IS A SURPLUS FROM A FIXED SERVICE CHARGE THE LANDLORD’S?
In my recent article on Arnold v Britton in the Landlord & Tenant Review, I only had space to allude briefly to the question of whether a surplus from a fixed service charge accrues to the landlord but the answer is by no means as clear as a casual look at Woodfall would suggest. The decision of Walton J in Frobisher (Second Investments) Ltd v. Kiloran Trust  1 WLR 425 is often cited as authority for the proposition that a landlord has an absolute right to any surplus but the case actually decided that any right of recoupment rested in contract rather than trust: see 430B.
It is true that in Arnold v Britton on the first appeal Morgan J and in the Court of Appeal Davis LJ expressed the view that if payments made under the fixed service exceeded the amount of the landlord’s expenditure, the benefit of any surplus would accrue to the landlord for her own benefit but their comments, strictly, were obiter and are contrary to the Court of Appeal’s decision in Brown’s Operating System Services Ltd v. Southwark Roman Catholic Diocesan Corporation  EWCA Civ 164,  L&TR 25.
The contrary view was also expressed in Friends Life Management Services Limited v. A & A Express Building Limited  EWHC 1463 (Ch), which is notable for being a decision of Morgan J, who decided in that case that a landlord is not necessarily entitled to retain surpluses for his own use: see 43.
Whether a contractual right to retain a surplus exists would appear to depend on the particular terms of the lease in question, although this is bound to be something that will be tested in future litigation.
A big problem for tenants would appear to be that if a right of recoupment is found to exist in their favour, on existing case law, it would appear to arise only at the end of the lease, which would make any right to recoupment problematic even in a lease of relatively short duration, not least because a lessee would lose the right in the event of a lease’s being terminated prematurely, for example by reason of a tenant’s breach of covenant — see Brown’s Operating System Services per Smith LJ 33.
Insofar as a right to recoupment may rest on an implied term, the ability to imply a term in a lease has recently been the subject of argument in the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited. The point under consideration was whether a term could be implied to entitle a tenant to a repayment of rent paid before but partially attributable to a period after the tenancy had been determined by the exercise of a break clause.
The submissions can be viewed at https://www.supremecourt.uk/watch/uksc-2014-0158/071015-am.html.