Case law: Intermediate tenant must be able to justify service charges passed on to sub-tenants as reasonable
Tenants passing on service charges (which have been charged by the landlord) to their residential sub-tenants should ensure they can prove the service charges are reasonable, if necessary by obtaining relevant information from the landlord.
This update was published in Legal Alert - August 2016
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A landlord let a mixed use property to a tenant. The tenant later leased residential parts of the building to sub-tenants, becoming their landlord.
Under landlord and tenant law relating to residential property, service charges charged to residential tenants by their landlord must be reasonable. This includes charges requested before a landlord has actually incurred particular costs – for example, when a landlord makes a service charge to create and maintain a 'sinking fund', or asks for money in anticipation of planned works at the property.
In this case, the landlord charged the tenant service charges in order to create a sinking fund to pay for decoration of the exterior of the building at some stage in the future. The size of the fund doubled over time but the tenant paid the service charges without asking the landlord to justify them.
The tenant then passed a proportionate part of the service charge on to each of its residential sub-tenants in accordance with their leases. However, the sub-tenants argued that the charges were not reasonable. The tenant argued that once it had paid service charges demanded by an ultimate landlord, the charges should be presumed reasonable.
The Upper Tribunal ruled against the tenant. It ruled that "it is not sufficient for the [tenant] merely to say: I have paid this sum to the freeholder and so it is reasonable for me to recover it from you". Rather, a tenant must justify the reasonableness of any service charge it passes on to sub-tenants and should, if necessary, make sure its landlord provides the necessary information to do so – preferably by requiring the landlord to do so in its lease to the tenant.
The tenant was therefore unable to recover from its sub-tenants the full amount of the service charge it had already paid to its landlord.
- A tenant passing on service charges (charged to it by its own landlord) to its residential sub-tenants should ensure it can prove the service charges are reasonable, if necessary by obtaining the information it needs from the landlord
Case ref: Balkhi v Southern Land Securities Ltd  UKUT 239
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