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.
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.