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These issues were considered by the Upper Tribunal (Lands Chamber) (UT) in two recent cases which we explore in this post.
In Sadeh v Mirhan and Azzniv (Charitable Trust)  UKUT 0428 (LC), the dispute centered on the service charge and insurance payable by residential tenants in a mixed use building.
The residential tenants argued that the insurance covered risks which were not envisaged by their leases and which could not properly be charged for through the service charge - both in terms of commercial weighting and on property owners’ liability.
The residential tenants argued that they should not have any obligation to contribute to the commercial weighting of the premium attributable to the commercial unit on the ground floor (a dry cleaners) whether directly or via the service charge. Instead, their
liability should be calculated as if the property was 100% residential.
The tenants also argued that part of the insurance premium - relating to property owner’s liability - should not be included as part of the service charge, claiming that:
i) the wording of the provisions of the lease did not permit such a charge; and
ii) the insurance was placed solely for the benefit of the freeholder and did not provide any cover for the tenants.
Again they referred to Ralph v Peachey which also considered the issue of payment for property owners’ liability. In that case:
In this respect, Sadeh mirrored Ralph.
However, the lease in Sadeh, contained an additional clause which stated that the landlord would:
“…do or cause to be done all such works installations acts matters and things as in the absolute discretion of the Lessor may be necessary or advisable for the proper maintenance safety and administration or the Building.”
The UT said this was wide enough to cover property owners’ liability insurance.
While the UT lacked the evidence to decide the point (and so referred the matter back to the FTT) the tribunal did confirm that if the property owners’ liability insurance had been placed in a way that it actually covered the tenants then the cost
of the insurance premium attributable to property owners’ liability was reasonably incurred and would form part of the service charge. If it did not, then that part of the premium was not reasonably incurred and should not be included
as part of the service costs.
Ingram v Church Commissioners for England  UKUT 495 (LC) concerned a dispute about whether or not VAT charged to the landlord for services could be included in service charge.
Ingram was the long leaseholder of a residential flat. The Church Commissioners (CC) were the freehold owners.
The lease included an obligation on CC to employ others (whether employees or agents) to undertake and fulfil its other obligations as landlord under the lease.
CC could, incur such costs as were necessary and desirable to achieve these ends and they were to be 'fully and effectually indemnified' in respect of such costs.
CC employed agents (KF) to meet these obligations. KF employed caretakers and the like to maintain and look after the building and invoiced CC the salary costs. This service provided by KF to CC attracted VAT and CC sought to recover this from Ingram
via the service charge.
Firstly, should KF have charged VAT at all?
If not, it was unreasonable of CC to have incurred VAT charges and in accordance with the Landlord and Tenant Act 1985, s 19, they should not form part of the service charge.
VAT is not payable on the provision of residential accommodation (the Value Added Tax Act 1994, s 31 (VATA 1994) and therefore, if the services provided were in the nature of rent, no VAT should have been charged.
The mandatory provision by the landlord of services closely aligned with the provision of accommodation will not attract VAT. When a third party provides those same services and charges VAT, VAT Notice 48 paragraph 3.18 may come into play as it provides
a further statutory concession from payment of VAT. The concession applies to 'the upkeep of the dwellings or block of flats in which they reside and towards the provision of a warden, caretakers and people performing a similar function'.
Ingram said that this meant that as the ultimate payer, no VAT was payable all down the line.
The UT did not agree with Ingram. Crucially in this case, VAT was not being charged directly to the Ingram but rather to CC. In analysis,
So, where a landlord directly employs staff and passes the cost to tenants in a service charge, VAT is not payable on the salaries. But if the same staff are employed by a managing agent who recharges the landlord the salary cost, VAT is payable on the
service and passed to lessees through the service charge.
As the judge pointed out:
“Given that the standard rate of VAT is 20%, this could give rise to significantly increased service charges. That may potentially give rise to an argument as to the reasonableness of properties being managed in this way and that the VAT thus passed on via the service charge is not reasonably incurred for the purposes of s 19 of the 1985 Act”
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Melissa Moore is a dual qualified in England and Wales and South African lawyer and has 14 years’ experience in property practice in England. She has worked in local government and been a partner at a regional law firm and most recently an associate director at Berwin Leighton Paisner which she joined in 2005. Melissa has wide experience in all areas of property law and specializes in commercial real estate development. She has experience in a number of sectors including hotel, leisure, offices, investment, industrial, motorway service stations and funding. She has worked on large scale strategic developments and government funding initiatives, town centre regeneration schemes and private mixed use developments both for public sector and private developers and investment funds. In 2013 she was ranked by Legal 500 as recommended for local government work.
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