Service charge covering legal fees

[wade]

The situation is as follows:

Block of 9 flats.

The landlord is a company consisting of five of the leaseholders.

There has been a falling out with one of the director/tenant which necessitated a reference to the LVT by the Landlord for certain repairs, sinking fund and an amout as a reserve against the anticipated costs of the necessary application to the LVT.

The award held that the Landlord could recover through the service charge for certain repairs and for a sinking fund.

However a lot of money was spent on legal fees by the Landlord and prior to the hearing the legal fees were paid by the Landlord out of funds of the tenants. Since then further legal fees have been incurred and the matter is obviously going to drag on for a long time.

The concern is that in the LVT award it states as follows

The Tribunal was not persuaded that paragraph 15 of the Sixth Schedule of the lease, relied on by the applicants, allowed these costs to be collected in advance of their expenditure. Under the lease such costs are to be borne by the applicants unless or until they are found to be reasonable and reasonalby incurred since, perhaps they demonstrate a failure of good management.

The directors do not appear to have obtained any specific written advice from the solicitor who conducted the case as to whether it was correct to have paid his bills prior to the LVT hearing from the tenants general funds or as to whether the tenants should be continued to be charged through the service charge for the continuing fees before the Landlord has actually paid the continuing legal fees. In other words the tenants are being asked to fund the past litigation and future litigation.

The simple question is whether the Landlord is entitled to do this or whether he has to fund the litigation himself and then seek to recover the same through the service charge once he has paid.

The Landlord seems to be saying that because the LVT award rejected an application under section 20C that this is sufficient for their purposes.

The legal fees are very substantial now and each of the tenant is being asked to find substantial amounts of money which is being put on their service charge three to four thousand pounds each.

I would be grateful for anyone thoughts from anyone or from anyone who has experienced this.

[jeffrey]

1. Which part of your post is the LVT's own words? Just the eighth paragraph beginning, "The Tribunal..."?
2. Does "the Applicants" mean the lessees who objected?
3. Why did L pay legal fees in advance, anyway? This is not usual practice for solicitors.

[jeffrey]

Also, please enlarge on eleventh paragraph ["The landlord seems to be saying..."]

[wade]

That was quick

1. Yes these are the words of the tribunal

2. The applicant was the Landlord in fact.

3. Presumably the solicitor sent the Landlord bills prior to the hearing of the LVT and substantial bills and about ten thousand pounds was paid prior to the hearing and the balance another eleven thousand pounds after the hearing. There are five directors all tenants as well. There are two new tenant directors and now three directors who work together and present a common front. One neutral director/tenant and one director/tenant who wont pay anything since they object to the increased costs etc.

It seems that the legal costs were run up without anyone really considering the point but the LVT obviously put the bit in they did since while they okayed the repairs and the contribution to the service charge they were probably not too impressed about the way the Landlord went about it and thought the tenants should not have to pay for what may be a dispute between directors as to the level of service charge.

[jeffrey]

There are five directors all tenants as well. There are two new tenant directors and now three directors who work together and present a common front. One neutral director/tenant and one director/tenant who wont pay anything since they object to the increased costs etc.

5+2+3+1+1 makes twelve, but there's only nine flats!

[jeffrey]

Are there enough objectors to form a majority and force a vote to require that the legal fees be assessesd by the Solicitors Regulation Authority (= Remuneration Certificate)?

[wade]

Service Charge

Nine flats and nine tenants

Four tenants not directors

Five tenants directors of which two are recent tenants.

Of the three older tenant directors one has sided with the two recent tenants.

One neutral tenant director

One tenant director opposed to the three tenant directors.

Hopefully clear

[jeffrey]

Nine flats and nine tenants

Four tenants not directors

Five tenants directors of which two are recent tenants.

Of the three older tenant directors one has sided with the two recent tenants.

One neutral tenant director

One tenant director opposed to the three tenant directors.

Hopefully clear

So which is you?

[wade]

Recovery of legal fees through service charges

The solicitors are instructed by the Landlord but obviously by the majority three director/tenants.

They will not grant access to any of the other directors to the legal files despite numerous requests.

They paid the £10,000 prior to the LVT hearing without informing any of the other directors and / or the tenants and only provided even the information that the same had been paid on the second day of the LVT hearing.

They have settled the subsequent bills without really explaining anything.

The real question is whether they should have paid these bills out of the tenants service charge levied for other purposes and whether they can continue to include a provision for legal charges in future service charges.

The neutral director/tenant has requested that the directors obtain from the company solicitor written confirmation that everything has been done properly and legally in paying the previous legal fees from funds of the tenants and that asking the tenants for future provision for legal fees through the service charge is in accordance with the lease but he is simply shouted down when he raises the question.

It is clear of course that the director/tenants can do what they want with their service charge payments but not so clear that they can fund the balance of legal fees through the service charge. The opposing director/tenant has not made any payments for service charges and is being sued for inter alia their contribution to the legal fees so we will see what happens on that. However they have not paid the items that are clearly covered by the LVT award and for items that are clearly within the service charge so from that point of view they are not being very sensible. However where very soon the legal costs will outstrip the original amount that caused the problem one has to wonder if the three directors have not rather gone over the top. By the end of the year it could well be that £40,000 have been spent on legal fees in less than two years.

[wade]

I am the neutral director/tenant

I have warned all along that the legal fees is a problem and that the three directors cannot simply expect the tenants to bankroll the legal fees.

However as you can appreciate with the amounts of money involved people are losing touch with reality. Also the refusal of the three directors to obtain a written legal opinion setting out clearly that everything is tickety boo is astonishing indeed the request for such is not even put in the minutes.

However in a sense this is straying into company law. While I have made payment of service charge without prejudice to date I cannot see why I should not now simply refuse to pay anything in the service charge that is not allowable.

[jeffrey]

Do Company's Articles of Association entitle all lessees to be Directors, or is there a limit?

[wade]

No

Again the real question is can they include a provision for the legal charge in the service charge and were they right to use tenants funds not in fact collected on account of legal fees to have paid the legal fees last year.

My concern is that they should have funded the LVT reference themselves and then sought to recover it, not pay the legal fees out of the tenants funds and then expect the tenants to rubberstamp their actions since one tenant at least the opposing director/tenant refuses to pay for the legal fees and one can hardly blame him

[jeffrey]

Distinguish various issues which you are conflating.
1. Should service charge generally include all legal fees? Yes, it should.
2. Were the fees in this case properly incurred? Probably.
3. Were the fees in this case properly billed in advance? I doubt it.
4. Should the fees in this case have been paid in advance? No.
5. Were the solicitors acting lawfully? Don't know.
6. Did the Directors properly cause the Company to take LVT proceedings? We cannot say, from the information so far provided.
7. Should the Directors "have funded the LVT reference themselves", as you ask? No. If it was undertaken lawfully, the Company would be able lawfully to pay the fees from the service charge account. It is not necessary for all parties to be in favour of a decision; a majority vote is sufficient unless the Articles (or legal requirements, such as the Companies Acts) require unanimity or a specific affirmation (e.g. 75% vote in favour).

[wade]

Jeffrey

Having read what the Tribunal wrote in their award as to the application by the Landlord for a provision for legal fees do you think it was prudent for the directors to have already paid the solicitor £10,000 and £11,000 and to continue to make a provision in the service charge for the year ahead for future legal fees. The wording of the Award seems black and white. Do not use tenants funds for legal costs. Fund the litigation yourself and then seek to recover the legal costs.

If moreover there were any doubt would you not have thought that the sensible course for the board of directors was to have a letter from the company solicitor confirming that everything had been done legally etc. This would not seem too much to ask.

[jeffrey]

The wording of the Award seems black and white. Do not use tenants funds for legal costs. Fund the litigation yourself and then seek to recover the legal costs.

If moreover there were any doubt would you not have thought that the sensible course for the board of directors was to have a letter from the company solicitor confirming that everything had been done legally etc. This would not seem too much to ask.

1. Yes: the LVT probably meant that Co. taking action against a lessee in default should try to recover its costs from that lessee, not from s/c payable by all the lessees, but- generally- legal fees do come out of service charge colection otherwise.

2. Yes: prudence would point towards obtaining solicitor's written confirmation, as you say.