09 October 2020 #Dispute Resolution
As businesses increasingly look to cutting their costs in order to make up for losses suffered during the pandemic, careful scrutiny of service charges bills is more important than ever, especially for tenants occupying multi-let buildings. Very often service charges tend to be seen as similar to rent, with the result that they are paid on receipt of invoices with little or no scrutiny of the underlying charges or what the lease actually says about responsibility for payment.
A case reported at the end of September, Criterion Buildings Limited -v- McKinsey & Company Inc, highlights the very large sums that can be payable by way of service charges, and two of the many ways in which tenants may be able to challenge service charge invoices.
McKinsey were the tenants of the Criterion Building in London until their lease ended in 2019.Their landlord was Criterion Buildings Limited, and the building was managed by an associated company, Criterion Capital Limited. In these proceedings Criterion claimed unpaid service charges of approximately £2.5m from McKinsey, incurred during the period from July 2013 to September 2019. McKinsey disputed liability.
The case itself is listed for an 8 day trial commencing 12 October 2020, so has not, at the date of this article, been finally decided. However the recent report relates to an application by McKinsey to add two further grounds of challenge to their service charges, an application made only a few weeks before trial and therefore very late in the day.
The first new challenge was the “commission claim”. McKinsey had discovered that Criterion Capital, the landlord’s group company managing the building, had been paid a 15% commission by the cleaning contractor on the value of their contract for cleaning the building. McKinsey contended that this inflated the cost of the service charges levied on the tenants.
Criterion did not dispute that the cleaning contractors had paid commissions to Criterion Capital, but disputed McKinsey’s entitlement to challenge the service charges. The Judge said that, whilst he could not say that McKinsey were “bound to succeed” he accepted that they “have a strong case”. Unfortunately for McKinsey, however the Judge decided that, because the application was made so late in the day, taking into account the prejudice that it was likely to cause to the Claimant and to the trial to permit such a late amendment, as well as taking into account the value of the commission dispute (£70,000) against the value of the claim as a whole, he would not permit the amendment.
The second new argument that McKinsey wanted to introduce was a contention that they had been charged for exterior cleaning that was not the landlord’s responsibility under the lease and did not therefore fall within the service charge obligations at all.Instead they claimed that this was a tenant’s responsibility and should have been paid by the tenants. Once again Criterion accepted that there were good arguments that some of this work was not the landlord’s responsibility and should not therefore have been included in the service charge but advanced legal arguments that, since the charges had been paid by McKinsey, they could no longer maintain a challenge. On this the Judge said that he had “no doubt that the Defendants have a real prospect of success” although he did not feel their case on this was as strong as on the commission issue.However, he refused to allow the amendment for the same reasons as on the commission claim.
Notwithstanding the failure in this case by McKinsey to have these additional arguments introduced shortly before trial, it is clear that their challenges would have had a good chance of success if they had been allowed to introduce them.
These are two examples of many issues that typically arise in service charge disputes and underline that tenants should be careful to scrutinise all service charge demands received before payment, and to take very swift action to challenge anything which they consider may not be payable under the terms of their lease.