Service Charges: Are legal costs paid through service charges always permitted?

This is a case which relates not only to a dispute on the reasonableness of service charges imposed by Thanet Lodge RTM Company Ltd (‘the RTM Company’) in relation to works and costs at a block of flats but also in relation to certain legal fees and mediation costs which were incurred in seeking to resolve the dispute with the leaseholders. 

 

The RTM Company managed the property with the assistance of a professional managing agent. 

 

The RTM incurred legal charges for advice in relation to external building works, internal redecoration, fire works and general work on the above matters from and charged the legal fees for this advice to the leaseholders as part of the service charges. The advice also included advice about the membership and constitution of the RTM company via the service charge. 

 

Arun Mirchandani, a leaseholder applied to the First Tier Tribunal (‘the FTT’) for a determination as to the reasonableness and liability to pay some of the service charges for the above works, as well as legal costs. 

The RTM Company relied on the 2 lease clauses to claim legal costs were payable. These clauses stated that the RTM Company could claim service charges: 

 

“(i) To employ at the Lessors’ discretion a firm of Managing Agents and Chartered Accountants to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents and service charges in respect of the Building or any parts thereof 

 

(ii) To employ all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building” 

 

The FTT found that the legal costs were not recoverable. The RTM Company appealed. 

 

The Upper Tribunal (‘the UT’) divided the legal costs into two categories being the costs related to the constitution and management of the RTM Company and the dispute resolution costs including legal fees and mediation related to claims involving the leaseholders. 

 

It was held that the right to manage legislation did not exist at the time of the leases were executed and as such the cost in relation to this benefited only some of the leaseholders and therefore could not be charged to all of the leaseholders. 

 

In respect of the dispute resolution costs they found that whilst the wording may include legal advice, the absence of specific mention of legal costs combined with the context and purpose of the clause led the UT to conclude that it did not extend to legal costs incurred in disputes with leaseholders. 

 

The definition of total expenditure was also considered which includes “any other costs and expenses reasonably and properly incurred in connection with the building”. It was held that this wording must be read in context and does not override the specific limitations in the lease. The parties would not have intended to impose uncertain and potentially significant legal costs as service charges without explicit wording. 

 

 

This decision like many before shows the upmost importance of ensuring all possible services and expenses are covered by the service charge provisions. It also stresses the importance of reviewing the lease and transfer terms before commencing an RTM application so that everyone has a clear understanding of what is and what is not required. 

 

Having a clear understanding will prevent errors being made and therefore avoiding significant and unrecoverable costs being incurred.