Do you know what your lease’s sweeper clause allows you to recover through the service charge? Brady Solicitors’ Harpeet Lehal takes a look at the Fairbairn v Etal case and explains its implications for both managing agents and RMCs.
There were two interesting points that emerged from Fairbairn v Etal:
- The ability to recover legal costs through the service charge, and
- Whether or not a leaseholder-owned company should be treated differently
The case concerned a block of 39 flats, on a 999 year lease. The landlord was the residents management company (RMC).
Back in 2010 one of the leaseholders had brought a claim against the RMC after it had failed to take action to repair her damaged floor. The end result was that the RMC admitted it had breached its repair covenant – but only after incurring legal costs of around £15,000, including £2,500 of damages.
These costs were then put through the service charge and split across the remaining 38 leaseholders. One of them, Mrs Fairbairn, refused to pay.
The RMC took the case to the First-tier Tribunal (FTT) on the basis that they could recover the costs through the lease’s ‘sweeper clause’, which said costs could be recovered for the purposes of carrying out ‘…all other acts and things for the proper management administration and maintenance of the blocks of flats as the Lessor in its sole discretion thinks fit.’
The FTT found in favour of the RMC.
Mrs Fairbairn then made a successful appeal to the Upper Tribunal (UT).
The UT found that the ‘sweeper clause’ can be used to cover unspecified costs incurred in the proper management of the block – including legal costs. What it was not there for, however, was to cover legal costs incurred by the landlord in defending a breach of their covenant.
So, legal costs can be recovered through a sweeper clause… but not if these costs arise because the landlord had breached the terms of the lease.
Brady Solicitors’ advice? The tribunal clearly recognises there is a place for sweeper clauses but RMCs and managing agents need to be careful how they use them.
If you find yourself in breach of the terms of the lease – whether through failing to meet a repair covenant or other reason – you could be unlikely to be able to recover the costs of defending this breach through the service charge. Be aware that the tribunals will have this recent decision in mind.
Strong words from the Upper Tribunal for RMCs
Timely collection of service charge monies is essential for RMCs and other leaseholder-owned companies that have no other source of income.
In the Fairbairn v Etal case, the RMC appealed to the Upper Tribunal judge to consider their status as a leaseholder-owned company and to recognise its lack of assets.
The judge however stated very clearly that the status of the landlord should not affect how the costs recovery clause in the lease was interpreted, saying:
“In particular it cannot be assumed that all expenditure by the respondent company must have been intended to be reimbursed through the service charge. If a liability is incurred which cannot be met through the service charge, it will be for members either to fund that liability voluntarily or face the risk of the respondent becoming insolvent. That is a characteristic of all leaseholder owned landlords or management companies”.
In other words, you can’t assume to put every cost through the service charge.
RMC directors must enter into their role with their eyes open, and consider what sources of funding they can rely on should an expenditure item not be able to be put through the service charge.
For expert help with any aspect of service charge recovery or legal property management matters, contact the block management specialists at Brady Solicitors. Call 0115 985 3450 or click here to send us an email.