A recent case involving the recovery of service charges has seen the court criticise the way that landlords and their agents often deal with service charges.
The case involved a property in Piccadilly, London, which is tenanted. The basement-level tenant is a casino (Distinctive Clubs Ltd.) and it entered into its lease in 1998. The building was known to have structural problems with its roof, which needed substantial repair, and the lease signed by Distinctive Clubs contained a clause which limited its liability for repair works during the first five years of its lease. The estimated cost of repair in 2002 was £200,000.
In 2004 (after the limitation clause had expired), the landlord carried out roof repairs, which included building a new structure which benefited only the tenant occupying the top floor. The total bill amounted to over £2m and Distinctive Clubs’ contribution to the repairs was assessed at £700,000. In court there were two main questions to address.
Firstly, was the basement tenant liable to pay for the works that benefited only the top floor tenant and which, in any event, were improvements to the property, rather than repairs?
Secondly, was the delay in carrying out the repairs reasonable?
In the view of the court, the repairs to the roof were justifiable repairs under the lease. However, the improvements which benefited only the rooftop tenant were not, so Distinctive Clubs would not be liable to contribute to those. However, in the view of the court, the landlord could, had it shown reasonable alacrity, have completed the repairs by 2003. Accordingly, Distinctive Clubs was not liable to contribute to any of the cost of the repairs.
The judge criticised the landlord and its agents for including in the landlord’s claim sums which were not properly due and for not informing the tenants of the spiralling cost of the roof repairs. He also criticised the agents for their lack of independence, characterising their approach as seemingly being intent only on recovering as much as possible of the cost from the tenants.
The lesson for landlords and their agents is that attempts to collect ‘full recovery service charges’ in a way which does not properly balance the interests of tenants and landlords is likely to get short shrift in the court. Indeed, tenants are increasingly looking to negotiate caps on such clauses.