The legislation that covers the rights of leaseholders under the terms of their lease in relation to service charges is that of the Landlord and Tenant Act 1985 and the Landlord and Tenant Act 1987 which expands on the framework of the 1995 Act.
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.
Service charges are the lifeblood of blocks of flats and leasehold houses and how these payments are used are broken down into 3 main areas:
- Day-to-day expenditure such as external lighting, security camera maintenance, drainage cleaning, buildings insurance, salaries and management fees all of which are payable every year and collected according to the terms of the lease;
- Cyclical expenditure such as external redecoration, according to the lease;
- Periodic long-term expenditure which is usually major spending on infrequent problems such as a lift or roof replacement.
Payable in advance or in arrears?
It will be the lease that will specify a) whether service charges are recoverable in advance or in arrears of the provision of works or services, b) whether they are to be collected on a regular basis and c) whether they are to be levied as costs arise. The most common provision for collection is where prescribed dates for payment (known as interim service charges) are typically required either twice or four times a year, usually around the ‘quarter days’ of 25th March, 24th June, 29th September, and 25th December.
If the service charges are collected in advance then under s19 of the Landlord and Tenant Act 1985 (limitation of service charge costs and ‘reasonableness’) then the amount payable must be reasonable. Such payments must be clearly presented against actual expenditure and the landlord must a) repay any excess paid or b) deduct it from subsequent charges once the costs have been incurred. The issue of ”reasonableness’ has three components:
- The service charge must be reasonably incurred;
- It must be reasonable in amount;
- The services are of a reasonable standard
Under s42 of the 1987 Act all variable service charge monies are to be held in trust, in ring-fenced designated bank accounts which must contain the words ‘trust’, ‘client’ or the property name in the bank account title. They must not be mixed up with the business accounts of whoever is holding them. Unless required by the lease, there’s no obligation to put reserve funds into separate bank accounts.
CAN’T PAY OR WON’T PAY?
When a landlord demands a service charge, whether directly or via a managing agent, it must contain the landlord`s name and address (because an agents name and address is not enough) and a ‘summary of leaseholders’ rights and obligations’. The law states that if the demand does not comply with either of these requirements, the leaseholder has a legal right not to pay unless and until the service charge is demanded in the proper manner.
Which brings us to the issue of arrears and whether the leaseholder can’t or won’t pay.
There are many reasons why lessees may find themselves in arrears, resulting in a breach of their lease. Changes in personal circumstance such as redundancy, being too ill to work, being on a low/fixed income or having no savings to fall back on means that they may not able to pay at any particular time. It is important that the freehold RMC or the managing agent is advised of any difficulties as soon as possible, particularly if the situation is likely to be ongoing for longer than first thought. Unless they are advised, they will continue to send out demands (which usually contain a threat of legal action) and administration charges, without having the slightest idea what the lessees are having to deal with and as a result inadvertently worsen their situation.
Regular updates should be provided and anything else that supports the situation such as sick certificates and GP letters. Copies of any hospital admittance and release forms should also be provided. Falling into arrears in this kind of situation is not a deliberate withholding of payment and so is not a deliberate breach of the lease covenant. In fact this is no different to a radical change in circumstances when a mortgage or a credit card is taken out as genuinely honest people enter into them in good faith.
Other reasons for falling behind could be:
- Leaseholders are disputing the service charges on grounds of validity, reasonableness or legality;
- When a leaseholder dies and the estate is being handled by family;
- Accounting failures such as where the incoming payments may have been posted to the incorrect leaseholder account;
- Demands incorrectly addressed;
- New leaseholders (or their solicitors) failing to serve the required notices stated by the lease during the conveyancing process.
There is also another reason for service charge arrears and and something our block has had considerable experience of. Leaseholders simply won’t pay! They don’t offer any explanation, they don’t use their right to challenge the charges and they deploy all sorts of delaying tactics such as continually asking for information despite records showing they have received it. Sometimes they may enter into a payment plan and make a payment but then renege on it, again with no explanation!
This is despite the fact that leaseholders have the right to challenge their service charges if they feel they are unreasonable, more on which can be read here.
Other Acts of Parliament relating specifically to block management are those of the Leasehold Reform, Housing and Urban Development Act 1993, the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002.