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Mixed User Buildings and Service Charges
When a building comprises ground floor commercial premises let on a business tenancy, and upper part residential flat sold on a long lease, there are two ways for the landlord to recover the costs and expenses incurred by the landlord in connection with repair and decoration of the common parts of the building, such as main structure walls, foundations, roof, etc.
One way is a ‘pay-as-you-go’ clause in both leases whereby the respective tenants separately covenant to reimburse the landlord whenever expense is incurred. The other is a service charge, payable part in advance, the balance after the end of each yearly accounting period.
Even though when repairing, etc., covenants are only partly the tenant’s responsibility, there may not be a reciprocal covenant on the landlord to carry out the work. The CML likes defined responsibility, basically for the landlord to also covenant, but to be obliged might not suit the landlord. Even if it were implied that if the tenant were not responsible at all, so surely the landlord would be, there is a practical difference between enforcing an implication and actual.
An advantage of ‘pay-as-you go’ is that the landlord may not be obliged to the tenant; the disadvantage is having to pay for the work before recovering from the tenant. With a ‘proper’ service charge, where an interim payment is in advance, the balance at the end of the charge accounting year, the landlord would have money up front and/or in the kitty.
For what might seem routine matters, landlords frequently encounter resistance from tenants when applying the wording in a lease literally. Services charges, along with building insurance, are amongst the thornier issues between landlord and tenant, and with mixed-user properties services charges can be fraught with difficulty.
The commercial property market is largely unregulated and a lease is a commercial contract which means the parties are deemed to know what they are doing. Residential property is largely regulated and oriented towards consumer-protection legislation. The main reason, I suspect, is that residential tenants pay using net income after tax, whereas for businesses leasing commitments are tax-deductible.
With commercial property, interpretation of the lease is a separate issue, but otherwise it doesn’t matter how open-ended a cost commitment, the courts are unlikely to interfere. Not so with residential property where regardless of any contractual agreement, the Landlord and Tenant Act 1985 (as amended) requires the landlord to comply with a formal consultation procedure in connection with qualifying works, failing which the maximum amount recoverable from the lessee is £250.
The Landlord and Tenant Act 1985 is to ensure residential tenants are not required to pay for unnecessary or defective services, and/or for the payment for necessary services to be provided to an acceptable standard. The gist of Daejan Investments Ltd v Benson and others [2013] is that failure to comply with the minutiae of the consultation procedure ought not be an opportunity for lessees to wriggle out of payment. However, per Phillips v Francis [2012] a landlord has to consider overall expenditure on qualifying works, the whole of which determines whether the leaseholders have to be consulted, even though the charge would be £250 or less for each individual leaseholder.
Long leaseholders may like to regard themselves owners, they are not: all they have is use of the space inside the premises, together with the right for the purpose stated in the lease for the duration of the term (subject to any rights on expiry). Everything else belongs to the landlord (subject to any exceptions) so arguably it is socially fair and reasonable when the landlord wants to carry out works at the tenant’s expense for the tenant to have a say in how much should be expended.
Generally, the landlord wants to do the works; tenants may be less inclined to make the first move when they know it is going to cost them. With mixed-user buildings, where the business tenancy may include tenant-enforceable covenants and/or tenants undeterred by legal proceedings it is a question of who wants the works done and the urgency.
In a matter I dealt with for a landlord of a mixed-user building, the residential lessee wanted repairs done urgently because the state of the building was deterring his prospective (sub)-tenants. He informed my client it was the landlord’s responsibility but would get the work done provided the landlord would reimburse approximately £5000. I advised that despite the lessee having indicated footing the bill, the work couldn’t go ahead until the consultation had been complied with, otherwise the lessee could refuse to pay more than £250. I wrote to the lessee to explain. I was told I could forget any suggestion of him paying my fees, let alone another surveyor for supervising the works. In response, I provided a copy of the lease whereupon I was questioned whether the fees were reasonable. As the matter progressed and insistency of urgency intensified. It transpired the estimates the lessee had obtained were verbal, so I set about obtaining written estimates from the several contractors, The lessee said the lowest price should be accepted, but the works proposed by the contractor would have resulted in an improvement not a repair, so not recoverable. Mentioning that, while scaffolding was erected, my Client could get some other work done, in the event the lessee told us to forget it, he would get the work done at his own expense.
Where the landlord wants to undertake works, then the consultation procedure must be satisfied with the residential element before the work is started. Where the commercial tenant wants the landlord to do the works as a matter of urgency, the landlord might have to decide whether preferable to endure the inevitable delay in getting the go-ahead from the residential tenant or go ahead regardless in order to pacify the commercial tenant and avoid any proceedings.
One way is a ‘pay-as-you-go’ clause in both leases whereby the respective tenants separately covenant to reimburse the landlord whenever expense is incurred. The other is a service charge, payable part in advance, the balance after the end of each yearly accounting period.
Even though when repairing, etc., covenants are only partly the tenant’s responsibility, there may not be a reciprocal covenant on the landlord to carry out the work. The CML likes defined responsibility, basically for the landlord to also covenant, but to be obliged might not suit the landlord. Even if it were implied that if the tenant were not responsible at all, so surely the landlord would be, there is a practical difference between enforcing an implication and actual.
An advantage of ‘pay-as-you go’ is that the landlord may not be obliged to the tenant; the disadvantage is having to pay for the work before recovering from the tenant. With a ‘proper’ service charge, where an interim payment is in advance, the balance at the end of the charge accounting year, the landlord would have money up front and/or in the kitty.
For what might seem routine matters, landlords frequently encounter resistance from tenants when applying the wording in a lease literally. Services charges, along with building insurance, are amongst the thornier issues between landlord and tenant, and with mixed-user properties services charges can be fraught with difficulty.
The commercial property market is largely unregulated and a lease is a commercial contract which means the parties are deemed to know what they are doing. Residential property is largely regulated and oriented towards consumer-protection legislation. The main reason, I suspect, is that residential tenants pay using net income after tax, whereas for businesses leasing commitments are tax-deductible.
With commercial property, interpretation of the lease is a separate issue, but otherwise it doesn’t matter how open-ended a cost commitment, the courts are unlikely to interfere. Not so with residential property where regardless of any contractual agreement, the Landlord and Tenant Act 1985 (as amended) requires the landlord to comply with a formal consultation procedure in connection with qualifying works, failing which the maximum amount recoverable from the lessee is £250.
The Landlord and Tenant Act 1985 is to ensure residential tenants are not required to pay for unnecessary or defective services, and/or for the payment for necessary services to be provided to an acceptable standard. The gist of Daejan Investments Ltd v Benson and others [2013] is that failure to comply with the minutiae of the consultation procedure ought not be an opportunity for lessees to wriggle out of payment. However, per Phillips v Francis [2012] a landlord has to consider overall expenditure on qualifying works, the whole of which determines whether the leaseholders have to be consulted, even though the charge would be £250 or less for each individual leaseholder.
Long leaseholders may like to regard themselves owners, they are not: all they have is use of the space inside the premises, together with the right for the purpose stated in the lease for the duration of the term (subject to any rights on expiry). Everything else belongs to the landlord (subject to any exceptions) so arguably it is socially fair and reasonable when the landlord wants to carry out works at the tenant’s expense for the tenant to have a say in how much should be expended.
Generally, the landlord wants to do the works; tenants may be less inclined to make the first move when they know it is going to cost them. With mixed-user buildings, where the business tenancy may include tenant-enforceable covenants and/or tenants undeterred by legal proceedings it is a question of who wants the works done and the urgency.
In a matter I dealt with for a landlord of a mixed-user building, the residential lessee wanted repairs done urgently because the state of the building was deterring his prospective (sub)-tenants. He informed my client it was the landlord’s responsibility but would get the work done provided the landlord would reimburse approximately £5000. I advised that despite the lessee having indicated footing the bill, the work couldn’t go ahead until the consultation had been complied with, otherwise the lessee could refuse to pay more than £250. I wrote to the lessee to explain. I was told I could forget any suggestion of him paying my fees, let alone another surveyor for supervising the works. In response, I provided a copy of the lease whereupon I was questioned whether the fees were reasonable. As the matter progressed and insistency of urgency intensified. It transpired the estimates the lessee had obtained were verbal, so I set about obtaining written estimates from the several contractors, The lessee said the lowest price should be accepted, but the works proposed by the contractor would have resulted in an improvement not a repair, so not recoverable. Mentioning that, while scaffolding was erected, my Client could get some other work done, in the event the lessee told us to forget it, he would get the work done at his own expense.
Where the landlord wants to undertake works, then the consultation procedure must be satisfied with the residential element before the work is started. Where the commercial tenant wants the landlord to do the works as a matter of urgency, the landlord might have to decide whether preferable to endure the inevitable delay in getting the go-ahead from the residential tenant or go ahead regardless in order to pacify the commercial tenant and avoid any proceedings.