A recent case involved a typical office lease which allowed L to charge such sum ‘as L shall in its reasonable discretion think fit as being a reasonable provision for expenditure likely to be incurred in the future’. T paid money on account of future expenditure and when the lease ended there was a surplus of £15,500. T asked for it to be repaid, but L pointed out that there was no provision in the lease for repayment of moneys on termination. Moreover, a previous authority (Possfund [1997]) had held that unspent contributions to a depreciation fund (to meet the cost of replacing an air-conditioning plant) belonged to L, not T.

At first instance, the county court judge agreed with L, but that was reversed by the CA which made it clear it would not follow Possfund [1997]. In its view, the lease only allowed L to recover expenditure that was likely to be incurred during the course of the lease; that being so, once the lease ended, any unspent moneys were the property of T. Crucially, the lease did not make any provision for a reserve fund to be set up, and that, in turn, meant the moneys remained general service charge moneys that were available to meet any shortfall in normal service charge expenditure. In effect, the payments on account were merely means of ensuring that T did not suddenly have to pay any larger than normal sums, and the money was therefore held on account for T.

Needless to say, this is a common situation. In practice, everything depends upon the precise wording of the lease, but in general terms the starting point will be to check whether or not there is a reserve fund. If there is, then the likelihood is that the money will be regarded as belonging to L. On the other hand, if there is no reserve fund then, on the basis of this decision, the funds are likely to belong to T (unless there is some wording in the lease to the contrary). Moreover (to quote from an article in Property Week) ‘if they are not genuine reserve funds, L should ensure that they are spent on repairs before the lease ends so that L does not have to return them to T’! Brown’s v Southwark [2007] EWCA Civ 164 noted in [2007] SJ 390 and Property Week 23 March 2007.  © Practical Lawyer