Strictly business?

Traditionally, property professionals have looked at service charges in one of two ways. If the property is let on a business tenancy, they have tended to consider that the only restrictions are those set out in the lease, or by terms that can be implied into the lease.

On the other hand, if the property is subject to a residential lease, the whole panoply of residential service charge legislation comes into play. Among other things, under the Landlord and Tenant Act 1985, service charge costs must be “reasonably incurred”, there is a requirement for consultation before major works and the parties can determine disputes in the Leasehold ­Valuation Tribunal (LVT).

However, thousands of shops, restaurants and pubs with residential accommodation above them cannot be fitted into these convenient categories. In these situations it is necessary to look at the provisions that underpin the statutory superstructure. ­Foremost among these is section 18 of the Landlord and Tenant Act 1985, which defines a “service charge” as being a charge relating to “a dwelling”. By section 38, this means a “separate dwelling”. The mass of case law that deals with the definition of a “dwelling house” in the Rent Acts does not really help with this, since housing legislation invariably excludes any application to statutory business tenancies.

The Court of Appeal decision in Ruddy v Oakfern Developments (2007) caused ­disquiet among landlords of such mixed-use premises. The case concerned a typical mixed-use development in Fulham, with commercial units on the ground floor and basement and 24 flats above. There was a headlease of the residential upper parts and the issue related to contributions made by the headlessee to the freeholder under the headlease. Mr Ruddy, the underlessee of one of the flats, argued that these were plainly service charges. The headlessee argued that they were not, because the headlease of the upper parts was not a lease “of a separate dwelling” but of many ­separate dwellings. Perhaps unsurprisingly, the Court of Appeal found in favour of Ruddy. The reasoning was that just because the headlease was a lease of a dwelling and other parts, this did not mean that it ceased to be a lease of the dwelling.

However, the real problem for landlords was the way that Lord Justice Jonathan Parker dealt with one argument about mixed-use premises. The landlord’s counsel stressed possible anomalies that might arise and gave the example of a lease of a shopping centre that included a caretaker’s flat among hundreds of shops let as business tenancies under the 1954 Landlord and Tenant Act. It could not be right that the owners of the mall would have to comply with residential service charge restrictions when demanding charges from the commercial lessees. However, the judge was not impressed with this argument. “I am not satisfied that the potential anomalies identified in argument are such as to compel any different conclusion as to the true ­construction of section 18(1) from that which I would otherwise have reached,” he said.

This suggests that the Court of Appeal was happy to apply the residential service charge to all mixed-used leases. However, the only reported case since 2006 where the point has been taken, the LVT decision in Buckley v Bowerbeck Properties (2009), went in favour of the landlord. Professor Buckley was the long leaseholder of a suite in Wimpole Street, London, that included consulting rooms linked to residential accommodation in the basement. There was no dispute that this was a regular 1954 act tenancy. However, based on Oakfern, Professor Buckley argued that the landlord should have complied with the consultation requirements of section 20 of the 1985 act before carrying out major works. But the LVT accepted Bowerbeck’s argument that the two parts of the suite were so inextricably linked that there was no “separate” dwelling at all – unlike the flats in Oakfern.

Whether the LVT’s reasoning was sufficiently robust to withstand examination by the higher courts was never tested, since an appeal was not pursued to the Lands Tribunal. For the time being, tenants will rely on Oakfern and landlords will have to make do with Bowerbeck.

Mark Loveday and Tim Polli are ­barristers at Tanfield Chambers