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Freeholder’s Recoverability on Contractually Valid Service Charge Demands and Legal Costs

Having recently written my piece on applying for forfeiture and the speed in which one must act, it is now useful to see a recent Court of Appeal decision relating to the importance of a Freeholder’s contemplation of forfeiture if a Freeholder wants to recover its legal fees as well as the issues surrounding recoverability of valid service charges.

The case of No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd (2021) EWCA Civ 1119, saw a long and protracted legal battle between these two parties. The commencement of this matter saw the Leaseholder, East Tower Apartments Ltd, take the Freeholder, No 1 West India Quay, to the First Tier Tribunal in June 2014 around the issue of service charges relating to utilities being provided to the residential area of the tower block, and thus a challenge on overcharging. Both parties appealed to the Upper Tribunal and this matter was remitted back to the FTT for a further determination.

The Freeholder had sought to include administrative charges of the company “Switch 2” which was responsible for reading the meters and calculating the energy bills. Their fees were labelled as a “standing charge” of the utilities bills into the service charge demand, although there was no provision in the lease to permit these to be charged as a “service charge”. Furthermore, the Leaseholders argued that the sums couldn’t be recovered by the Freeholder as the relevant time period for the Freeholder to make the claim had expired. Under section 20B of the Landlord and Tenant Act 1985, a Freeholder is not able to recover service charge that were incurred more than 18 months before they were demanded. A Freeholder’s failure to demand service charge within this strict time scale will mean that a Leaseholder is not liable to pay the demand.

Furthermore, the Freeholder argued that the Leaseholder was liable to pay its legal fees arising from defending the claim, and the Leaseholder opposed this, by way of a November 2018 application to the FTT, on the basis that legal fees were not properly due under the terms of the lease. The Freeholder’s argument, which failed at the Upper Tribunal, was that these costs were recoverable as administration charges or service charge and so could be demanded. The Freeholder appealed this costs issue to the Court of Appeal as well as the service charge element.

The Court of Appeal dismissed the Freeholder’s appeal and held that a demand, under section 20B, must be a contractually valid demand and in accordance with the terms of the lease.

The Court of Appeal also dismissed the Freeholder’s argument regarding its ability to recover its legal costs. Most leases contain a provision which enables the Freeholder to be able to recover and be indemnified against its legal fees if it contemplates forfeiture proceedings as a result of the Leaseholders’ default and breach of lease. The Freeholder tried to argue that it was not relevant that it had no intention to forfeit but that in theory it could apply and seek to forfeit. However, this was rejected and it was held that the fact that the Freeholder had not taken any steps to seek to forfeit the lease meant that it was not entitled to its costs.

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