In the ongoing evolution of Landlord and Tenant law there have been many new Acts of Parliament which are not only lengthy but also come with a number of Statutory Instruments (secondary legislation) attached to them. The long leasehold sector has seen many such Acts, with 5 specifically concerned with the management of blocks of flats: the Landlord and Tenant Act 1985, and the Landlord and Tenant Act 1987, (both of which specifically cover the rights of leaseholders in relation to service charges under the terms of their leases) the Leasehold Reform, Housing and Urban Development 1993, the Housing Act 1996, and the Commonhold and Leasehold Reform Act 2002. There has also been the newer Act, that of the Leasehold Reform Amendment Act 2014.
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
Statutory Control of Service Charge Recovery
The relevant section under the Landlord and Tenant Act 1985 is as follows:
s21b (notice to accompany demands for service charges) which stipulates that every demand for service charge must be accompanied by a written summary of rights and obligation which is a prescribed form and reads as follows:
This summary which briefly sets out your rights and obligations in relation to variable service charges must by law accompany a demand for service charges.
Unless a summary is sent to with a demand, you may withhold the service charge.
The summary does not give a full interpretation of the law and if you are in any doubt about your rights and obligations you should seek independent advice’.
Reasonableness of Service Charges
Your lease sets out your obligations to pay service charges to your landlord in addition to your rent. Service Charges are amounts payable for services, repairs, maintenance, improvements, insurance or the landlords’ costs of management to the extent that the costs have been reasonably incurred.
Liability to Pay
You have the right to ask a leasehold valuation tribunal to determine whether you are liable to pay service charges for services, repairs, maintenance, improvements, insurance or management.You may make a request before or after you have paid the service charge. If the tribunal determines that the service charge is payable, the tribunal may also determinewho should pay the charge and who it should be paid to, the amount; the date it should be paid by and how it should be paid. However, you do not have these rights where a matter has been agreed or admitted by you, a matter has already been, or is to be referred to arbitration, or has been determined by arbitration and you agreed to go to arbitration after the disagreements about the service charge or costs arose or a matter has been decided by the court;
Legal Costs Recoverable as Service Charges
If your lease allows your landlord to recover costs incurred or that may be incurred in legal proceedings as service charges you may ask the court or tribunal, before which those proceedings were brought, to rule that your landlord may not do so.
A Determination from the First Tier Tribunal
Where you seek a determination from the FTT, you will have to pay an application fee and, where the matter proceeds to a hearing, a hearing fee, unless you qualify for a waiver or reduction.The total fees payable will not exceed £500, but making an application may incur additional coasts such as professional fees which you may also have to pay.
Costs Awarded by The First Tier Tribunal
A leasehold valuation tribunal has the power to award costs, not exceeding £500, against a party to any proceedings where it dismisses a matter because it is frivolous, vexatious or an abuse of process or it considers a party has acted frivolously, vexatiously, abusively, disruptively or unreasonably. The Lands Tribunal has similar powers when hearing an appeal against a decision of a leasehold valuation tribunal.
Major Works and Qualifying Long Term Agreements
If your landlord proposes works on a building or any other premises that will cost you or any other more than £250 or proposes to enter into an agreement for works or services which will last for more than 12 months and will cost you or any other tenant more than £100 in any 12 month accounting period, your contribution will be limited to these amounts unless your landlord has properly consulted n the proposed works or agreement or a leasehold valuation tribunal has agreed that consultation is not required;
You have the right to apply to the First Tier Tribunal to ask it to determine whether your lease should be varied on the grounds that it does not make satisfactory provision in respect of the calculation of a service charge payable under the lease
Written Summary of Service Charge Costs
You have the right to write to your landlord to request a written summary of the costs which make up the service charges.The summary must cover the last 12 month period used for making up the accounts relating to the service charge ending no later than the date of your request, where the accounts are made up for 12 month periods or cover the 12 month period ending with the date of your request where the accounts are not made up for 12 month periods. The summary must be given to you within 1 month of your request or 6 months of the end of the period to which the summary relates, whichever is the later.
Inspecting the Accounts
You have the right, within 6 months of receiving a written summary of costs, to require the landlord to provide you with reasonable facilities to inspect the accounts, receipts and other documents supporting the summary and for taking copies or extracts from them.
You have the right to ask an accountant or surveyor to carry out an audit of the financial management of the premises containing your dwelling, to establish the obligations of your landlord and the extent to which the service charges you pay are being used effectively.It will depend on your circumstances whether you can exercise this right alone or only with the support of others living in the premises.You are strongly advised to seek independent advice before exercising this right.
Note: The prescribed information for administrative charges is similar and it is advisable to follow one summary with the other to accompany demands.
Your lease may give your landlord a right of re-entry or forfeiture where you have failed to pay charges which are properly due under the lease.
However to exercise this right the landlord must meet all the legal requirements and obtains a court order. A court order will only be granted if you have admitted you are liable to pay the amount or it is finally determined by a court, tribunal or by arbitration that the amount is due.The court has a wide discretion in granting such an order and it will take into account all the circumstances of the case.The prescribed information for administrative charges is similar and it is advisable to follow one summary with the other to accompany demands.
Relevant sections under the Landlord and Tenant Act 1987 are as follows:
- s47 (landlord’s name and address to be contained in demands for rent etc.);
- s48 (notification by landlord of address for service of notices) which stipulates that all rent/service charge demands must state the name and address of the landlord and supply an address for service in England and Wales.
Additionally the Landlord and Tenants (Notice of Rent) (England) Regulation 2004 states that rent will not be due until such time as a prescribed notice has been served on the leaseholder
Service Charge Monies to be held in Trust
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.