the estate, Laing Homes and the Faulkners had agreed to establish a management company to take care of the communal areas, with each property to contribute 1/231st the costs.

Now here’s the rub.

The intention to share the costs was never actually crystallised, meaning that the leaseholders in the 13 Faulkner properties never contributed to the costs.

This created a substantial shortfall in service charge receipts so, from the year 2000, the management company (then OM Property Management, now FirstPort Property Services) began charging the Laing Homes leaseholders 1/218th of the total estate costs.

Mrs Ahmet’s reasonableness claim

A leaseholder on the Laing Homes part of the development since 2001, Mrs Ahmet was not happy with this situation and asked the First-tier Tribunal for a determination on the reasonableness of her service charge from the period of 2009 to 2014.

Her argument was that it was unreasonable that the Laing leaseholders covered all the estate costs while the Faulkner leaseholders contributed nothing but enjoyed all the benefits.

The FTT found in favour of Mrs Ahmet.

FirstPort appealed – and won.

Lease construction was a key issue:

The leaseholders were obliged to “pay the Part A Proportion” of the “Estate Costs”, defined as:

“The percentage figure calculated by reference to the formula:

(1/x x y ) where x = the total number of transfers and leases of Dwellings legally completed by the Transferor up to the end of the relevant Rentcharge Year and y = all the expenses reasonably and properly incurred within the relevant Rentcharge Year by the Manager in connection with the matters comprising the Variable Rentcharge Costs save that the finally crystallized Transferee’s Proportion may be subject to variation from time to time in accordance with the provisions of this Lease.”

If you have an aversion to algebra we appreciate we may have lost you here.

The important bit to note however is that none of the terms in bold were actually defined in the lease.

The Upper Tribunal set Mrs Ahmet’s service charge at the 1/218th proportion and the Faulkner estate was confirmed as being excluded from the need to contribute to the estate costs.

How did the Upper Tribunal arrive at this decision?

The UT judge looked at the 2015 Arnold v Britton case, concerning the calculation and apportionment of service charges at a Welsh holiday park.

In the Arnold case, Lord Neuberger set out seven principles to consider when interpreting a lease and stated:

“The purpose of interpretation is to identify what the parties have agreed, not what the court thinks they should have agreed.”

So, for Mrs Ahmet and the other Laing Homes leaseholders, the lease is not open to interpretation – regardless of the expensive consequences for them.

What does this mean for managing agents, developers and leaseholders?

Managing agents: make sure you not only read but understand the leases for the developments you manage. If you don’t understand how the terms apply in practice then you should take legal advice. Do not put your own interpretation on terms of the lease, especially service charge clauses.

Developers: talk to your solicitor about how you foresee the management of your developments. Raise any concerns or fears and ensure your solicitor is aware of any material facts that may shape the agreement.

Leaseholders: leasehold conveyancing can be complex; avoid the temptation to go for the cheapest quote and ensure you work with a solicitor that can identify any issues at the outset. They may not be able to change the lease, but at least you will go into the purchase with your eyes open.

Get in touch with our experts

With hundreds of years’ worth of combined experience, our experts have dealt with nearly every leasehold property matter you can imagine. If you’re currently in need of legal support or advice, please get in touch.

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