Milon Miah & Anor v Anchor Court Management (Ipswich) Limited

Introduction

1. This is an appeal on a short point of construction of a lease, from a determination made in the course of a decision of the First-tier Tribunal in its jurisdiction under section 27 A of the Landlord and Tenant Act 1985 to decide whether and in what sum service charges are payable under a long lease. The appeal has been decided under the Tribunal’s written representations procedure. The appellants have not been legally represented; the respondent was represented by Gaby Hardwicke solicitors. The background, and the decision appealed

2. Anchor Court is a building of Victorian construction, converted into six flats (A to F) in the late 1950s. The appellants are the leaseholders of Flat E. They hold it under a long lease; Flat E was initially held under a lease granted in 2002 for 99 years, but in 2015 by a Deed of Surrender and Regrant a new lease of 999 years was granted. The appellants became the lessees in 2019. The lease contains service charge provisions in unsurprising form, requiring the leaseholders to pay an interim service charge in advance each year and then to make a balancing payment if necessary at the end of the year once the freeholder has produced audited accounts.

3. The respondent is the freeholder of Anchor Court (following a collective enfranchisement in 2010); it is, if I have understood correctly, also the manager of the property and fulfils the obligations of the “Management Company” in the lease.

4. The appellants applied to the FTT for a determination as to the amount of service charges and administration charges payable in respect of Flat E; their application included a number of years prior to their purchase, but since they purchased their lease in 2019 and the previous leaseholder had paid the service charges up to the end of 31 August 2020 without challenging them the FTT sensibly decided to limit the scope of its determination to the years ending 30 September 2021 onwards.

5. The FTT in its jurisdiction under section 27 A of the Landlord and Tenant Act 1985 has to decide whether service charges are payable. Service charges may be disputed on the basis that they are not payable either under the terms of the lease, or on the grounds of reasonableness; section 19 of the 1985 Act provides that service charges in respect of costs incurred are payable only insofar as the relevant costs were reasonably incurred, and that charges payable in advance are payable only insofar as they are reasonable. The appellants in the present case raised both types of challenge.

6. So far as the terms of the lease were concerned the appellants relied upon clauses 3.9 and 3.11 of the lease, in which the leaseholder covenanted as follows: “3.9 To pay to the Management Company in advance on the 1st day of January and the 1st day of July in each year on account of the maintenance charges payable by the Lessee one half of such amount as the Management Company shall certify to be the estimated amount of the maintenance charges attributable to the demised premises for such maintenance year (such certificate to be final and binding on the Lessee). … 3.11Within twenty eight days after the accounts of the Management company for the maintenance year have been audited and a certificate signed by the auditors stating the amount of the maintenance charges attributable to the demised premises for that year (or a certified copy thereof) has been served on the Lessee (such certificate to be final and binding on the Lessee) to pay to the Management Company the amount (if any) by which the maintenance charges payable in respect of the demised premises for such year exceed the amount paid on account in respect of such year …”.

7. The appellants argued that the respondent had not provided a proper certificate of the estimated amount of the maintenance charges at the start of each year, so that no interim charge was payable, and that it had not produced audited accounts at the end of each year.

8. The FTT rejected the appellants’ challenge on the basis of clause 3.9, and there is no permission to appeal that finding. As to clause 3.11 the FTT agreed with the appellants that it required the landlord each year to produce audited accounts, with a certificate signed by the auditors, whether or not a balancing payment was required from the leaseholders.: “38. … The Tribunal accepts the submissions of Counsel for the Respondent that in every year, the amount paid on account had been higher than the sums actually paid and so a balancing exercise was not required; the Tribunal does not accept that this meant that clause 3.11 was not to be followed. Clause 3.11 required the accounts to be audited and a certificate signed by the auditors and this was the position whether or not there was a balancing charge.

9. However, it went on to say: “39. The Tribunal does not accept the position of the Applicants that the Lease required a full audit or externally certified accounts. The Tribunal finds that the Respondent complied with its accounting obligations under the Lease. Clause 19 of the Fifth Schedule required the Management Company to keep “proper books of account of all costs charges and expenses incurred by it in carrying out its obligations under this Schedule and maintain proper records of the reserve fund..”. The Tribunal finds a full audit would have been disproportionate to the size of the Property so as to make it unworkable and disproportionate given that the Respondent was a non-profit company.”

10. The FTT accordingly determined that the respondent had complied with the terms of the lease, and proceeded to consider the reasonableness of the costs incurred by the respondent. The appeal

11. The appellants have permission, granted by this Tribunal to appeal the FTT’s construction of clause 3.11. In their grounds of appeal they say the lease requires “audited accounts and an auditors’ certificate served before any balance is payable. The FTT effectively excused full audit as “disproportionate … A tribunal cannot dilute a contractual condition precedent by proportionality.”

12. The respondent points out that there is no express requirement for an audit in any particular form and no mention of having the accounts externally audited. The respondent is required to keep “proper books of account”, as the FTT said, and the FTT was entitled to take proportionality into account in view of the size of the property. Discussion

13. It is not entirely clear what the FTT decided in paragraph 39. It agreed with the appellants that audited accounts were required each year, and that a certificate had to be provided to each leaseholder stating the amount of the charges payable by it for the year just passed before any balance was payable. But the FTT disagreed with the appellants’ assertion that there had to be a “full audit” or “externally certified accounts.” It decided that the respondent had complied with the requirements of clause 3.11 but did not specify what it had done in compliance with those requirements.

14. What I think the FTT decided in its paragraph 39, set out above, was that the requirement for an “audit” could be satisfied by something done by the respondent itself; hence its reference to the respondent’s own accounts as required by Schedule 5.

15. That cannot be right. The point of an “audit” is that it is an external scrutiny. Something done by the respondent itself, however accurate its “books of account”, cannot possibly fulfil that requirement. That follows as a matter of ordinary language from the word “audit” and the reference to “auditors”. Auditors are not employees of the company or person concerned; they are by nature external. Considerations of proportionality are not to the point; the original parties to the lease decided that an audit was required.

16. The balancing charge referred to in clause 3.11 is therefore not payable without the provision of audited accounts and a certificate signed by the auditors, who are necessarily external to the respondent. They would usually be accountants. They cannot be members of the respondent’s staff.

17. I do not think that authority is really needed for any of that; if it is, a useful similar decision at least is found in Powell and Co Investments Limited v Aleksandrova [2021] UKUT 10 (LC) where the leaseholder covenanted as follows: “ 3(2)(ii) .. (b) on or as soon as possible after the twenty fourth day of June in each year the respective annual costs expenses and outgoings of the matters referred to in sub-clause (i) of this clause shall be calculated and if the Lessee’s share of such annual costs and expenses and outgoings under the provisions hereinbefore contained shall fall short of or exceed the aggregate of the sums paid by him on account of his contribution the Lessee shall forthwith upon production of a certified account pay to or shall be refunded by the Lessor the amount of such shortfall or excess as the case may be … (d) the liability of the Lessee under the provisions hereinbefore contained shall be certified by a Chartered Accountant to be appointed by the Lessor.”

18. The Tribunal (the Deputy President, Martin Rodger KC) found that the production of the certificate of a Chartered Accountant showing what the leaseholder owed was a condition precedent to the individual leaseholder’s liability to pay the balancing charge.

19. Accordingly I set aside the FTT’s construction of clause 3.11 of the lease, and I substitute the Tribunal’s construction as set out above: the auditing of the accounts and the production of a certificate signed by the auditors stating what is payable is a precondition to the liability of any individual leaseholder to pay a balancing charge at the end of the service charge year.

20. There is no cross-appeal from the FTT’s finding that the lease requires the respondent to produce audited accounts and a certificate even if there is no demand for a balancing payment. If that is correct, for the avoidance of doubt I make it clear a failure to have the accounts audited could not affect the appellants’ liability to pay the interim service charge each year because that liability is set out in clause 3.9 and does not depend upon the production of audited accounts or of a certificate. Consequences of the appeal

21. The appellants have made repeated applications for a transcript of the hearing before the FTT, apparently on the basis that they wish to make submissions about discussions at the hearing about what constituted an audit. I have refused those applications on the basis that the appeal raises only a point of construction. The FTT in its decision did not say anything about the documents relied upon as an “audit” by the respondent, because as it happened the point had no practical consequences: at its paragraph 38 the FTT said “The Tribunal accepts the submissions of Counsel for the Respondent that in every year, the amount paid on account had been higher than the sums actually paid and so a balancing exercise was not required.”

22. That means that the absence of information as to what the FTT thought constituted an audit does not matter; the absence of an audit can have no effect upon the FTT’s substantive decision as to whether service charges were payable. It was not making a decision about balancing charges, and the requirement for an audit takes effect only if a balancing charge is demanded. Permission to appeal was granted on the basis that this was a point of construction that should be corrected and may have consequences for the future, but the rest of the FTT’s decision stands. Judge Elizabeth Cooke 3 March 2026 Right of appeal Any party has a right of appeal to the Court of Appeal on any point of law arising from this decision. The right of appeal may be exercised only with permission. An application for permission to appeal to the Court of Appeal must be sent or delivered to the Tribunal so that it is received within 1 month after the date on which this decision is sent to the parties (unless an application for costs is made within 14 days of the decision being sent to the parties, in which case an application for permission to appeal must be made within 1 month of the date on which the Tribunal’s decision on costs is sent to the parties). An application for permission to appeal must identify the decision of the Tribunal to which it relates, identify the alleged error or errors of law in the decision, and state the result the party making the application is seeking. If the Tribunal refuses permission to appeal a further application may then be made to the Court of Appeal for permission.