Service with a smile

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Service with a smile

• Jon Mowbray
• Ralph Bankes
• Andrew Olins
• Real Estate Dispute Resolution

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Service with a smile
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Service charge provisions, reasonableness and
recovery

• Ralph Bankes
• Real Estate Dispute Resolution

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Service charge provisions

• Usual provisions
• Services
• Proportion
• Accounting periods
• Advance service charge
• Certification
• Balancing service charge

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Service charge provisions

• Missing provision
• Construction of provisions
• Gilje v- Charlgrove Securities 2002 L.T.R. 1
  E.G.L.R. all monies expended by the landlord

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Service charge provisions

• Onus on the landlord to show that a reasonable
  tenant would perceive that the lease obliges the
  landlord to make payment sought
• Must emerge plainly and clearly from words
• Ambiguity in favour of tenant

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Reasonableness of service charges

• No statutory requirement
• Express terms
• Test of reasonableness
• Scottish Mutual Insurance Company v- Jardine
  (1999) EGCS 43 QBD Tech Constr Ct reasonably
  or properly incurred
• Fluor Daniel Properties Ltd v- Shortlands
  Investment Ltd 2001 EGCS 8 ChD

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Compliance with service charge machinery

• Follow procedures in the lease
• Leonora Investment Co v- Mott Macdonald Limited
  2008 EWHC 136 (QB)
• Sutton (Hastoe) Housing Association v- Williams
  1988 1 E.G.L.R. 56

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Right of set off

• Equitable right
• No right where lease expressly excludes

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Remedies against non-paying tenant

• Withholding services
• Marceno v- Jacramel Co Ltd (1964) 191 EG 433 CA
• Dispute resolution
• Terms of the lease
• RICS Dispute Resolution Service
• Courts

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Distrain and forfeiture

• Distrain
• Reserved as rent
• Tribunals, Courts and Enforcement Act 2007 (CRAR)
• Forfeiture
• Reserved as rent or section 146 notice

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Sinking and reserve funds

• Andrew Olins
• Real Estate Dispute Resolution

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Sinking funds the benefits for landlords and
tenants

• RICS Code of Practice Service Charges in
  Commercial Property
• A replacement fund where the owner builds up a
  fund to pay for repair and replacement of major
  items of plant and equipment

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Building up the fund - use of the service charge

• The fund has built up through service charges
  year by year
• Service charges embrace
• usual operational costs incurred annually
• replacement of large items of plant or major
  repairs

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Major items of plant or major repairs

• The landlords 2 choices
• budget and collect the cost of the works in the
  year when the cost is incurred or
• estimate the likely cost and the future date when
  the work will be undertaken and collect a
  proportion of the cost over the intervening years

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The benefits of the sinking fund

• Less than 10 of buildings make use of a sinking
  fund
• Many landlords do not make use of the entitlement
  to establish a sinking fund
• Why?

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Benefits for tenants

• Certainty of cost
• Elimination of large peaks and troughs and
• Where premises are let on short-term leases,
  previous tenants also contribute to the cost of
  major works

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Benefits for the landlords

• Certainty of funding and
• Reduced tenant concerns from one-off high service
  charge costs in any one year

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Lease clauses - setting the parameters

• Restrict the purpose for which a sinking fund may
  be used
• Avoids a broad and unregulated approach
• Prevents abuse
• the landlord using the tenants money to improve
  the premises to enable re-letting at a higher rent

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Lease clauses protecting the monies

• Often leases do not state how the landlord should
  hold the sinking fund monies
• If the monies are not held in a separate
  identified bank account in trust for the tenants,
  the money has become the landlords assets
• If the landlord gets into financial difficulties,
  the monies may be lost to its creditors

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Potential problems

• Few leases require a transparent accounting
  process
• Landlords obligation is limited to issuing a
  certificate
• Little information disclosed to tenants
• Difficult for tenants to assess the current state
  of the fund and whether it bears any relationship
  for the purpose for which money has been collected

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Problems cont.

• A sinking fund is only an estimate of likely
  future costs of repair
• Landlords use of CIBSE tables of expected life
  of plant and machinery
• But old does not (necessarily) means out of
  repair
• Ultraworth Ltd -v- General Accident Life
  Assurance Corporation plc 2000 LTR 495
• Excess money has built-up

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Who owns the excess? When, if at all, should it
be returned to the tenants?

• In the absence of a clear provision in the lease,
  the landlord should not profit from the services
  for which it seeks reimbursement
• Universities Superannuation Scheme Limited -v-
  Marks Spencer Plc 1999 04 EG 158

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RICS Code of Practice

• Jon Mowbray
• Real Estate Dispute Resolution

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RICS Code of Practice

• Why was the Code introduced?

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Why was the Code introduced?

• By setting down best practice, we intend to
  help owners, occupiers and managers and their
  advisers, who create and deliver the deals, a
  simple set of standards that all users of
  commercial property can expect. This code will
  help to ensure that disputes between owners and
  occupiers on service charge matters will become a
  thing of the past
• Christopher Edwards, Chairman of Pan-Industry
  Steering Group

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Key objectives

• Reduction of conflict
• A budgeted/forecastable part of the occupiers
  overhead
• Not for profit, not for loss
• Transparency and communication

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Key elements

• Management
• Communications
• Transparency
• Service standards and provision
• Administration

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Management

• Right to challenge expenditure
• Monitoring of standards
• Information on plans for property
• Skilled on-site staff

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Communications

• Timely and regular consultation
• Feedback
• Variance from budget
• Substantial works

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Transparency

• Cost codes
• Separate service charge account
• Credit of interest

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Service standards

• Written performance standards
• Value for money/effective service
• Does not include owner/specific tenant cost

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Administration

• Management fees
• Apportionment
• Estimates minimum of one month before period
• Certified accounts within four months of end of
  period
• Reasonable period for enquiries

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Problems with the Code

• Negligence claims
• Reasonable skill and care
• Rules of conduct
• Interpretation of leases
• Best practice not taken into account
• Lease renewal
• Section 35 of LTA 1954
• OMay v City of London Real Property (1982)

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Effectiveness of the Code?

• Are tenants now being served?

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How effective is the Code?

• Loughborough University Service Charge Study
  Update 2007
• Late budgets
• Inaccurate budgets
• Late certificates
• Management fees predominantly a percentage
• Limited interest credited

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Occupier satisfaction index 2008
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Options for change

• London Business School report on service charges
  in commercial property 2008
• Conflict of interest
• Tenants want flexibility and predictability
• Adoption of Code limited
• Legislation not the best option

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Options for change
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Any questions?

• We are at your service!

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Contact details

• Ralph Bankes 01895 207986
• ralph.bankes_at_ibblaw.co.uk
• Andrew Olins 01895 207976
• andrew.olins_at_ibblaw.co.uk
• Jon Mowbray 01895 207988
• jon.mowbray_at_ibblaw.co.uk
• www.ibblaw.co.uk

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