Criterion Buildings Ltd v McKinsey and Co Inc  EWHC 216 (Ch)
In the final years of the tenant’s occupation, a dispute arose with the landlord over c. £2.3m service charge. The tenant claimed that it had been overcharged and accordingly withheld payment for part of the sums demanded.
Issue 1 – Is a “fair proportion” an objective or subjective matter
This issue centred on whether the landlord had demanded a fair proportion of the total costs of the services provided to the building.
Pursuant to their leases, the tenant had to pay a “due proportion” of the total costs of the services provided to the building apportioned between the various tenants.
A due proportion was defined in the lease as “a fair proportion to be determined by the landlord”.
The tenant claimed the demand did not comply with the lease on the basis it was not “fair”. In particular, the tenant complained that the landlord claimed that the proportions charged were based on the respective floor areas of the demised parts of the building, but had failed to ensure the measurements used were accurate and that it had offered a considerable discount to another tenant which could not be justified based on the consumption or benefit of the services provided.
The Court held that:
- It would not be practical to hold the landlord to an objective standard of fairness.
- The landlord was entitled to make a subjective determination of what amounts to a “due proportion” of the service charge payable. It is not for the court to decide what is “fair” or “due”.
- The evidential burden should be on the tenant to prove that the landlord’s decision was “irrational”.
- As the percentage apportionment of the service charge payable by each tenant ultimately made no financial difference to the landlord, the court declared that that the landlord could be trusted because “it has no axe to grind”.
- Even if the landlord’s apportionment was subject to an objective test, in respect of the tenant who received a discount, the claimant tenant had not proven the landlord had fallen foul of this standard because the landlord’s apportionment was based on the nature of the space occupied by the other tenant, which was a legitimate consideration.
Issue 2 – The reserve/sinking fund
The lease permitted the landlord to charge an amount “it reasonably determines is appropriate to build up and maintain” a reserve/sinking fund.
The tenant claimed the landlord was using the sinking fund to cover routine service charge costs and to circumvent the balancing payment provisions and that unspent contributions paid into the sinking fund each year to be returned at the end of the relevant service charge year as a credit.
The Court held that:
- The lease permitted the landlord to seek contributions to the sinking fund. Although the tenant expected unspent advance payments to be returned, the lease did not provide for this but allowing payments to the sinking fund to be retained by the landlord on trust to be spent on the services it provided.
- There was nothing in the lease which prevented the landlord from making demands in respect of expenditure which it intended to incur in full in the same year in which the demand was made.
- There was therefore no obligation to return unspent monies each year as the Landlord was not using the contributions to cover yearly routine service charge costs.
- Must check that prior to entering into the lease it knows how the service charge percentage it is responsible for is calculated and negotiates any express safeguards into the lease.
- Should ask their solicitor to explain the service charge provisions clearly to them to ensure that it has a proper understanding of how they operate and how surplus funds are dealt with.
- It will always be prudent for a landlord to retain evidence of how apportionments between tenants are determined in case they are challenged by tenants on grounds of rationality.
As always, each case will turn on the wording in the lease and landlords and tenants should consult with their legal advisors on the terms of the service charge provisions to ensure that they are aware of what they are agreeing to in the lease.
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