Tenant and third party contributions to cost of residential remedial worksPrint publication
Walker Morris Housing Management & Litigation specialists Karl Anders and Zoe McLean-Wells highlight a recent Court of Appeal case concerning on account service charge demands and the potential for a set-off to be applied in respect of anticipated third party contributions.
Why is Avon Ground Rents v Cowley of interest?
The calculation and payment of service charges frequently prompt landlord and tenant disputes. The recent Court of Appeal case of Avon Ground Rents Ltd v Cowley & Ors  is of interest to landlords and flat owners and all those involved with residential property management and investment. It provides authoritative guidance on when it would be reasonable to apply an offset when demanding on account service charges in circumstances where third party contributions are anticipated.
What are the key takeaways?
- Where residential long leaseholders are contractually obliged to pay a variable service charge, section 19 (2) of the Landlord and Tenant Act 1985 (the LTA) applies. Section 19 (2) states that leaseholders are not required to pay any greater amount than is reasonable before the associated costs are incurred by the landlord.
- What is reasonable should be assessed on a case-by-case basis. All relevant circumstances should be taken into account in making that assessment.
- Where there is an effective insurance policy in place (or where there is a possibility that any other third party contribution may apply) in respect of service charge expenditure, those are relevant circumstances to take into account when assessing what is a reasonable amount for the leaseholder to pay.
- When embarking upon a scheme of repair or maintenance works, landlords and managing agents should assess whether any third party contribution is likely and, if so, how much, when assessing what to demand via the service charge. They should not simply charge all anticipated costs to leaseholders with a view to carrying out a balancing/refunding exercise later.
What happened in the case?
In Avon Ground Rents v Cowley remedial works were required to repair water damage at a mixed commercial and residential development. The tenants were obliged under their leases to contribute to the cost of the works through the service charge. The service charge was payable in advance based on an estimate of the anticipated expenditure.
There was no issue as to the estimated costs of the works, nor as to the apportionment between the tenants. However, the NHBC had agreed to contribute under its warranty for the premises, albeit the amount of that contribution had not been determined. The landlord sought advance contributions in respect of the full costs of the works from the tenants.
The landlord argued that the NHBC contribution would be taken into account, and refunds given to the tenants, as part of a subsequent balancing exercise.
The First-Tier Tribunal and the Upper Tribunal had held that it was not reasonable to require an advance payment for the full costs in circumstances where an amount was anticipated from the NHBC. The landlord appealed to the Court of Appeal.
The landlord’s appeal was dismissed. The Court of Appeal explained that, whilst the lease provisions were the starting point, section 19 (2) LTA is a statutory overlay which modifies tenants’ obligations so that they are not required to pay any greater amount than is reasonable before the relevant costs are incurred. What is reasonable should be assessed in light of the facts of the particular case, and here the landlord’s argument that no account should be taken of the likely sums to come from the NHBC ignored the reality.
It was relevant to the Court of Appeal’s finding that, not only was there an insurance policy in place, but also that the landlord had agreed to give credit for any amount received from the NHBC, and that the overall anticipated costs were not hypothetical or disputed. The decision means that landlords and/or their managing agents will now need to consider the possibility of third party contributions and, if appropriate, make allowances in respect of the timing of and/or the amounts that are included in on account service charge demands.
  EWCA Civ 1827