Planning maintenance and spreading the costs

Bruce Maunder Taylor looks at a recent case that highlights the necessity of planning maintenance ahead of time and spreading the costs

There are good reasons why the cost of major maintenance works on blocks of flats should be spread over a number of years and not collected in one hit.  Payments will be spread and, thereby, annual service charge liabilities are evened out.  The reserve funds will be collected from those lessees who have owned their flat during the period of deterioration rather than those who have bought their flat afterdeterioration.  Quite apart from anything else, buyers of flats typically ask in pre-contract enquiries: when are the next major works programmed?  Is there a reserve fund and if so, how much is held in that fund? 

While many blocks of flats do operate reserve funds properly and reasonably, there are others which treat it more like a ‘sink bin’ from which any excess annual expenditure can be taken instead of making an additional demand, which can be used to avoid inflationary increases to the ordinary service charge account, or which can be neglected until the inevitable cannot be deferred any longer, by which time it is too late. 

One recent case highlights these issues and should serve as a warning to landlords and RMCs.

Frognal Estate has 54 flats which had been neglected for many years: four lift shafts had been boarded up, Enforcement Notices had been served by the Local Council in respect of dangerous fire escapes, uninsulated and leaking flat roofs, and insurance cover for water damage had been withdrawn.  There is a history of multiple litigation and a complete breakdown of everything between the landlord and the residents' association.  A property manager was appointed by the FTT in mid 2009 (about the only thing the parties could agree on) pursuant to Section 24 of the Landlord and Tenant Act 1987.

The new manager set about identifying those works which, in his mind, needed to be carried out in a first major works contract (eg, lift renewals were to be temporarily deferred) and demanded £630,000 to cover the costs.  While some residents welcomed the prospect of the estate being put back into repair at long last, others protested that they could not afford to pay.  To enforce service charge collection, an FTT determination of reasonableness and payability was needed and obtained, but some flat owners had argued that their inability to pay in one year (rather than being spread over five years), was an aspect of reasonableness which the Tribunal should take into account.  The FTT doubted that their jurisdiction extended to that and the lessees appealed to the Upper Chamber (the Lands Tribunal). Its decision in Garside v RFYC: (LRX/54/2010) will have far-reaching effects.

The Upper Chamber was not concerned with the particular facts of the Frognal Estate but was concerned with the legal interpretation of ‘reasonableness’ in so far as it related to the ability of flat owners to pay. 

The first point established was that, by the terms of the Management Order, the property manager had the power to raise a reserve fund which many of the individual leases did not provide for.  The Upper Chamber noted the expenditure levels from previous years and held: “it is important to make clear that liability to pay service charges cannot be avoided simply on the grounds of hardship, even if extreme.  If repair work is reasonably required at a particular time, carried out at a reasonable cost and to a reasonable standard and the cost of it is recoverable pursuant to the relevant lease then the lessee cannot escape liability to pay by pleading poverty… that is a different matter from deciding whether a decision to carry out works and charge for them in a particular service charge year rather than to spread the cost over several years is a reasonable decision, thus the costs reasonably incurred for the purpose of Section 19 (1) (a) of the 1985 Act.” 

What we can all learn from this decision is that if landlords and RMC/ RTMCo’s want to protect themselves from the tactics of non payers, they are now going to have to draw up a long term maintenance term plan, setting out a reasonable estimate of the life expectation of the various parts of the building fabric and services, predicting the anticipated cost of renewal and, from that information, deciding on a reasonable annual contribution to reserves. 

If the lease does not contain reserve fund provisions, flat owners need to be forewarned about what they should be saving. Maybe an application to the FTT should be considered to vary the leases to include a reserve fund provision in future (S.35 or S.37 of the Landlord and Tenant Act 1987). 

Failure to take these steps will expose the landlord or RMC/RTMcCo to the risks of flat owners relying on the Garside decision to support their refusal to pay a major works bill in one particular service charge year. They will ultimately be obliged to pay but now have the option to spread payment over months or even years. This leaves the landlord or RMC/RTMco exposed to claims for damage if the necessary works are delayed.  Rocks and hard places come to mind!

Bruce Maunder Taylor is a partner with Maunder Taylor chartered surveyors and managing agents based in London

Tel: 020 8446 0011