Challenging a residential service charge – should tenants pay first and dispute later?

Introduction

Residential tenants who wish to challenge a service charge when it is demanded are faced with an awkward decision. They can either withhold payment of a service charge from the landlord whilst they try to resolve the matter, or choose to make the payment anyway and then challenge it afterwards. As unpalatable as it may be for a tenant to make a payment for something which they do not believe to be reasonable, the “pay now, challenge later” option is often considered to be less risky. This is because withholding payment of a service charge from the landlord could potentially expose a tenant to a forfeiture claim, and/or lead to other charges being levied where the lease so permits (such as the landlord’s costs of recovery).

Challenging a service charge

Either the tenant or landlord may make an application under s27A of the Landlord and Tenant Act 1985 (“the Act”) to the First-Tier Tribunal (Property Chamber) (“the FTT”) for a determination as to whether a service charge is payable. The FTT can also be asked to determine:

–      Who should pay the service charge;

–      To whom the service charge should be paid;

–      The amount which is payable;

–      The date at or by which it is payable; and

–      The manner in which it is payable.

The Act expressly states that the FTT can be asked to make such a determination, regardless of whether or not the disputed service charge has already been paid by the tenant.

Section 27A(4) of the Act includes certain situations where an application to the FTT may not be made. It is not possible to make an application in respect of a matter which has already been agreed or admitted by the tenant. However, under s27A(5), the Act makes it clear that the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment. This gives tenants the option to “pay now, challenge later”. The meaning and effect of s27A(5) of the Act has been considered in detail in the recent case of Peter Cain v Mayor and Burgesses of the London Borough of Islington [2015] UKUT 542 (LC).

Facts

The tenant, Mr Cain, acquired the lease of Number 46 Thornhill Houses in 2002. Soon after acquisition he started asking for further general information about the service charges from his landlord, who was the respondent in this case. However, it was not until 7 July 2014 that he issued an application challenging the reasonableness of the service charge under s27A of the Act. The application challenged the reasonableness of seven specific elements of the service charge, as well as the apportionment of the service charge between tenants. It covered service charges going back 12 years, from the service charge year 2002/2003 up to the service charge year 2012/2013. At first instance the FTT held that the tenant was barred from litigating in respect of service charges from the years preceding 2007/2008, on the basis that:

–      The tenant  was to be treated as having agreed or admitted each of the elements of the service charge and its apportionment and so by virtue of section 27A(4)(a) could no longer bring an application.

–      The claim was statute barred under the Limitation Act 1980 and also prevented by the doctrine of laches.

–      It would be disproportionate, unfair and unjust to now require a detailed examination of service charges going back so far.

There then followed an appeal to the Upper Tribunal, whose decision on each point was as follows:

Agreement or Admission

The Upper Tribunal upheld the FTT’s decision that the appellant had agreed or admitted the amounts due. It was recognised that undersection 27A(5), the making of a single payment on its own, or without any other indication of agreement or admission, will never be sufficient to show agreement or admission. There must always be further factors from which agreement or admission can be implied or inferred. However, a series of payments without any protest or qualification could be sufficient to constitute the further indication required.

Limitation/Laches

The case also provides useful guidance on the correct limitation period for applications for a determination as to the reasonableness of service charges. Under section 19 of the Limitation Act 1980, claims for the recovery of arrears of rent or damages in respect of arrears of rent (i.e. claims by the landlord) may not be brought more than six years after the date the arrears fell due. The FTT applied this to the tenant’s application and held that where it related to service charges from more than six years ago the claim was statute barred. This was overturned by the Upper Tribunal. An application to the FTT is a claim for a determination as to reasonableness of service charges and is not caught by section 19. The limitation period is therefore 12 years in accordance with section 8 of the Limitation Act. The doctrine of laches does not apply because the claim is not an equitable one.

Disproportionate

Given the findings above, the Upper Tribunal did not need to consider this last ground adopted by the FTT. However, by way of observation, it was commented that the FTT’s case management powers should not be used to prevent litigation where that is the function of the laws on limitation, laches or indeed, as in the present case, the provisions of the Act itself.

Practical Effect

The proviso in section 27A(5) of the Act which states that a tenant is not to be taken to have agreed or admitted any matter by reason only of having made a payment must be read literally. If all the tenant has done is only make one payment, he is not to be treated as having agreed it. However, if there are any other circumstances which point towards agreement or admission, then section 27A(5) may not always assist. In particular, a lengthy period of making payments without any protest may well lead a tribunal to infer acquiescence. A substantial delay in bringing a claim, as well as the failure to bring a claim when the opportunity presents itself, are further factors which may lead a Tribunal to disallow future claims.

The Upper Tribunal acknowledged that it will still be common for tenants to pay service charges “so as to avoid the risk of forfeiture and preserve their home and the value of their lease.” The advice to tenants may therefore remain to pay now and challenge later. However, tenants should be aware that this is not a stance which should be pursued for any length of time if, ultimately, the service charges are disputed and that any other sign of agreement or admission is likely to tip the balance out of their favour. Payment of a service charge which the tenant intends to challenge would certainly benefit from being accompanied by a qualification that payment is made without prejudice to the tenant’s right to challenge the service charge, and the exercise of that right should not be unduly delayed.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.