[2025] UKUT 120 (LC)

The respondent is the long leaseholder of Flat 25 at Palace Court, 250 Finchley Road, London NW3, a block containing commercial premises on the ground floor and basement and 21 flats on the upper floors. The appellant owns the freehold of the block and is itself owned by the leaseholders of the flats.

The respondent acquired her lease of Flat 25 by assignment in 2009. It had originally been granted by the appellant to a predecessor of the respondent on 14 April 1978 and is for a term of 150 years from a date in 1977.

The lease includes conventional obligations for the repair and maintenance of the building by the landlord and for the payment of service charges by the leaseholder (referred to in the lease as the Tenant).

The Landlord’s covenants are in the Fifth Schedule of the lease and include obligations to repair the exterior and common parts of the block, to carpet, furnish and keep clean the interior common parts, to decorate the external parts of the block at least once in every five years and so on.

The leaseholder’s covenants are in the Fourth Schedule and include, at paragraph 2, an obligation to pay as additional rent in two equal instalments on account, 6.1% of an estimate of the Landlord’s expenditure in performing its obligations during the current financial year and 10% of the cost of maintaining the lift. The paragraph continues as follows (I have adjusted the layout to aid comprehension):

“… and as soon as possible following the end of each such financial year the Landlord shall provide the Tenant with a summary of such expenses certified by its accountants or managing agents

and subject to the provisions of Clause 5(iii) of this Lease any necessary or subsequent adjustment certified as due from or to the Tenant by such accountants or managing agents of the Landlord (whose certificate shall be binding upon the Landlord and the Tenant) shall be paid by the Tenant or credited to the Tenant on the date for payment following the issue of such certificate.”

The reference to clause 5(iii) of the Lease in the above extract is to the following agreement (again adjusted to aid comprehension):

“5(iii) The Landlord shall at its absolute discretion create a reserve fund to provide towards the renewal of equipment and/or materials required for the provision of the services and amenities herein provided and/or for carrying out works other than those of an annual recurring nature

and such sum as from time to time the Landlord shall notionally allocate to such fund shall be deemed to be an expense incurred by the Landlord in discharge of its covenants herein contained

and accordingly a proportion of any sum so allocated shall be included in the amount to be estimated under the provisions in paragraph 2 of the Fourth Schedule provided that any sum so allocated and paid by way of further and additional rent shall be set aside by the Landlord and utilised only for the purpose for which it was so allocated

and provided further that such sums so allocated and paid shall not be subject to adjustment under the provisions of paragraph 2 of the Fourth Schedule and accordingly in ascertaining whether any sum is to be paid by or credited to the Tenant under paragraph 2 of the Fourth Schedule there shall be disregarded any sum allocated by the Landlord and paid by the Tenant under the provisions of this sub-clause.”

Clause 5(iii) authorised the creation of a reserve fund and the inclusion of contributions to it in the annual estimate of expenditure. This sum was to be allocated to the reserve and was exempted from the balancing adjustments required by the concluding part of paragraph 2 of the Fourth Schedule. It was the practice for a sum of £10,000 to be allocated to the reserves in the estimate for each year. But additionally it is said to have been the practice for many years for any surplus of service charges collected over costs incurred to be paid into the reserve at the end of the year, rather than being credited to each leaseholder.

Relations between the appellant and the respondent and between the respondent and the directors of the appellant (of whom she was formerly one) have not always been cordial. In her evidence to the FTT the respondent referred to proceedings between the parties as long ago as 2009 and to a dispute over reimbursement of director’s expenses in 2018. In 2021 the appellant commenced proceedings in the County Court for the recovery of arrears of service charges and in a draft defence which she later relied on in the FTT the respondent identified charges for the years 2019 and 2020 which she disputed or required to be justified.

In 2018 the appellant had appointed a new firm of managing agents, NG Properties (UK) Ltd (NGP), and it was they who had arranged for summaries of expenditure for 2018 onwards to be prepared and certified by the appellant’s accountants, as required by paragraph 2 of the Fourth Schedule to the lease (see [9] above). According to Debra Fisher, of NGP, the summaries were prepared with the requirements of section 21, Landlord and Tenant Act 1985, in mind. The accountants also prepared annual service charge accounts, which adopted the accounting standard agreed between relevant professional bodies, known as Tech 03/11.

Section 21 of the 1985 Act has been amended many times but the version in force between 2008 and April 2023 allows a tenant to require their landlord to supply a written summary of costs incurred in the last accounting period which are relevant costs in relation to the service charges payable by the tenant or demanded by the landlord in that or any other period (section 21(1)). A landlord who receives such a request is required to comply with it within one month or, if later, within six months of the end of the period to which the request relates. The summary is required to show how the costs have been or will be reflected in demands for service charges. It must also show which are costs in respect of which no demand for payment was received by the landlord within the relevant period, which are costs in respect of which a demand was received but not paid, and which are costs which were both demanded and paid during that period (section 21(5)).

The summaries commissioned by NGP and provided to leaseholders did double service, both as the certified summary of expenses required by paragraph 2 of the Fourth Schedule, and as a pre-emptive response to any request for a summary under section 21. They were prepared at the end of June each year and provided details of total costs incurred in the preceding year, which were then divided between the three categories required by section 21(5). For example, the summary for 2019 showed a breakdown of expenditure in 17 categories (cleaning, repairs, insurance, lift maintenance etc) totalling £107,013 which it then broke down into costs for which no demand had been received during 2019 (£8,342), those demanded but not paid (£4,775), and those both demanded and paid (£93,897). The summary also included a figure for the total service charge demanded for the year, which was the original budget figure, which in 2019 was £110,200.