Making service charge demands is often a painful and controversial process, and especially where tenants might object on the basis that someone else – an insurer, for example – may have the liability to pay, and so the costs are not 'reasonable' pursuant to s.19 of the Landlord and Tenant Act 1985.
The Building Safety Act 2022 (the BSA) has added a number of potentially liable third parties where building safety defects are concerned, but it is not necessarily easy to get these claims determined before work needs to be done. Can the landlord charge tenants under such circumstances?
In the recent case of St John Street Property Services Ltd v Riverside Group Ltd the First-tier Tribunal (Property Chamber) (FTT) considered whether, and to what extent, the potential for a successful claim under the BSA affected the payability of service charge costs. In this case, it was established that the landlord had a potential claim for a Remediation Contribution Order pursuant to the BSA 2022. The remediation works were however urgent and the landlord had paid for remediation to be carried out swiftly and a waking watch to be instituted in the period before the works could be completed. The landlord was seeking the costs of the works and the waking watch and one of the tenants – a housing association with a lease of a number of flats – objected on the basis that the landlord had not taken sufficient steps to establish whether there was third party liability or applied for a Remediation Contribution Order and hence the charges were unreasonable.
In the previous case of Avon Ground Rents Ltd v Cowley and others, NHBC had confirmed liability to pay for works under a latent defects insurance policy, but payment had not (yet) been received. The FTT determined that in the circumstances only 50% of the works costs were chargeable to the leaseholders, to be repaid once NHBC had paid what they had agreed.
In the St John's case, not only was there the usual statutory considerations regarding what would be 'reasonable', there was also an explicit provision in the lease that service charges would not include 'any costs which are recovered from a third party and the landlord shall use reasonable and commercially sensible endeavours to do so'. This wording refers to 'costs recovered' rather than 'recoverable' but in effect the FTT appears to have treated the question as one of potential recoverability.
However, despite these explicit provisions in the lease, the Tribunal distinguished this case from the earlier case of Avon Ground Rents on the basis that the payment from NHBC in that case was a near certainty, but 'there is no certainty in litigation'. While there was a potential claim that could be pursued, 'a landlord cannot reasonably be required to litigate as a precondition to recovery of service charges'. The landlord had taken some steps to seek recovery from a contractor (sending a letter before action) but had been met with resistance and did not have the means to continue litigation. As the FTT noted, should litigation be pursued in the future and recovery achieved, repayments would be made to the leaseholders, but the landlord ought not in the meantime to be prevented from recharging the costs of the works to tenants.
This will be a welcome decision for landlords who may have onerous and urgent remediation works to be carried out. While the BSA has added a number of welcome routes for seeking contributions from third parties, litigation is never easy and in the meantime, work has to be paid for: it appears the costs of such work can be sought, at least in the first instance, from tenants.
However, while this is good news, it is worth noting that where remediation works are concerned there are strict limits on charging certain categories of tenant under Part 5 and Schedule 8 of the BSA, and landlords will also need to be particularly careful around timings and deadlines for the provision of landlord's certificates if they are not to inadvertently increase the number of tenants who do not have to pay.
