Stephen Hubner and Suzanne Toomey, of Shepherd and Wedderburn's London office consider the recent High Court case of Princes House Limited v Distinctive Clubs Limited and the effect that a landlord's delay had on the tenant's liability to pay service charge, in this case where the tenant was entitled to a service charge cap for a limited period of time.

Decisions in the English Courts are not binding on Scottish judges, but they can often be regarded as informative or persuasive when similar circumstances come before the courts north of the border.

Background

The High Court recently had occasion to consider once more the circumstances in which, having incurred costs in carrying out repairs to a building, a landlord can fully recover those costs from the tenants.

Although not quite on all squares with the earlier case of Postel Properties Limited v Boots the Chemist [1996] 2 EGLR 60, the recently reported case of Princes House Limited v Distinctive Clubs Limited caused the Court to determine both in what time scale a landlord should carry out works and whether a tenant of a basement of a property could legitimately argue it need not contribute to the cost of works to the roof of the building.  As is well known, the Postel case established that landlords are basically entitled to recover the costs of repairs "which a reasonably minded building owner might undertake", even if those repairs consisted of replacement (which could be said to improve the building in question) rather than continuing a programme of maintenance works.  What the Court needed to consider in the Princes House case were two issues:

  • whether the landlord could or could not delay works such that those works could be carried out after expiry of the period in which at least one tenant could enjoy the benefit of a cap on service charge liability; and
  • whether, for the landlord to recover costs, there needed to be a clear and direct benefit to the tenant of the works being carried out.

Basic Facts

As reported, Princes House Limited was landlord of a building, which consists of four floors and a basement.  Distinctive Clubs Limited was tenant of the basement of the building.  The lease was said to include an obligation on the landlord to use all reasonable endeavours to provide services, including maintenance, renewal, replacement and decoration of, amongst other parts, the roof of the building.

Besides usual provisions regarding the service charge and the obligation on the part of the tenant to pay a proportion of the costs incurred, in this instance we are told that the service charge was capped for the first five years of the lease.

Within those first five years, Princes House Limited notified all tenants of the building that it was its intention, as landlord, to carry out works to the roof during the calendar year 2003.  The works would in fact require replacement of the roof.  The landlord provided an estimate of costs, and Distinctive Clubs Limited responded pointed out that its contribution to the cost of the works would be subject to the present service cap, but otherwise there appears to have been no further correspondence or discussion.

The landlord did, however, have discussions with another of the main tenants of the building, which had substantial amounts of plant on the roof.  The outcome was that the plans for the works to the roof were revised substantially and so building works did not start until 2004.  This was after the period of service charge cap in the Distinctive Clubs lease had expired.

The landlord sought to recover the uncapped service charge contribution from Distinctive Clubs Limited.  Distinctive Clubs Limited refused to pay anything more than to the original capped level.

The matter wound up in the Court, with Princes House Limited claiming for non payment of service charge instalments and Distinctive Clubs Limited counter-claiming for an equivalent amount of charges on the basis that the landlord should have carried out the repair works before the end of 2003, when Distinctive Clubs Limited would have had the benefit of the cap on the service charge contributions.

Decision

The Court upheld the counter-claim.  The landlord had known the roof was in poor repair for quite some time and would have had opportunity to carry out the works during 2003 as originally planned.  It was reasonable for the landlord to consult tenants regarding the repair works, but it was not reasonable to delay when it appears the works could have been done within the original time scale.  Had that been the case, the service charge cap would have applied.

On the other hand, a landlord is not obliged to carry out repairs in a way that incurs the lowest cost.  Similarly, although a tenant is entitled to ask for a breakdown of any estimate of costs, and indeed for a breakdown of any actual costs, it is to be expected that there will be some inaccuracy when an estimate of costs is produced; this does not rule out the ability of the landlord subsequently to claim for a top up to meet the full contribution to costs even if the tenant has made on account payments during the year.

The tenant cannot deny liability on the basis that it occupies part of the building which does not directly benefit from the works which are to be carried out (as was the case here, with the tenant occupying the basement and the works being carried out to the roof).

In terms of the costs incurred, the Court has followed generally the provisions of the Postel Properties case in that it was reasonable to replace the roof rather than carry out patch repairs, and it was acceptable to erect a temporary roof (and so pass on the costs of doing this) whilst the new roof was being constructed.

Conclusion

The case supports the view that has been taken for a decade now, whereby landlords are generally entitled to recover costs of works even if tenants would like to argue costs could be lower if temporary repairs are done rather than replacements effected.  As ever, much will depend upon the particular circumstances of any case in determining whether or not replacement is justifiable and outweighs in benefit terms what would otherwise be a lower cost of temporary repair.

On the other hand, landlords cannot delay carrying out works, and expose themselves to risk of a successful counter-claim from a tenant which benefits from a service charge cap if works could be done within the period in which the cap is effective even if, for what might seem to be good reasons to the landlord at the time, works are postponed.

Tenants can take comfort from the fact that landlords do not have complete carte blanche as to timing and costs of work, but will need to make sure they challenge any service charge demands which appear not to comply with the terms of any relevant lease, particularly where a service charge contribution may be capped.

Since the Postel Properties case was decided, the commercial property industry has tried to improve relations between landlords and tenants, particularly in respect of multi-occupied buildings where service charges are a frequent source of dispute.   The original Guide to Good Practice was published in August 2000. The RICS Code of Practice, published in June 2006, supersedes the original guide with effect from 1 April 2007.  Neither the guide nor the code bind landlords or tenants, but both provide advice, which, if it is followed, may well reduce the likelihood of parties ending up in Court.

Service Charges in Commercial Property – A Guide to Good Practice, which was published in August 2000 provides recommendations for good practice that landlords and tenants should aim to follow where possible and is available from the website of the Property Managers Association at: http://www.propertymanagersassociation.com/files/2002729212512_Service_Charges_in_Com_Prop.pdf  

The Royal Institute of Chartered Surveyors (RICS) Code of Practice: Service Charges in Commercial Property, published in June 2006, will replace the Guide to Good Practice and will apply to service charge arrangements starting on or after 1 April 2007. It is available from the RICS website at: http://www.rics.org/NR/rdonlyres/F720AF5F-2C7B-4E0A-9924-D41E92553957/0/ServiceChargesinCommercialPropertyweb3.pdf

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