Landlord wins dispute over service charges in commercial building

A landlord has won a dispute over service charges in a commercial building because the onus was on the tenant to prove they were unfair, and it had failed to do so.

The case involved Criterion Buildings Ltd and Mckinsey & Co.

Criterion was the landlord of a building comprised of offices, a sportswear store, a theatre and a restaurant.

McKinsey leased the offices and had covenanted to pay a service charge which was the "due proportion" of the total costs of specified services and expenses.

"Due proportion" was defined as "a fair proportion to be determined" by the landlord, taking into account "the use made of and the benefit received from the services and expenses" by each tenant.

There was also provision for service charge payments to build up sinking and reserve funds in an amount which the landlord "reasonably determines to be appropriate".

Criterion had calculated the "due proportion" based on respective floor areas occupied by the different tenants.

McKinsey argued that what Criterion had charged as the "due proportion" did not comply with the lease because it was not "fair" as it did not represent their share of the floor area and had not properly operated the provisions regarding sinking and reserve funds.

The High Court found in favour of the landlord, Criterion. It held that this was a case where there were several tenants amongst whom the service charge had to be divided, and it made no financial difference to the landlord how it was done.

The landlord could be trusted because it had no axe to grind. Thus, the evidential burden was on McKinsey to prove that the process of apportioning the charges was unfair. It had not done so.

The landlord was only obliged to state the amount that it "reasonably determines to be appropriate" to build up and maintain the relevant funds. It was not obliged to give any more reasoning than that or how it had arrived at that sum. It had complied with the lease terms.

It was not enough for McKinsey to say that "good estate management" would have justified taking a different view. It was a decision for the landlord, not the tenant.

Please contact us if you would like more information about the issues raised in this article or any aspect of commercial property law.

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