Certification Of Service Charge Accounts

Monday, December 17, 2018

The service charge provisions in most Leases follow a similar scheme. Usually, charges relate to a specific (most commonly 12 month) period which is known as the service charge (or financial) year. The following timetable is typical:

• before the start of the service charge year the manager will estimate what the service charges for the coming year are likely to be;
• service charge demands are issued;
• costs are incurred on services through the year;
• at some point after the end of the service charge year accounts will be drafted; and
• demands will be issued if the demands issued in respect of the estimated charges were insufficient to pay for all the costs actually incurred during the year.

Many Leases provide that the year end accounts shall be certified. However, it is not uncommon, for the accounts not to be certified by the time demands are issued in respect of the next service charge year. In fact, the timetable in most Leases means that it is almost inevitable that certificates will not have been provided before interim demands for the next year have to be sent out. That is because (i) the accounts can only be prepared after the end of the service charge year and yet (ii) most interim demands have to be sent out before the start of the next service charge year.

The issue before the Upper Tribunal in Klosterkotter-Dit-Rawe v Greyclyde Investments Limited was whether the failure to provided certified accounts at the year end (in breach of the terms of the Lease) meant that the interim demands (in respect of the next financial year) were invalid. In legal language the issue was whether the provision of certificates was a condition precedent to the Tenant’s liability to pay the interim charges.

Although it is certainly possible for interim charges to require certification (see, for example, the case of Akitora v Marina Heights) the Upper Tribunal determined that the particular wording of every Lease is crucial. The Upper Tribunal referred to an earlier decision of the Upper Tribunal which had stated:

"It may well be the case that, ordinarily, non-compliance with a certification regime will not prevent a Landlord from recovering service charges payable on account (as in both Pendra Loweth and Elysian Fields) but, if so, that is because payments on account are likely to be set by reference to an estimate of future expenditure, rather than by the definitive certification of past expenditure.... In every case the function and significance of the certificate will depend on the terms of the agreement."

The Upper Tribunal determined that the provisions of the Lease in that case did not prevent the Landlord from recovering sums in respect of interim service charge demands – even though the accounts had not been certified in accordance with the Lease. That was because the Lease did not require certificates before interim charges could be recovered. Although recovering charges in respect of balancing (i.e. end of year) demands might be difficult if certified accounts have not been provided, that should not mean – in the majority of cases – that charges in respect of interim demands cannot be recovered.