Service Charges and Other Ongoing Leasehold Costs
Service charges are paid by leaseholders to the freeholder/managing agent for the repairs, health and safety and maintenance of the common areas (which are areas not owned by individual leaseholders). They are also used for the services of a managing agent and the costs of any and all risk assessments. The costs 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.
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.
Service charges will be fixed or variable and are usually payable in advance because most leases require 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.
When leaseholders who pay variable service charges 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).
However, if the service charges are fixed but considered too high, then unfortunately the First Tier Tribunal don’t have any power to determine 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 in order to spread the cost is that of major works.
MONEY MAKING DOCUMENT
What most people aren’t aware of is that long leases were created as a money making mechanism for freeholders at the expense of leaseholders. So, in addition to the paying of service charges there are 4 main areas of the lease that allow money to be made from leaseholders:
- Lease Extensions Leases on new builds that are written up for 99 or 125 years have to be extended when they reach below 80 years left unexpired to a) reverse the loss of capital value to make it far more likely to reach it’s true market value and b) make it more saleable. An extended lease can also secure funding which would not be possible if the lease only had around 60 unexpired years left on it.
More on lease extensions can be read here.
- Buildings Insurance Leases are not written to allow leaseholders to choose their own buildings insurer, thereby allowing freeholders to gain commissions from the brokers which they don’t pass on to the leaseholders (who pay for the privilege).
More on buildings insurance can be read here.
- Ground Rent This is where the most money can be made. There has been nothing less than outrage where it has not been spotted that ground rents rise significantly over a regular period, actually making properties unsaleable.
- Administration Charges This is where charges to the leaseholder are neither ground rent or service charges but cover consents granted by the freeholder.
More on administration charges can be read here.
This is why there has been so much legislation introduced over the years to balance the rights of leaseholders with that of freeholders but this will not work for two reasons: firstly leasehold tenure is ‘cut’ from freehold tenure which will always make it the lesser tenure and secondly, the fact that property is an asset class has allowed the rights of the freeholder to make a profit overwhelm the cornerstone of leasehold which is ‘reasonableness’.
Due to the forthcoming election, the All Party Parliamentary Group on leasehold reform has now been disbanded although the pressure groups remain convinced that leasehold will still be a key part of election manifestos.