A recent case at the Upper Tribunal clarified the validity of an estimated service charge demand where the freeholder failed to include the costs of major works. Brady Solicitors explains the facts of the case and offers some clear advice.
London Borough of Southwark v Proktor
Under the terms of the lease, the freeholder (Southwark) was entitled to demand service charges on an interim basis by making a reasonable estimate of the works to be carried out and paid for the following year.
Southwark issued a service charge demand for 2012/13 and at that time anticipated that they may need to carry out some major works. The estimated costs of these major works, however, were not included in the demand.
The leaseholder (Proktor) argued that the omission of the major works costs invalidated the service charge demand following the earlier case of London Borough of Southwark v Woelke.
First-tier Tribunal decision
The FTT agreed with the leaseholder after considering the case of London Borough of Southwark v Woelke, which involved a lease with identical terms. The decision in this case found the service charge demands to be invalid due to the omission of estimated major works expenditure, which was “not consistent with the contract”.
Upper Tribunal appeal
Southwark appealed the FTT decision and this was upheld at the Upper Tribunal. The UT disagreed with the FTT and concluded that it had not taken into consideration a further statement (paragraph 52) in the Woelke decision:
“in normal circumstances, however, the only practical consequence of a failure to take account of major works in the estimate would be that the appellant would not be entitled to collect advance payments from the leaseholders which included any contribution towards the costs of those works”.
The UT held that the validity of an estimated service charge demand must be immediately apparent and not be dependent on future events, such as the decision to carry out the major works.
If this was the case, then an enquiry into the freeholder’s intentions to go ahead with the works at the time of the demand would be necessary, which couldn’t be right.
The outcome of the case, based on the Woelke decision, is that a demand which failed to include an estimate of all expenditure would not be invalid, but rather the consequences set out in paragraph 52 would apply, i.e. a landlord cannot collect payments in advance towards the cost of estimated major works that have not been accounted for in the demand.
Our message to freeholders and managing agents
The Southwark v Proktor case offers some reassurance to freeholders who have failed to account for potential major works in their estimated service charge demands, in that they can still recoup the costs in future demands. However, Brady Solicitors would always encourage you to carefully consider the possibility of all major works when estimating service charges and ensure that these are all accounted for in the demands.