Giving credit where it is due

How should landlords account for third-party contributions when making service charge demands? James Driscoll shares guidance from a recent case Local authorities leaseholders sometimes face very hefty service charge bills. Major works to an estate under the Decent Homes Programme are the sort of case where they could bear significant costs. The tenants living on such an estate (usually secure tenants) cannot be required to contribute to the costs of the works (which may include repairs and improvements). This is because their landlord has responsibility for repairs (under sections 11-14 of the Landlord and Tenant Act 1985 (“the 1985 Act”)). However, the position of a long leaseholder (whose lease was probably granted under the statutory right to buy) is very different. Their lease will usually include a provision requiring the landlord to carry out repairs and improvements and one requiring the leaseholder to contribute towards the costs through service charge payments. Third-party payments? What is the position where the landlord receives a contribution towards the costs from a third party? To what extent does the landlord have to give credit for a third-party contribution when billing its leaseholders for service charges? This was the issue at the heart of the litigation in Oliver v Sheffield City Council [2017] EWCA Civ 225; [2017] PLSCS 83. It came out of a massive works programme to a large Sheffield estate comprising 1,000 flats and maisonettes in 40 separate blocks, groups of which are connected by walkways and stair towers to form “super blocks”. Almost all the flats are rented out and just 77 of the 1,000 (rising to 80 by the time of the hearing) are held on long leases. The final costs came to £11,438,801, of which Sheffield has sought to recover £615,323.64 from the leaseholders. In the case of Hazel Oliver, who had purchased her flat (with her mother) under the right to buy, she challenged her service charge bill of £9,378.72 (they paid £6,840 to buy the flat). Under her lease, Oliver must pay a “reasonable part” of the landlord’s costs of repairs. Did the landlord have to give full credit for the payment? Sheffield decided not to charge any of the leaseholders for the costs of replacing boilers. Although it received government funding under the Decent Homes Programme, this was designed for the benefit of the tenants rather than the leaseholders. But Sheffield also received funding under the Community Energy Saving Programme (CESP) for part of the estate in which Oliver’s flat is situated. In other words, only leaseholders in that area of the estate could benefit from the payments. But Sheffield decided that this was unfair, so it resolved to make an allowance to all leaseholders, including those whose flats did not benefit directly from the CESP funding. This meant that Oliver’s service charges for the works did not include in full an allowance for that proportion of the CESP funding that was attributable to her flat (some £4,000). In proceedings before the Upper Tribunal (UT), the UT concluded that, under the service charge provisions in the lease, only contributions to the costs of the block containing that leaseholder’s flat can be recovered and that the leaseholder should be credited for the amount of the fund relating to her property. In reaching this decision, the UT concluded that the cost of the funded work had not been “incurred” by the landlord within the meaning of the lease. Following Sheffield’s appeal, the main issue for the Court of Appeal was whether Sheffield had to give Oliver credit for the third-party funding when charging for her proportion of the repairs. It decided that Sheffield did, and dismissed the appeal. The judgment The court accepted the submissions made on behalf of Oliver that the parties to the lease could not have contemplated that the service charge provisions would allow the landlord to have a double recovery of its costs. No reasonable party to the lease would have contemplated such a result. Sheffield submitted that as section 20A of the 1985 Act excludes grant payments for service charges for funded work, this implied that this is an exception to the general rule that double recovery may be legitimate. This submission was rejected: leases must be construed as preventing double recovery, otherwise they would lack common sense. However, the court was to an extent divided on the way in which double counting should be avoided. Lords Justices Longmore and Briggs held that the issue was to be decided on the basis of what is a “fair proportion” of the authority’s costs. While the UT correctly interpreted the lease, it was wrong to give a special meaning to the word “incurred”. Instead it is necessary to assess whether Sheffield’s apportionment was fair. It could only be fair if credit is given for the government funding so to avoid double counting. Lord Justice Lewison concluded that the tribunal should have assessed Sheffield’s costs as those which ultimately left it out of pocket. Although this case might be thought to be limited to local authority service charges, it could apply to any landlord who receives third-party monies, such as payments from the original builder under a guarantee.