Update: residential property

When is service charge not service charge?

The judgment in Morshead Mansions Ltd v Di Marco (2008) EWCA Civ 1371 highlights the way in which residential management companies can circumvent the tenants' right to challenge the reasonableness of service charge under the Landlord and Tenant Act 1985 (LTA1985). The Court of Appeal considered whether a management company had lawfully prevented the tenants of a block enjoying the protection of the Act by demanding 'service charge' from them as shareholders in the management company, rather than as tenants of the block.

In this case all the tenants in the block were shareholders in the management company set up to manage and maintain the block. The management company had two distinct ways in which it could recover the cost of managing the building. The first was under the company's articles of association, which allowed it to require the shareholders to pay contributions to a management fund. The other was the more usual route of payment of service charge under the leases. The company needed to finance anticipated maintenance expenditure, so passed a resolution authorising the directors to form a fund into which the shareholders would be required to make defined contributions. The management company did this to avoid possible delays in payment from tenants challenging the demand under the LTA 1985.

One of the tenants refused to pay, claiming that the contribution requested was in fact service charge and its reasonableness could therefore be challenged under the LTA 1985. The Court of Appeal disagreed and emphasised the 'crucial legal distinction' between the liability of a tenant under the service charge provisions of a lease and the liability of a member of a company, where all the tenants are shareholders, to pay into a management fund. Two kinds of legal relationship can co-exist between the same parties in different capacities and they give rise to different legal obligations '“ a defence to one of the claims is not necessarily available as a defence to the other legally separate claim.

Clearly it would be a practical solution for management companies to raise funds in this way in blocks where tenants routinely challenge service charge demands. The downside is that it would also enable a management company to raise funds to deal with shortfalls and discrepancies in poorly managed service charge arrangements.

This decision highlights the need for conveyancers to check the articles of association of management companies and to warn the buyers of flats, where relevant, of their obligations both under their leases and, quite separately, as company members. Enquiries should also be made of the seller and the management company as to whether any demands have been made by the management company, other than service charge demands under the terms of the lease, and if so, to obtain detailed information on such demands alongside the usual request for service charge history.

Restrictive covenants

With the residential property market stagnating and banks paralysing their lending, home owners may find the prospect of extending their current home ever more tempting. Also, since the government freed up the 'permitted development' regime on 1 October last year in the Town and Country Planning Order 2008, the planning hurdles to building a modest extension in most areas have become a great deal easier.

It is likely that any rush to build extensions will bring restrictive covenant problems in its wake. In recent months there have been a couple of cases on restrictive covenants that warrant a second look. The first considers who has the benefit of a covenant. In the case of Margerison v Bates [2008] EWHC 1211 (Ch), Margerison was the owner of a bungalow who wanted to replace its flat roof with a pitched roof. The bungalow stood on what was originally the garden of the adjoining property, now owned by Bates. In the original conveyance of the bungalow there was a covenant not to make any alteration to the bungalow without the plans having first been approved by the seller, and that such approval was not to be unreasonably withheld. The original seller of the bungalow land died in 1977 and the main issue before the High Court was who was entitled to consent to the alterations; the original seller or Bates, the current owner of the adjoining property.

The court looked closely at the actual wording of the conveyance. There were express references to the seller's successors in title in some parts of the document but not in others, and the court was of the view that the professional draftsman would have been well aware of the effect of his drafting.

The court concluded that it was not commercially 'absurd' for the original seller to be the only person entitled to give consent as the intention could have been to avoid the need for numerous consents if other parts of the original property had been sold off for building. Also, common sense dictated that it would not have been the intention of the parties that the bungalow could never be altered after the original seller's death, simply because she was no longer around to give consent, so as a matter of construction the court found that the covenant had been discharged by the death of the original seller.

This case emphasises the importance of diligent and consistent drafting and, when new covenants are to be imposed, careful thought should be given to who is to enjoy the benefit of them. Although this case does not provide new law it helpfully highlights that the courts are likely to adopt a literal interpretation, unless the result would be absurd.

Interference with view '“ an annoyance

The other case on covenants that gives pause for thought is Dennis and others v Davies [2008] EWHC 2961 (Ch), in which the High Court held that the construction of an extension would breach a covenant not to cause nuisance or annoyance. Davies, the owner of a house on a small estate next to the River Thames, obtained planning permission to build a three-storey side extension on his house. Five of his neighbours wanted to stop him building the extension and claimed it would breach the covenant not to cause nuisance or annoyance as it would wholly or partially obscure their river views. The court, in applying the nineteenth-century cases of Tod-Heatley v Benham and Wood v Cooper, held that the test for annoyance is whether 'reasonable people, having regard to the ordinary use of a house for pleasurable enjoyment, would be annoyed or aggrieved' by the extension and that this must be judged by 'robust and common sense standards'. The court decided that the loss of view from three of the five houses would be significant and constitute an annoyance within the meaning of the covenant.

It is well established that there is no right to a view, but in this case the group of neighbours succeeded in using the covenant to protect their river views.

This case warns home owners to check if any nuisance or annoyance covenant might thwart their plans, even if there is no restriction on building. Also, when negotiating the wording of a covenant, careful thought should be given to the inclusion of the word 'annoyance' rather than just 'nuisance', which has a significantly narrower definition.

No time limitation on charging orders

Recent reports suggest that the number of charging orders obtained, which effectively secure a previously unsecured debt, has hugely increased causing yet another problem for home owners in the current economic climate. While in practice, and in view of sliding property prices, many creditors may prefer to wait until there is a sale to claim monies secured under a charging order, the case of Yorkshire Bank Finance Ltd v Mulhall [2008] EWCA Civ 1156 is of particular interest as it looks at the effect of the Limitation Act 1980. What was unusual about this case was that Yorkshire Bank obtained a charging order against the Mulhalls in June 1991, in respect of a guarantee that they had given in 1990. Apart from realising one asset in about 1992, the bank took no further steps to enforce the charging order.

Mrs Mulhall argued that under the Limitation Act 1980 the charging order should be set aside because it was no longer enforceable as 15 years had passed without Yorkshire Bank taking any steps to enforce it. This was rejected by the High Court. Mrs Mulhall appealed to the Court of Appeal and argued that either the relevant time limit was 12 years under s.20(1) of the Act which deals with money secured by mortgage or other charge on property; or six years under s.24, which deals with an action brought on a judgment. The Court of Appeal rejected both arguments and following the House of Lords decision in Lowsley v Forbes [1999] AC 342D, it held that s.24(1) applied only to fresh actions and not to proceedings by way of execution.

Mrs Mulhall also argued that Ezekiel v Orakpo [1997] 1 WLR 340 concerning the application of ss.20(5) and 24(2) of the Act on the time limit for the accrual of interest to sums secured by a mortgage or other charge against land, had been wrongly decided. In this case the Court of Appeal held that when a charging order is enforced all arrears of interest that have accrued since the making of the charging order were recoverable and that neither ss.20(5) nor 24(2) limit the interest recoverable to six years. Again the Court of Appeal did not agree with Mrs Mulhall and made it clear that the case was correctly decided and remained good law.

The decision in Yorkshire Bank Finance confirms that the Limitation Act 1980 does not apply to charging orders, and a failure to enforce a charging order will not automatically discharge it. This case contrasts with the position of a mortgagee who does not pursue a borrower for default. In such a case s.20(1) of the Act would apply, and the mortgagee's rights would be extinguished after 12 years.

This case gives us a timely reminder that in the sale of a property many years after a charging order has been obtained, it remains valid and will need to be paid off at completion. Information on the charging order should be obtained early on in the transaction to minimise the inevitable delay that this complication will cause.