Morshead Mansions Ltd v Mactra Properties Ltd

A service-charge lease requiring the landlord to furnish an account does not necessarily require full audited accounts prepared on an accruals basis. The required document must identify the expenses falling within the lease’s definition of recoverable expenses and the resulting service charge. Expenses are generally allocated to the year in which they are paid or become due for payment, subject to any contractual discretion to allocate periodically recurring expenditure between accounting years and to make reasonable provision for anticipated expenditure. A reserve fund is primarily a fund of actual assets and receipts, distinct from an accountancy construct. Difficulty in preparing reserve-fund information does not ordinarily excuse failure to provide the service-charge account.

The leaseholder of 19 flats sought specific performance of the landlord’s obligation to provide certified accounts of expenses and service charges for 2003 to 2007. The landlord contended that the lease required full accounts, including accruals-based balance-sheet and reserve-fund information, and relied on difficulties caused by the inadequate records of a former court-appointed manager.

The county court ordered performance of the accounting obligation and made a consequential costs order. The landlord appealed. The central issues were the true construction of the fourth and sixth schedules, the relationship between the service-charge account and reserve-fund statements, and whether the landlord had an arguable defence based on impracticability or the time needed to prepare the accounts.

1. Construction of the lease. The lease was to be construed as a whole, including the fourth and sixth schedules. The purpose of the fourth schedule was to identify the actual service-charge liability for an accounting year and to enable the landlord to recover expenditure paid or due for payment, together with permitted provisions for anticipated and periodically recurring expenditure.
2. The word “incurred” referred to an obligation which had become due for actual payment, rather than automatically importing a full accruals basis. The landlord or its accountants could allocate a reasonable proportion of periodically recurring expenditure to another accounting year, but the lease did not require full accounts. An item was not to be duplicated in different years.
3. The reserve fund under the sixth schedule was a fund of actual monies and other assets accumulated to meet specified future works. Paragraph 7 required a statement of its balance and actual income and expenditure in the same document as the service-charge account. Those statements were separate obligations, however, and inability to prepare reserve-fund information did not necessarily prevent provision of the account of expenses.
4. On the evidence, the landlord had no sufficient defence to summary judgment for 2004 to 2006. The difficulties relating to the former manager’s records, litigation, alleged obstruction and the director’s illness did not objectively make production of the accounts impracticable. There was, however, an arguable issue concerning 2003. The period from 31 December 2007 to commencement of proceedings was not a reasonable period for preparing the 2007 account, so summary judgment for that year was premature.
5. The appeal was allowed to the extent that the order was limited to accounts for 2004 to 2006. No summary judgment was entered for 2003, and the technical position concerning 2007 was recognised. Costs and the precise form of order were left for further determination if not agreed.

• Central London County Court: HH Judge Bailey made orders dated 29 September 2011 and 17 February 2012 requiring performance of the accounting obligation and dealing with costs.
• High Court (Chancery Division): The appeal was allowed in part. The order was upheld in substance for 2004 to 2006, but summary judgment was refused for 2003 and was premature for 2007.