Service charges – time is (sometimes) of the essence!

The Court of Appeal has handed down judgment in the matter of Kensquare Limited v Boakye, concerning (among other issues) whether the landlord, Kensquare, was still able to recover interim service charges from its tenant, Ms Boakye, despite being late in making the demand. 

In short, the answer was no. Although a residential case, this judgment is equally important for commercial landlords to be aware of.

Whether time is "of the essence" is an important concept in landlord and tenant law. When time is of the essence for the purposes of following a timetable (such as to review rent or raise service charges), then failure to comply with the timetable means that the right is lost. This can result in substantial losses for tardy landlords. However, the law has been built up to give landlords protection, other than in cases where time is expressly stated to be of the essence.

Interim or final service charges distinction

In this case, the lease required Kensquare to serve interim service charge demands (that is, costs anticipated to be incurred for the forthcoming year) not less than one month prior to the commencement of that financial year. Kensquare did not follow this timetable, instead giving notice several months after the financial year had begun. Ms Boakye therefore denied that she should be liable to pay the increased sums demanded. 

The court at first instance disagreed with Ms Boakye, on the basis that there was no express wording making time of the essence. The judge cited a well-known rent review case (United Scientific Holdings Ltd v Burnley Borough Council) and found that there was nothing in this lease to indicate that, if the demand was served late, the parties intended the interim charge to revert to its previous (now inadequate) amount.

Ms Boakye appealed the first instance decision, arguing that there were in fact sufficient indicators in the lease that this was intended to be a "use it or lose it" scenario for the landlord. The Court of Appeal agreed with her, finding that, in this lease, the presumption against time being of the essence was displaced by the relevant clause, in particular the words "[notice] to be served on the Lessee not less than one month prior to…" Therefore, Kensquare will now have to seek its costs at the end of the financial year.

In his lead judgment, Lord Justice Newey said that parties should more readily be taken to have intended time to be of the essence in the context of interim service charges than in the context of final service charges. This is owing to the far greater detriment that a landlord would suffer from losing the right to recover its costs at the end of the year, compared to the detriment of not having the funds up front.

Osborne Clarke comment

As a general rule, time will still not be of the essence for the purpose of end of year service charge demands. Therefore, and in particular where leases provide for a landlord's certificate of costs to be conclusive, landlords should still find themselves in a strong position at the end of the year (this follows the Court of Appeal's decision last year in Sara and Hossein v Blacks).

However, the loss of interim charges can still cause major cash flow difficulties for landlords. The key takeaway from this case is that landlords should pay careful attention to the service charge machinery and ensure compliance wherever possible.