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Why estimating service charges is a matter of experience

1024 581 Realty Law

Why estimating service charges is a matter of experience

The recent Upper Tribunal (UT) decision in the Wingmore Homes (UK) Ltd v Spembly Works Residents Association Ltd (2018) is a reminder that estimating service charges is a dynamic process.

It is one that requires a landlord to apply its improving knowledge of actual costs from year to year, to its decision making in respect of estimates.

The appeal in Wingmore concerned payment of interim service charges. Clause 5.1 of the lease provided that the tenant was to pay the landlord each year “a proportionate sum on account of Service Charge … as the Landlord shall consider is fair and reasonable” and to pay the balance “on receipt of the Certificate”.

The UT decided that the reasonableness of the demand had to be assessed by what was known at the time the tenant’s liability arose; in this case the date of the invoice. The UT found that there was an increasing amount of knowledge available to the landlord of the level of actual expenditure as time progressed, after it had taken over the building in 2011.  The UT decision means that as a landlord’s experience of actual expenditure increases over time, so estimated interim charges should become more refined and accurate, if they are to be considered reasonable.

The evidence in Wingmore indicated that the estimating process had not developed.  For example, the amount demanded for each year was precisely the same, which was a clear indication that a landlord has not carried out any meaningful well-founded assessment based on a genuine estimate of the likely expenditure. Furthermore, the estimates repeatedly turned out to be approximately twice the expenditure in any given year, such that it became increasingly difficult for the landlord to justify that its approach produced reasonable estimates. Indeed, it appeared that the landlord was not learning from experience.

The UT, which was not impressed by the landlord’s failure to refine its estimating process between 2011 and 2016, reduced the claims by 50%.

A copy of the judgement can be found here.

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