Merrick v Milsom

The James Committee, set up under the auspices of the Royal Institute of Chartered Surveyors, reported in 1982 that the most common complaints by tenants included the level of service charges and the way in which they were administered by landlord-appointed managing agents.

The James Report recommended the introduction of legislation to cover control of the cost of services payable by tenants. In particular, sections 18-20 of the act contain a measure of control over the amount of service charge that can be recovered by the landlord. Section 19 specifically provides that service costs can only be recoverable if they are reasonably incurred, seemingly shifting the balance in favour of the tenant.

A recent High Court decision may be a watershed in what can be construed as "reasonably incurred" in respect of service charge costs. In Merrick Corporation Ltd v John Milsom Properties Ltd, a claim was made by the landlord for service charge costs arising from the defective construction of additional flats at the property, which were not in existence at the date of the tenant's lease. The decision is the subject of an application for permission to appeal.

Although the freehold had been transferred after the additional flats had been constructed, it was the tenant's view that it was not reasonable for the landlord to recover costs through the service charge account in rectifying defects to the additional flats, which the landlord admitted had been defectively constructed. The court found that the original shoddy workmanship did not disentitle the landlord from claiming these costs, but this seems at odds with section 19 of the act.

The facts of the case are that at the time the tenant's lease was originally granted, the building consisted of 16 flats, a porter's lodge and a basement. It had a flat roof. Three years later, after the grant of the lease, the landlord demised the airspace of the roof on a 999-year lease and this was developed by two penthouse flats being built on top of the block of flats. The new roof to the penthouse failed on a number of occasions and it was estimated that costs of approximately £100,000 would need to be expended to put it in a proper condition. The court found against the tenant on two grounds - first, the current landlord had not owned the block when the penthouse flats had been constructed and, second, the penthouse roof disrepair was caused by an inherent defect. However, from the tenant's point of view, it is difficult to understand how a change in the landlord or the grant of a building lease could affect the issue of reasonableness of the service charges under the 1985 act. The act is clearly intended to protect the tenant and surely a change of landlord or the grant of a building lease, being outside the tenant's control, should not affect the tenant's position. Moreover, as all landlord and tenant lawyers will know, covenants run with the land and therefore it is difficult to see why a change in the landlord should affect the question of reasonableness.

The other reason for the judge's decision was the number of cases cited to him concerning inherent defects, although it is difficult to see how cases concerning inherent defects could support the landlord's position. In the Milsom case, the lease in question was granted before the defective building works were carried out.

Whether permission to appeal is granted or such an appeal is successful remains to be seen, but a similar situation could be avoided if attention is paid to the drafting of the demise clause and that relating to the building in which the demised flat is located. If the service charge payable by the tenant had been restricted to costs incurred by the landlord in complying with its repairing and other covenants as they related to the block of flats as constructed at the date of the residential lease, the whole question of charging for repairs resulting from the original shoddy workmanship would not have arisen.