High Court guidance on commercial service charges

Cutbacks iStock 000013353612XSmall 146x219The High Court has recently provided some useful guidance on commercial service charges, anticipated expenditure and apportionment, writes David Bird.

In Friends Life Management Services Ltd v A & A Express Building Limited, Morgan J considered the validity of the landlord's collection of money towards anticipated expenditure. The lease provided for service charges to include:

(a) all reasonable and proper costs, fees, expenses and outgoings actually incurred by the Landlord during the financial year;

(b) all such reasonable and proper fees expenses and outgoings actually incurred by the Landlord in the previous financial year and not previously taken into account;

(c) such reasonable and proper sums as the Landlord shall in its reasonable discretion consider appropriate to charge in that financial year by way of provision for anticipated expenditure in any future financial years.

However the clause setting out how the tenant was to pay the service charges said:

"The Tenant shall pay by four equal quarterly payments in advance on the Payment Days for the next and each subsequent financial year a provisional sum calculated upon a reasonable and proper estimate by the landlord supplied in writing to the Tenant of what the [service charge] is likely to be for that financial year."

The landlord had, over some four years, collected almost £875,000 from the tenant under heading (c) towards some major works.

The tenant exercised its break clause bringing the lease to an end on 24 March 2010. The service charge years ran to 13 December of each year.

The landlord carried out over £1m of works after the lease end and sought to use the £875,000 set aside and also collect the balance in the final payment.

The judge held that the landlord could not collect service charges for future years and the £875,000 was to be credited to the tenant's balancing account.

On the question of apportionment, Morgan J held that at the stage where the service charges were to be apportioned to the premises, it was implicit that the charges would also be apportioned as to the length of the actual term during that financial year. The tenant paid 83/365ths therefore.

Comment

In commercial service charge cases, the precise words of the lease are vital. Whilst the case above shows that the court will lean towards the paying party when interpretation is required, every lease turns on its own wording.

Having said that, this judgment provides useful ammunition for tenants to argue that there is an implication that service charge years are to be apportioned and also that if the landlord wants to collect anticipated expenditure, especially to spend after the term of the lease, the wording must be explicit and water-tight.

David Bird is a Senior Associate at Veale Wasbrough Vizards. He can be contacted on 0117 314 5382 or This email address is being protected from spambots. You need JavaScript enabled to view it..