The Court of Appeal has ruled that the residential service charge regime under the Landlord and Tenant Act 1985 (1985 Act) applies to mixed-use premises.
Unit 6, Priory House, Cloisters Business Centre ("Unit 6") forms part a former convent which was converted into units primarily comprising serviced offices. Unit 6 consists of a suite of rooms including a kitchen and shower room, which were, at the relevant time, used for storage.
The long lease of Unit 6 specified the permitted use as "offices (and ancillary residential use)".
There was further wording in the lease which provided that the tenant was: “Not at any time to use the Demised Premises or any part thereof or permit or suffer the same to be used [for residential purposes or as sleeping accommodation] …”The landlord sought to recover service charges from the tenant under the lease, and the tenant argued that the statutory service charge protections in the 1985 Act applied, on the basis that Unit 6 was a "dwelling". If this was correct, it would mean that any charges the landlord sought to recover would need to be reasonably incurred and relating to services provided to a reasonable standard. Obligations to consult with leaseholders on major works and provide statutory information with service charge demands would be imposed, and the tenant would not be liable for costs incurred more than 18 months before a valid demand was made. There is no corresponding statutory regime applicable to service charges recoverable under the lease of a commercial premises.
At first instance, the County Court found Unit 6 to be a "dwelling" and referred the case back to the First-tier Tribunal to determine the recoverability of the service charges. The landlord's first appeal was dismissed by the Circuit Judge, and the landlord subsequently appealed to the Court of Appeal.
The issue before the Court of Appeal was whether the 1985 Act applied to "mixed-use" premises and ultimately turned on the meaning of the word "dwelling" as defined in s38 of the 1985 Act.
Lord Justice Lewison's leading judgment held that the removal (by the LTA 1987) of the definition of "flat" and reference to "occupied wholly or mainly as a dwelling" from the operative provisions of LTA 1985 meant that a mixed-use premises could be considered a "dwelling". Further, the requirement that the dwelling is "separate", was a physical question, not a question of use. If a unit was physically capable of residential occupation and in at least part, was intended to be occupied as such, it would fall under the definition of "dwelling".
The terms of the lease, which permitted ancillary residential use were key to deciding whether the premises was used as a dwelling. Lord Justice Lewison considered that if Parliament had intended to restrict the protection to tenants whose use of property was predominantly residential, then it would have said so expressly, as it had done elsewhere in the LTA 1985.
The conflicting further wording in the lease prohibiting the residential use was a boilerplate clause in which the square brackets used indicated that the words within them were optional.
The appeal was dismissed, and the original decision that Unit 6 constituted a dwelling was upheld.
This outcome is an important one for landlords where their leases permit the mixed-use of a premises, as it means their ability to recover service charges from their tenants will be subject to the service charge requirements of the 1985 Act, even if the premises are not actually used as a dwelling.
Landlords should therefore review their existing lease user clauses carefully, to consider whether they need to comply with the residential service charge regime in LTA 19845 and may also seek to ensure that they do not permit mixed use in any new leases, where they do not wish to be caught by the regime.
