Friends Life Management Services Ltd v A & A Express Building Ltd (2014)


The court set out how the service charge payable for the last accounting period of a commercial lease should be calculated.


The claimant tenant (F), which had been party to a commercial lease in respect of which the defendant (L) was the landlord, sought a determination of the service charge payable for the last accounting period under the lease.

The lease, which related to office premises and a car park, had been determined on March 24, 2010. Thereafter, in 2010 and 2011 L procured the carrying out of major works to the premises at a cost of £1,046,691.36. In a number of years, L had included in the service charge accounts a sum which did not relate to actual expenditure in the service charge year but which was included by way of a provision for anticipated expenditure on services in future years; such sums amounted to £875,000 in total. The computation of the service charge depended in part on the gross annual expenditure incurred. Such expenditure was defined in the lease as "the aggregate of (a) all reasonable and proper costs fees expenses and outgoings actually incurred by [L] during the Financial Year in or incidental to providing all or any of the Services ... (b) all such reasonable and proper fees expenses and outgoings actually incurred by [L] in the previous Financial Year and not previously taken into account in calculating Gross Annual Expenditure and (c) such reasonable and proper sums as [L] shall in its reasonable discretion consider appropriate to charge in that Financial Year by way of provision for anticipated expenditure in any future Financial years in respect of any of the Services ... ". The provisions in the lease dealing with the payment of the service charge contained a clause (para.1.2 of the Third Schedule) reading as follows: "[F] shall pay by four equal quarterly payments in advance on the Payment Days for the next and each subsequent Financial Year a provisional sum calculated upon a reasonable and proper estimate by [L] supplied in writing to [F] of what the Annual Expenditure is likely to be for that Financial year".


The lease provided for there to be three stages of accounting or computation. The first involved the preparation of a certified account showing, for a relevant financial year, the amount of the gross annual expenditure, the amount of the annual expenditure and a summary of the relevant expenditure. The second stage involved an apportionment of the annual expenditure in relation to the premises and of the annual expenditure in relation to the car park. The third stage involved a comparison between the amount of the service charge for the financial year and the amount of the provisional sum for that financial year. F's liability should be computed as follows. A certified account should be prepared for the year to December 31, 2010, being the financial year for the last accounting period under the lease. The costs actually incurred on the major works in 2010 should be included. The costs incurred on the major works in 2011 were not to be included. All other costs qualifying under paras (a) or (b) of the definition of gross annual expenditure should be included. Credit should be given for the sum of £875,000. Those steps would identify the gross annual expenditure. It seemed that no sums were to be deducted from the gross annual expenditure to arrive at the annual expenditure, so that the figure for gross annual expenditure would also be the figure for annual expenditure. The resulting figure for the annual expenditure should be apportioned at the second stage of the computation. The fraction of 83/365, representing the period from January 1 to March 24, 2010, should be applied to the apportioned figure. The resulting figure should be compared with the provisional sum charged to F under para.1.2 of the Third Schedule, and any overpayment made by it should be repaid (see paras 19-20, 22, 24, 68 of judgment).

Judgment accordingly