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Service Charges….or not

The Court of Appeal in Morshead Mansions Ltd v Di Marco distinguished between service charges payable under a long lease and the liability of a member of a company to pay that company under its Articles of Association.

The claimant company owned the freehold and undertook the management and administration of the block of 104 flats. All the flats were under long leases, with each lease containing provision for the payment of service charges. The leaseholders also owned a share in the company.

Under the company’s Articles of Association, the company was permitted to establish and maintain capital reserve, management funds and sinking funds to pay or contribute to fees costs and other expenses for such things as maintenance of the block and the provision of services. The Articles allowed the company to require the shareholders to contribute to such reserves or funds in a manner approved by the shareholders at a general meeting.

At the general meeting, the shareholders approved the establishment of a recovery fund for the purpose of raising some £400,000 to redecorate the exterior of the block and to finance the provision of services. It was resolved that each leaseholder would contribute £4,000.

The defendant was a leaseholder and a shareholder in the company and refused to contribute to the recovery fund. The company issued proceedings to recover the funds and the defendant contended that such funds were service charges as defined by s.18 of the Landlord and Tenant Act 1985, and that the company was not entitled to summarily decide to collect service charges which could be recovered under the terms of the lease.

The Court held that there was a distinction between the liability of a tenant to his landlord to pay a service charge, to which s.18 of the Landlord and Tenant Act 1985, applied, and the liability of a member of a company to pay similar sums under the Articles; the claim bought by the company related to the company’s right to recover money owed by the defendant as a member of the company and had no bearing on his position as a leaseholder, s.18 of the 1985 Act was irrelevant.

The key point to note here is that it is important for companies to be clear as to which of the two positions they are seeking to recover monies under and equally, leaseholders need to make sure they are not shareholders of the company if they plan to contest such payments.

The Government has recently consulted on default Articles for Right to Manage companies such as that in the Morshead case and we have previously posted on this issue.

One Comment

  • J 8th December 2009 at 12:44 pm

    It wasn’t an RTM company in Di Marco, but a company established to purchase the freehold reversion, probably under the Leasehold Reform, Housing and Urban Devleopment Act 1993

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