Major works covered by warranty – is it reasonable to demand service charges in advance?

This case concerned the reasonableness of major works contributions and if the FTT should take into account the likelihood of future payments by a third party.

Specifically, it dealt with major works repairs that were covered under an NHBC warranty and where the NHBC had indicated it would ultimately cover the full cost.

Jonathan Watts, operations director at Brady Solicitors explains:

Can a freeholder demand service charges from a leaseholder when it is likely that a third party will ultimately pay?

This was the issue at stake in the case of Avon Ground Rents Ltd v Cowley.

The building in question had a water leak in the central courtyard. The leak was caused by a failure in the waterproof membrane.

The freeholder correctly got the section 20 consultation procedures underway. During the process, one of the leaseholders suggested making a claim under the NHBC warranty.

The NHBC accepted liability and proposed to cover the service charge liability in full, although a final decision was not reached.

The freeholder however proceeded to issue service charge demands for the full amount from the leaseholders. The freeholder also sought a determination from the FTT that the costs of repairing the membrane were reasonable and recoverable from the leaseholders.

What did the FTT find?

On the reasonableness point, the FTT found that the repair works were reasonable and could be recovered through the service charge.

However, the FTT found that the service charge contributions by the leaseholders should be reduced to zero, as the NHBC had indicated that they would cover all the costs through the warranty.

The Upper Tribunal dismissed the appeal and upheld the FTT’s decision on both parts.

Whilst the cost of the repairs was reasonable, the UT agreed that it was likely the NHBC would cover the costs of the work within a reasonable time – and so the service charge contributions should be reduced accordingly.

Brady Solicitors advice

This case clarifies the ability of the FTT to take into account likely future payments when deciding on the reasonableness of service charge contributions.

So, if you are expecting the costs of works to be paid either in full or in part by an insurer, warranty provider or other third party then you should reduce the service charge contributions accordingly.

Read more detail on this case on the Arden Chambers website

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