Service charges

If a lease does not contain a provision for the return of service charge monies unexpended at the end of the term, it does not follow that those monies belong to the landlord.

In a recent case, the landlord had accumulated a service charge surplus and the tenant requested a service charge “holiday”. The landlord refused and the tenant served notice to determine the lease pursuant to its break option. The tenant refused to pay the service charge rent for the final two quarters on the basis that the sums held by the landlord would adequately cover the charge.

The case turned on the construction of the service charge provisions. The lease provided that the service charge could include “such sum as the landlord shall … think fit as being a reasonable provision for expenditure in the future”. Any excess monies paid in advance by the tenant were to be retained on account of any future service charge payable by the tenant. Unusually there was no express requirement for the landlord to return unexpended service charge monies at the end of the lease.

The landlord argued that these provisions allowed it to create a reserve fund and that the service charge paid on account was not recoverable by the tenant even if the anticipated works had not been carried out by the time the lease had determined.

The Court of Appeal held that the lease did not create a specific reserve fund and that the provision for future expenditure could extend only to expenditure that was likely to be incurred during the term of the lease. There was no obligation on the tenant to contribute to future works after termination. The landlord was required to return any unspent money that it was holding at the date of the termination.

Relevant Law

Southwark Roman Catholic Diocesan Corporation v Brown’s Operating System Services Ltd (2007) EWCA Civ 164