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Frances-v-Phillips - Don’t Forget About the Other Issue - warning for conveyancers

Please note that  law is a complex subject and you should not rely on this article without professional advice on the facts of your case

The Court of Appeal has finally handed down its judgment in the long running saga of Frances -v- Philips [2014] EWCA Civ 139.

Whilst the main focus of attention has been, quite rightly, on the correct method of calculating when the requirement for the section 20 consultation period for major works is triggered, there is another aspect of the case which should not be overlooked.  This relates to the landlord’s right to claim for their own wages in addition to a standard management fee, and to lease interpretation.

Brief background

The case concerned a holiday site with a large number of chalets, mostly on 999 year leases. The service charges doubled after the sale of the site to new owners.  There were two main aspects of the dispute, firstly whether the statutory threshold for major works (costs exceeding £250 per tenant) triggering the section 20 consultation procedure was to be dealt with by adopting an aggregate approach i.e. by adding together the cost of all works during a service charge year, however minor, or by reference to individual sets of works.  Secondly, whether the landlord could include in the service charge wages of the owners of £95,000 p.a for themselves in addition to a management charge of 5%.  The High Court, on appeal from the County Court, found the aggregated approach was correct in terms of assessing the trigger of the consultation period process and that the landlord could not recover the wages of its owners as part of the service charge.  The Court of Appeal held that the aggregated approach to the consultation issue was wrong and the individual sets of works approach was correct.  This was said to be a common sense approach and in accordance with the intent of the legislation which was directed at major works.  The High Court’s decision on the wages issue was upheld but for different reasons. 

Commentary

The main aspect of the decision will come as a relief to most working in the industry as well as for landlords and probably also for tenants. There has been, and no doubt will be,  a considerable amount of commentary on that aspect.  I do not propose to dwell on it but as an aside, the High Court decision could be seen as one of those situations where hard cases make bad law or would of done if not reversed.  It is clear that the judge did not take kindly to the landlord’s approach with the large increase in service charges seen as an attempt to line its own pockets by adding in a significant cost for wages.  This may have coloured the judge’s approach in attempting to meet the perceived justice of the case and he made a decision which, had it stood, would have had a profound and adverse impact on the world of service charges. 

Fortunately, his lack of common sense ruling on the point has been overturned by the Court of Appeal. 

Focussing on the wages issue, the key aspect was the interpretation of the terms of the lease.  A landlord can only recover the costs of services as provided for in the lease.  If the ambit of what can be charged for is exceeded then he will not be able to recover the cost or additional costs involved.  Here the services for which a charge could be made were contained in Schedule 3 of the lease and on the wages issue the relevant ones were paragraphs 6 and 8.  Paragraph 6 contains what can be described as a number of general items for which a charge could be made including the wages of staff employed by the landlord.

Paragraph 8 stated that the landlord was entitled to charge a management fee of 5% of the total of the costs of the other service charge items.  The landlord company purported to employ its main shareholders on wages of £95,000 per annum.

The Court of Appeal found that to allow the landlord to claim both wages and a management fee would in effect be a double recovery which was not what was intended when reading paragraphs 6 and 8 together.  In effect the payment of wages would be a charge to cover the services intended to be covered by the 5% management fee referred to in paragraph 8.  The landlord was not entitled to payment of the same management service both under paragraph 6 and paragraph 8. 

The judgment of the Chancellor, Sir Terence Etherton is interesting in that he analyses some of the problems with the approach argued for on behalf of the landlord.  He also held that whilst the landlord could not recover wages paid to him by a company without very clear wording to that effect that the landlord ought to be able to recover the costs of an agent appointing to advise on aspects of the management of the estate.  He also finally went on to refer to matters of more general implication and problems which were a recurrent feature of service charge disputes.  It is easiest to set out the relevant paragraph (88) verbatim which is as follows:-

“Finally it must be said that this litigation as in so many of the cases show how predictable it is that there will be disagreement and often litigation when service charge provisions in a lease fail to make absolutely clear (1) whether the lessor can recover by way of service charge and if so, how much for (a) specific activities carried out personally by the lessor bearing in mind that during the currency of the lease the reversion may be or become vested in either an individual or a company , (b) general management by the lessor ,including estate strategy and (c) management advice and activities by an agent appointed by the lessor and if so whether limited to specific activities including general management oversight and strategy and (2) whether there is any restriction on the lessor recovering the entirety of the cost of all (1)(a)(b) and (c).  Lack of clarity on these common issues is capable of affecting a huge number of lessors and tenants across the country involving them in expense and disharmony.  The reported cases show how many disputes turn on similar or nearly similar provisions.  Those who draw up or approve residential leases for their clients are plainly under a duty to take care.  There is a clarity and certainty in relation to these matters.”

I am not sure how often that these particular problems are recurrent.  Nevertheless, it is true that many disputes arise over the wording of the lease as to what is or what is not recoverable under a service charge.  Whilst it is difficult for a conveyancer drafting a lease to encompass all factual possibilities and the types of service which may or may not arise, he or she needs to consider and to correctly define the chargeable services in a residential (and indeed a commercial) lease to make sure these are clear and cover all services likely to be undertaken in the maintenance and management of the block/estate concerned.

It should also be pointed out that even if the landlord can establish that in principle it is entitled to charge for a particular service, this does not necessarily mean that the landlord will be able to recover the cost or the full cost.  Service charges are always subject to the overriding statutory tests or whether they are both reasonably incurred and at a reasonable cost and the duty to consult when this is triggered. 

Please note that  law is a complex subject and you should not rely on this article without professional advice on the facts of your case

Christopher Sykes
Sykes Anderson Perry Limited
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November 2014