Service charges are paid by leaseholders to the freeholder/managing parties for the management of the common areas. These are areas not owned by individual leaseholders and cover the building structure, the land the building stands on, gardens, paths, garages and any outbuildings. Service charges also include paying for the buildings insurance.
Service charges will be fixed or variable and are usually payable in advance because most leases need leaseholders to pay charges ‘on account’ for expenditure during the course of the financial year. So the year-end accounts are usually prepared on an accrual and prepaid basis. Accruals are items where expenses have been incurred during that period or year end where a) the benefits have already been taken by the company but the payments have not yet been paid, or b) services which have already been provided but payment has not yet been received. Prepayments occur when a debt or installment payment is made before its official due date and can be for the entire balance or for any upcoming payment that is paid in advance of the date for which the borrower is contractually obligated to pay it.
All variable service charge payments held by the Resident Management Company (or the managing agent) must be held ‘in trust’ under s42 of the Landlord and Tenant Act 1987 with s42a of that Act stating that service charge contributions are held in a designated account. Such accounts must contain the words ‘trust’, ‘client’ or the property name in the bank account title and they must not be mixed up with the business accounts of whoever is holding them.
The costs incurred by the freeholder must be reasonable under s19 of the Landlord and Tenant Act 1985 (limitation of service charges: reasonableness) which rules that service charges are only payable to the landlord to the extent that they are reasonable.
If variable service charge payers feel the amount they are paying is unreasonable, they have the right to take their complaint to the First-tier Tribunal (Property Chamber) in England (or the Leasehold Valuation tribunal in Wales). When determining whether service charge costs have been reasonably incurred there is no restriction on what can be taken into consideration and again, any increase in service charge payments instigated by the landlord must be reasonable.
However, if the service charges are fixed but considered too high, then unfortunately the First Tier Tribunal don’t have any power to decide how much is payable. The only possible option available here is apply to have the leases varied which depends on certain criteria being met.
Note: The only area that service charge payments cannot be phased to enable the spreading of the cost is that of major works.
There are only two officially recognised ways in which service charges (and administration charges) can be withheld. One is where the service charge demand has been sent without containing the address of the landlord under s1 of the Landlord and Tenant Act 1985 (disclosure of landlords identity) and under which leaseholders have the right to ask for it. The managing agent has 21 days to reply. Under s2 of the same Act (disclosure of directors and corporate landlord) leaseholders also have the right to ask for the name and address of every Director and the company Secretary. This is also amended in s47 of the Landlord and Tenant Act 1987 (landlords name and address to be contained in demands for rent etc) and s48 of that same Act (notification by landlord of address for service of notices), regardless of whether leaseholders only deal with a managing agent. Payment can be withheld until the landlord complies and any provisions in the lease regarding non-payment or late payment do not have effect as long as the landlord remains in breach.
Should the freeholder change then all leaseholders have the legal right to receive notice of such a change (to again include an address) under s3 of the Landlord and Tenant Act 1985.
No Summary Of Rights And Obligations
The other legally recognised reason to withhold payment of service charges is if, under s21B of the Landlord and Tenant Act 1985 and s153 of the Service Charges (Summary Of Rights And Obligations And Transitional Provision) (England) Regulations 2007 a demand for service charges is not accompanied by a summary of the rights and obligations of the leaseholder.
Since 2007 leaseholders have also been legally entitled to withhold administration charges from the landlord if they fail to provide a summary of their rights and obligations. A landlord will not be able to apply to the First Tier Tribunal to dispense with the requirement to serve these summaries and any clauses of the lease relating to non-payment or late payment (i.e. interest charges etc) are deemed to have no effect during the period that administration charges are withheld.
CAN’T PAY OR WON’T PAY
There are two distinct categories for leaseholders who fall behind in their service charge payments:
1: Some can’t pay because they have hit financial difficulties resulting from a number of issues such as being made redundant, suffering ill-health or both. Falling into arrears in this kind of situation is theoretically no different to falling behind in paying a mortgage or credit card. You agree take on the responsibility at the time (in this case when you buy a leasehold flat) but a serious change in circumstances further down the line may well put your ability to continue to meet your obligations into the waste bin.
We unfortunately fall into this category due to the long term ill health of my partner. Our managing agent gets regular e-mails about our financial state, and my partners health (sick certificates and hospital release forms) and we also have a charge placed against our property.
2: The second (and the absolute worst) are those that simply don’t want to pay. They don’t offer any explanation, and they don’t use their right to challenge the charges through the courts if they feel them unreasonable. They keep asking all sorts of questions or request information that has already been sent (as delaying tactics) and they may also enter into a payment plan but renege on it, again with no explanation. They may even pay simply when they feel like it!
In this particular situation we have a leaseholder who is a serial non-payer. Whilst his lender has paid for one lot of arrears he has simply accrued another lot, forcing the recovery process to be started all over again!
My advice would be that if lessees fall into the first category, they should tell the freeholder or managing agent! Unless these parties are advised, they will continue to send out demands (which usually contain a threat of legal action) without having the slightest idea what the lessees are having to deal with and as a result inadvertently worsen their already existing conditions!
If the inability to pay is very short-term, again, tell the relevant parties. You will likely be able to arrange a payment plan to take off the heat!