UK: Lease Termination: Where Does Liability For Major Works Fall?

You should read this if you deal with asset or facilities management of commercial real estate.

A landlord's entitlement to service charges for costs incurred around lease termination depends on the accounting and invoicing mechanics stipulated in the lease; the language of the lease is decisive.

However, any attempt to recover the cost of work not performed during the relevant accounting period is likely to fail.

In a recent case, the question was whether service charges could be claimed where, over the years, the tenant had paid a provision for future, major works, but those works had not been carried out before the lease came to an end.

The case concerned a 1930s Art Deco Grade II listed building, where the lease came to an end on 24 March 2010 and the then current accounting period for service charges ended on 31 December 2010. After the lease had ended, the former landlord carried out major works to the HVAC and M&E systems serving the building at a cost of £1m. The works started in autumn 2010 and were completed in 2011.

Only some of the sums paid by the landlord for the major works qualified as costs actually incurred during the service charge period up to 31 December 2010.

The critical issue was whether the service charge financial year ended when the lease ended or did it continue until the following 31 December?

Having examined the wording of the lease in the context of a building occupied by more than one tenant, the judge concluded that the service charge financial year ended on 31 December 2010. Thus the cost of major works performed up to 31 December 2010 could be included in the service charge.

At the same time the judge concluded that the amount recoverable from the tenant should be apportioned to reflect the fact that the tenancy ended on 24 March 2010.

What this lease required was a certified account for the year to 31 December 2010:

• including major works costs actually incurred in 2010;
• but excluding major works costs actually incurred in 2011; and
• including all other proper service charge costs.

Credit should have been given to the tenant for the full provision for the major works costs paid by the tenant in the past.

The resulting figure should then be the service charge to be apportioned to reflect the termination of the tenancy on 24 March 2010 (i.e. 83/365) with any overpayment of the service charge, compared to provisional sums charged, to be repaid by the landlord.

Reference: Friends Life Management Services Ltd v A &A Express Building Ltd [2014] EWHC 1463 (Ch)

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