Service and Administration Charges
Service charges: the lifeblood of leasehold flats and houses and essential for the repairs and maintenance of the building. They are broken down into 3 main areas:
- Day to day expenditure such as the heating and lighting of the common parts, cleaning, buildings insurance, salaries and management fees all of which are payable every year;
- Cyclical expenditure such as external redecoration;
- Periodic long-term expenditure which is usually major spending on infrequent problems such as lift or roof replacement.
Monies held for period long-term expenditure are usually held separately in either reserve or sinking funds, and an overview of both can be found here.
There are 5 main Acts of Parliament relating to block management and with regard to service charges, the Landlord and Tenant Act 1985 is the first Act which forms the framework for the rights of leaseholders under the terms of their leases. It was expanded by the Landlord and Tenant Act 1987 and an overview of these and the other 3 Acts can be found here.
Another area of service charge control is set out by the ICAEW Tech 03/11 Residential Service Charge Accounts which is now recognised as best practice and included in the RICS Service Charge Residential Management Code and Additional Advice 3rd Edition.
Landlords are usually permitted under the terms of many of their leases to recover from the leaseholder payments that are neither ‘rent’ or ‘service charges’ but before this area was regulated this made such charges a) open to abuse as freeholders could charge what they liked beyond the interpretation of ‘reasonableness’ and b) difficulties for the leaseholder in challenging those charges as the FTT (formerly the LVT) had no jurisdiction to deal with them. Parliament again had to redress another problem relating to the balance of power between leaseholders and freeholders and so they introduced new protections for the leaseholder under Schedule 11 (s158) of the Commonhold and Leasehold Reform Act 2002. This put such charges under a new legal category, that of administration charges. Additionally, since the 2002 Act came into force it has become possible to levy variable administration charges for breaches of a lease, such as late payment, even if the lease does not specify this.
When advising a leaseholder of an administration charge it is necessary to ensure that the leaseholder also receives a notice of the Tenant’s Rights and Obligations (Administration Charges).
Fixed or Variable?
Administration charges will either be ‘fixed’, which means they are calculated according to a formula or ‘variable’. If leaseholders want to challenge the reasonableness of fixed charges the only way they can do so is to apply to the First Tier Tribunal for a lease variation on the grounds that either the calculation formula is unreasonable or the administration charge specified in the lease is unreasonable. If they feel the variable charges are unreasonable then under s158 Schedule 11 of the 2002 Act, leaseholders have the right to ask the First Tier Tribunal whether they are payable. The request can be made before or after payment because the FTT doesn’t presume that simply because the charge has been paid that the issue of reasonableness doesn’t arise. If the Tribunal determines that the charge is payable it may also determine:
- Who should pay it;
- Who it should be paid to:
- The amount;
- The date it should be paid by;
- How it should be paid.
The process for setting the service charge budget can be read here.