Guide To The Recovery Of Residential Service Charges

GUIDE TO THE RECOVERY OF RESIDENTIAL SERVICE CHARGES

Service charges are one of the principal areas for dispute between long leaseholders and their landlords.

The Commonhold and Leasehold Reform Act 2002 empowers leaseholders in this area, giving them wide-ranging rights to challenge unreasonable charges, inspect documentation, apply for a management audit, seek the appointment of a new manager etc. The new provisions place greater administrative burdens on landlords, management companies and managing agents, who ignore the obligations at their peril.

Definition of service charge
Service 18(1) of the Landlord and Tenant Act 1985 (as amended by the Commonhold and Leasehold Reform Act 2002) defines a service charge as an amount payable by a tenant of a dwelling as part of or in addition to the rent:

1. which is payable, directly or indirectly, for services, repairs and maintenance, improvements or insurance or the landlord's costs of management; and

2. the whole or part which varies or may vary according to the relevant costs."


Pre-conditions for the recovery of service charges
Landlords of residential premises should be aware that there are a number of steps and procedures which need to be followed before service charges are deemed to be properly due:

Notices to accompany demands
Section 47 of the Landlord & Tenant Act 1987 provides that any written demand given to a tenant must include the name and address of the landlord/or managing agent. The charges will not fall due until such a notice is given.

Section 48 of the Landlord & Tenant Act 1987 also provides that no rent or service charge will be due from the tenant unless the landlord has served a written notice giving the tenant an address in England and Wales at which notices can be served on the landlord.

Section 153 of the Commonhold and Leasehold Reform Act 2002 requires a landlord to provide with every demand for payment a summary of the tenant's rights and obligations in relation to service charges.


Regular statements of account
Section 152 of the Commonhold and Leasehold Reform Act 2002 imposes a requirement for landlords to issue regular accounting statements.

Landlords are obliged to supply a written statement not later than 6 months after each accounting period. The statement should summarise the total expenditure for the block and the amount payable by the tenant. The statement of account must also be certified by a qualified accountant and be accompanied by a summary of the tenant's rights and obligations.

The tenant is given the express right to withhold payment of service charges if the landlord fails to comply with these requirements.


Consultation procedures for major works
The consultation procedure under Section 20 of the Landlord and Tenant Act 1985 was amended by section 151 of the Commonhold and Leasehold Reform Act 2002, making the procedure more complex and onerous for landlords.

In summary, where a landlord proposes to carry out works of repair, maintenance or improvement which will cost a tenant more than £50, it must serve a notice on each leaseholder (and on the secretary of any recognised tenants' association ("RTA")) which:

The leaseholder (and the tenants' association) has a period of 30 days in which to send their observations to the landlord and, if they wish, to nominate an alternative contractor of their choice.

Where the leaseholders or the tenants' association have nominated a contractor, the landlord must try to obtain an estimate from that contractor and must include this in the estimates submitted or made available to the leaseholders. If more that one nomination of an alternative contractor is made, then the landlord must try to obtain an estimate from:

1. the person who received the most nominations; or
2. if two or more people received the same number of nominations, then he can seek an estimate from any one of these nominees;
3. if neither (1) or (2) applies, then he must obtain an estimate from any nominee.

After this, the landlord must supply to the leaseholders (and the RTA) at least two estimates for the proposed works. Alternatively, it may make the estimates available for inspection by the leaseholders and the secretary of the RTA. One of the estimates must be from a contractor whoilly unconnected with the landlord.

Again, the landlord must invite observations and it must have "have regard to" the observations it receives. This does not mean that the landlord is obliged to follow or act on the comments, but if later challenged on the reasonableness of the costs, it will need to show that it paid regard to observations or justify why it did not do so.
In the event that any leaseholder or the RTA makes any observations or nominates an alternative contractor, then as soon as reasonably practicable after entering into the contract, the landlord must serve further notices on all previous recipients stating its reasons for awarding the contract, a summary of any observations received and the landlord's response to those observations. Alternatively, instead of serving notice, the landlord can specify the place and hours at which a statement of those reasons may be inspected.

In cases where the works are considered urgent, e.g. a leaking roof or a dangerous structure, or in other cases where the landlord wishes to proceed quickly, the landlord may apply to the Leasehold Valuation Tribunal for an order to dispense with the consultation procedure. In such a case, the LVT will notify all service charge payers of the proposal.

If the landlord fails to carry out the consultation process in the correct form and has not sought a dispensation from the LVT, it will be unable to recover the cost of the works from the leaseholders beyond the statutory limit of £250 per leaseholder.


Consultation on long-term agreements
Similar consultation procedures apply where a landlord proposes wishes to enter into an agreement for works/services (e.g. lift maintenance, gardening or cleaning services), if the agreement is likely to last longer than 12 months and any tenant will be expected to pay more than £1000 per accounting period.

Again, the process is initiated by service of a notice on each tenant and on the secretary of any RTA. The notice will describe the proposed agreement and why it is deemed necessary, or provide details of where this information can be inspected. The notice must invite comments and observations in writing within a 30 day period, which must also include an invitation to tenants to nominate a person from whom the landlord should try to obtain an estimate.
At the end of the 30 day period, the landlord must obtain at least two estimates. At least one estimate must be from a contractor unconnected with the landlord. The landlord must obtain an estimate from any person nominated by the tenants or the RTA.

At least two proposals must be prepared for inspection, containing details of:

Notice in writing of the proposals must then be given to each tenant or details provided of where these can be inspected. Again, comments are invited within a 30 days period and the landlord must have regard to any observations received.

Save in the event where the landlord chooses a nominated person or the lowest estimate, it must (within 21 days of entering into the agreement) send a written notice to the tenants specifying reasons for its choice and a summary of observations and responses, or else stating an address and hours at which this information can be inspected.
The consultation requirements for long-term qualifying agreements are in addition to the requirements for works. Landlords now have to anticipate in advance any contracts where the term will last for more than 12 months and allow enough time to carry out the consultation.

Contracts that are on a rolling monthly basis may be caught by the consultation requirements and, if in doubt, landlords should err on the side of caution. Landlords should review at an early stage requirements for works and contracts, to identify works or agreements that may need consultation. To fail to do so may mean that the landlord is severely limited in the costs which it can recover from its tenants - £100 per tenant in the case of long-term agreements and £250 per tenant in the case of ordinary works.


Limitation Periods
It is important for landlords to give their residential tenants notice of costs which will be demanded more than 18 months after the costs have been actually incurred, as section 20(b) of the Landlord & Tenant Act 1985 prohibits such costs from being payable unless the tenant was properly informed of the anticipated charges. A landlord should ensure that written notices are served on its tenants, specifying the amount of costs which will be incurred.


Entitlement to recover service charges

Contractual provision
The key to levying a service charge is derived from the lease and landlords should ensure that there is specific provision to recover such costs from the tenants. The charges must be contractually due before the issue of reasonableness can even be considered.

Most leases contain a detailed definition of the items of expenditure permitted within the service charge. There may be specific wording, setting out quite precisely the works or services to be chargeable, or else the clauses may be very general, simply referring to costs of the repair and maintenance of the structure of the building.

Case-law gives some guidance as to the provisions needed to recover costs in relation to the following matters:

Test of reasonableness
Although a landlord is not usually bound to minimise the costs incurred, all service charges must be reasonable, but both landlords and tenants have a right to apply to the County Court or to the Leasehold Valuation Tribunal to determine whether a charge or a proposed charge is reasonable.

Under the 2002 Act, tenants may make such an application irrespective of whether the charge has already been paid, as any payment does not constitute an admission that it is properly due.

For further information or advice please contact propertylitigation@charlesrussell.co.uk

These notes represent only an outline summary of relevant principles and detailed advice should always be sought in particular cases.