Service charge disputes continue to be one of the most common sources of disagreement between landlords and tenants in London. With rising maintenance costs, environmental upgrade obligations and major refurbishment projects taking place across the capital, many landlords rely heavily on service charges to recover the cost of works. However the law requires that these charges must be reasonable and directly linked to the services and responsibilities set out in the lease. The Upper Tribunal decision in Marlborough Knightsbridge Management Ltd v Daejan Investments Ltd provides an important illustration of how closely courts and tribunals scrutinise service charge demands and why landlords cannot assume that every cost they incur will automatically be recoverable.
This case is particularly relevant for commercial landlords and tenants in areas such as Canary Wharf, the City of London and West London where multi occupant buildings require extensive maintenance and refurbishment. The decision highlights the importance of transparency, consultation and evidence when carrying out substantial works that will form part of a service charge bill. It also reinforces that tenants have the right to challenge costs they believe are excessive or unnecessary.
Background to the Dispute
The dispute in Marlborough Knightsbridge Management Ltd v Daejan Investments Ltd concerned major works carried out by the landlord at a residential and commercial mixed use building in Knightsbridge. The landlord sought to recover the cost of these works through the service charge provisions in the leases. Daejan Investments Ltd which is well known for appearing in service charge litigation challenged the demands and argued that parts of the works were unnecessary, duplicated or carried out at an unreasonable cost.
The First Tier Tribunal agreed that certain elements of the works had been duplicated or were unnecessary. The landlord appealed to the Upper Tribunal but the Upper Tribunal upheld the decision and confirmed that landlords must not only follow statutory consultation procedures but must also justify that each element of the cost was reasonably incurred.
The Legal Test Applied by the Tribunal
Under section 19 of the Landlord and Tenant Act 1985 service charges are only recoverable to the extent that they are reasonably incurred. This test applies regardless of whether the landlord has complied with Section 20 consultation requirements. Even where consultation has been followed correctly, the landlord must still show:
• that the works carried out were necessary
• that the cost of the works was reasonable
• that the works were carried out to an appropriate standard
The Upper Tribunal reaffirmed that the test of reasonableness is objective. It does not depend on whether the landlord believed the works were necessary. Instead the tribunal evaluates whether a competent and prudent landlord would have incurred those costs.
In this case the tribunal found that certain parts of the works had been duplicated. For example some areas had been repaired and then later replaced despite the replacement not being strictly necessary. Other works were completed despite there being no clear evidence that the work would add value or prevent deterioration. As a result the tribunal reduced the recoverable service charge amount.
Why Duplication Matters
One of the most important aspects of the case is the tribunal’s approach to duplication. When landlords plan substantial works particularly major refurbishment schemes it is common for multiple contractors to be enlisted or for stages of work to overlap. However duplication can lead to inflated service charge claims and tribunals will not hesitate to make reductions where the landlord cannot justify why a second set of works was needed.
This is particularly relevant in commercial buildings where maintenance cycles are complex and where landlords sometimes adopt improvement works in the same programme as repair works. Improvements are not always recoverable from tenants unless the lease clearly allows it. If the landlord bundles improvement works into repair obligations without clarity those costs may be struck out entirely.
The Role of Consultation and Evidence
The Upper Tribunal confirmed that compliance with the statutory consultation process is not enough on its own. Consultation provides tenants with transparency but it does not guarantee that the underlying cost is reasonable.
Landlords must be able to show:
• a clear scope of works
• contractor quotations and comparative pricing
• reasons for selecting particular contractors
• evidence of value for money assessments
• clear documentation showing why works were required
In this case the tribunal considered whether tender documents and the landlord’s professional advice supported the scope and cost of the works. Where documentation was unclear or incomplete the tribunal took the view that the landlord had not justified the cost.
This case is a reminder to landlords that good record keeping is essential and to tenants that they are entitled to seek disclosure of documents if they intend to challenge a service charge.
Implications for Commercial Landlords in London
Commercial landlords in Canary Wharf and across London frequently undertake large maintenance and upgrade projects including façade repairs, HVAC system upgrades, lift replacements and energy efficiency works. These projects create significant service charge demands and tenants increasingly challenge these costs.
The decision in Marlborough Knightsbridge Management Ltd v Daejan Investments Ltd demonstrates that landlords must think carefully about:
• how they plan major works
• how they document decision making
• whether works fall within repair obligations rather than improvement schemes
• whether the lease wording clearly allows for the proposed expenditure
Landlords should also be mindful of the growing importance of environmental upgrades. While sustainability improvements may be beneficial they are not automatically recoverable unless the lease wording is broad enough to include them.
Why the Case Matters for Tenants
Tenants especially those with long leases often assume that they have little control over service charge demands. This case confirms that tenants can challenge unreasonable charges and can request evidence to show that the landlord acted competently and proportionately.
Commercial tenants in London should consider reviewing:
• the service charge provisions in their lease
• the landlord’s consultation notices
• the scope of works carried out
• the costs compared to market rates
• whether the works were necessary rather than cosmetic
If a tenant suspects duplication or unnecessary works there is a strong legal basis for challenge.
Conclusion
The decision in Marlborough Knightsbridge Management Ltd v Daejan Investments Ltd is an important reminder of how tribunals approach service charge disputes. It confirms that reasonableness is a strict test and that landlords must justify every element of expenditure. For landlords this means careful planning and evidence gathering. For tenants it reinforces the right to scrutinise and challenge service charge demands.
If you are a landlord or tenant in London or Canary Wharf and need advice on service charges, major works or commercial property disputes Penerley Solicitors can provide expert guidance. Contact us today to protect your position and ensure your commercial interests are supported by strong legal advice.
