In Liam Spender & Ors v FIT Nominee Limited and FIT Nominee 2 Limited, the Upper Tribunal has provided useful guidance when considering the reasonableness of service charges payable in respect of long-term agreements.
The leaseholders made an application to the First-tier Tribunal (FTT), under section 27A of the Landlord and Tenant Act 1985, challenging the reasonableness and payability of service charges at St David's Square, London, for the period 2018 to 2020. Numerous heads of expenditure were in dispute, and by the time of the FTT hearing, this was grouped into 15 categories.
The most important category related to the "Countryside Contracts". The Countryside Contracts were four rental agreements for a 20-year period. The rental agreements were for the door intercom, TV and satellite distribution, covered car park gates and barriers, and business and leisure centre CCTV. Over the three-year period in dispute, the total expenditure on the Countryside Contracts was £590,721.43.
The Countryside Contracts were entered into between the developer of St David's Square and Countryside in 2000; the developer having decided to rent the equipment from Countryside. The costs recharged to the leaseholder included both rental and maintenance costs.
The leaseholders central argument, before the FTT, was that it was prohibitively expensive to rent the equipment, rather than purchasing it, and as a result, they had been lumbered with a bad deal.
The landlord, however, argued that it was reasonable to incur the cost of the Countryside Contracts. It was contractually bound to do so and the cost of terminating the contract was far too high and not commercial sensible. It was further argued that the FTT was unable to consider decisions made in 2000 when the contracts were entered into.
The FTT held that the "20-year contract was on any account onerous" and that the rental agreement was "on any account a bad deal for them". They went on to say that "the bad deal made in 2000 was still a bad deal in 2018". It was held that the leaseholders should only be liable for the cost of maintenance and repair for the years in question, and not the rental costs. The leaseholders received an 81% reduction against the costs as originally sought; the FTT having adopted the leaseholders' suggestion as to what they should pay in respect of the contract price being applied against the anticipated costs of maintenance provided for a newer system.
The landlord appealed.
Although it is correct to say that the relevant costs were incurred on the date when invoices were presented in the three years in dispute (applying Burr v OM Property Management), the Upper Tribunal (UT) held that this does not mean the FTT should only make a judgment about what happened at that point in time. The correct approach also requires an examination of the background to the presentation of the invoice and whether it was reasonable for the landlord to have incurred the costs by entering the contract - this is regardless of whether it was a one-off contract or a long-term agreement. In this case, no evidence was put forward by the leaseholders that the contract was a bad deal in 2000.
The UT noted that the problem appears to have arisen as the price of technology has considerably reduced, rendering the rental too high. This could not have been foreseen. The 2000 decision criticism only comes from hindsight, and no evidence was provided by the leaseholders that in 2000, the decision to enter into the contract was a "bad deal".
It went on to say that the decision adopting the leaseholder's suggestion as to what they should pay was not a realistic or fair determination. The leaseholders would have had to pay what it would cost to maintain a relatively new system, without incurring the cost of ever having had to purchase it.
The UT therefore set aside the FTT's decision. In substituting its own decision, it held that, save for the landlord's prior concession of 25% of the cost in 2020, the sums were payable in full and reasonably incurred.
In assisting further interpretation of such disputes, the UT has provided useful clarification on relevant considerations in determining whether sums incurred under a long-term agreement are reasonable, within the meaning of section 19 of the 1985 Act. At paragraph 74 of its decision, the UT indicates that the test for approaching a challenge in respect of costs incurred under long-term agreement is whether the cost was reasonably incurred in the sense that the landlord acted reasonably in taking on the commitment and thereby making it inevitable that it would incur the cost when the invoice was presented (whether that is going to happen once, or repeatedly throughout the contractual term).
It is therefore clear than when considering a long-term agreement, the parties need to have regard to the decision making at the time the contract was entered into. If a leaseholder wants to challenge an old contract, they will need to show it was a "bad deal" at the time it was entered into.
