Service charges: outcomes of a landlord’s management decision engages FTT’s section 27A jurisdiction

The jurisdiction of the First-tier Tribunal is engaged under section 27A of the Landlord and Tenant Act 1985 only in relation to the outcome of a landlord’s management decisions and not the manner in which those decisions are made. If jurisdiction is engaged, the burden is on the lessee to make out a “prima facie” case on the question of payability for the FTT to consider. In Fairleigh and others v St George South London Ltd and others LON/00AY/LSC/2019/0338 and LON/00BJ/LSC/2019/0330 the FTT was asked to determine whether VAT on service charge costs incurred by the respondent landlords for the years 2018 and 2019 were reasonably incurred. The applications concerned two large leasehold developments adjoining the south bank of the Thames: St George Wharf and Battersea Reach. Both developments were managed on behalf of the landlords by managing agents. The agents directly employed site staff to manage the developments, which the FTT found to be well managed. Under the relevant tax legislation in force, the employment of the site staff directly through the managing agents resulted in VAT on staff costs being payable and this was passed onto the lessees through the service charge. The lessees argued that if the landlords were able to somehow arrange for site staff to be employed directly by them, so as not to attract VAT, the change in employment arrangements would not cause significant costs or disruption to the services provided. The landlords’ refusal to do so was unreasonable. In dismissing the lessees application, the FTT provided helpful guidance as to when its jurisdiction to make determinations under sections 27A(1) and 27A(3) were engaged. A two stage test applied. First, the FTT had to be satisfied that the question before it engaged the issues of payability under section 18, which related to the contractual or statutory legitimacy of the service charge costs. The FTT could make declarations in respect of the outcome of a landlord’s management decisions, but not how those decisions were made. Second, if the FTT’s jurisdiction was engaged, the burden was on the lessees to demonstrate they had made out a “prima facie” case on payability. The question of whether the respondents’ decision to procure the supply of site staff was or was not reasonable, did engage the FTT’s jurisdiction. Yet, the FTT was ambivalent about its decision to proceed to the second stage. It had a real concern that the costs outcome was simply governed by fiscal law, as opposed to any complaint about the standard or provision of services. The FTT determined that the lessees had failed to make out a “prima facie” as to the alternative course of action their landlords could adopt. Additionally, there was no evidence to support their contention that their landlords had acted unreasonably in incurring the VAT costs. Elizabeth Dwomoh is a barrister at Lamb Chambers