Service charge is the cost payable by a leaseholder to the landlord for the services the landlord provides under the terms of the applicable lease.
It will usually vary from year to year, depending upon the actual costs that the landlord incurs. The service charge is usually divided between all of the leaseholders according to the lease terms or generally accepted practice of apportionment.
What are examples of service charges?
These can include maintenance and repair and sometimes the improvement of the exterior, roofs, foundations, window frames, and common areas, amongst others. They also include the insurance of the building and the cost of its management. Leaseholders should carefully check their lease for the full details of the service charge payable and the full extent of their contractual obligation.
When are service charges payable?
The applicable lease will state when the service charge is due. It is most frequently payable yearly or twice yearly, or sometimes on the “Quarter Days.”
Most modern leases allow the service charge to be payable before the landlord incurs the costs, based on an estimate of costs for the coming year. Some older leases will only allow recovery in arrears, so the landlord will have to incur the cost first before demanding recovery.
What are estimated costs and final accounts?
The lease may state that the landlord must estimate what it will spend in the coming year. If this is the case, most leases require the landlord to produce an end-of-year statement of account of what it has actually incurred. Sometimes, the lease requires that this account be audited or certified by an accountant or other professional, and this is known as a reconciliation.
If the end-of-year account shows that the landlord has spent more than it estimated, the lease will normally allow him to recover the shortfall from the leaseholder via a balancing charge. If it has spent less than it estimated, the lease may state that a credit for the overpayment should be carried forward, or occasionally, the lease may say it is to be returned to the leaseholder or retained in a “reserve fund”.
What are reserve or sinking funds?
Some leases allow the landlord to demand an advanced contribution towards planned, extensive works via the service charge. The purpose is to build up a fund to pay for future, large-scale works, such as lift or roof replacement. This means that the leaseholders will not face such a large one-off bill when the work becomes necessary.
NB. It is important to know that if a leaseholder intends to sell their flat, unless they agree to the contrary with the buyer, the leaseholder will not receive any of this contribution back.
Reasonableness and the Tribunal
The Landlord and Tenant Act 1985 states that a service charge is only recoverable by a landlord so far as the costs have been reasonably incurred. It also states that it is only recoverable if the works carried out are of a reasonable standard.
A leaseholder can challenge the reasonableness of a service charge by applying to the appropriate Tribunal. The Tribunal has the power to rule on how much of any service charge is reasonable and payable by the leaseholders.
What is a service charge demand?
When a landlord demands a service charge, the demand must contain the landlord`s name and address and include a “summary of leaseholders’ rights and obligations.” If the demand does not comply with either of these requirements, the leaseholder can lawfully refuse to pay until the service charge is demanded in the correct form.
Do service charge monies need to be held “on trust” for leaseholders?
The law states that any service charge contributions are held on trust by the landlord for the leaseholders. This means that the money must be held (in one or more accounts) and used for the purposes set out in the lease. If the landlord becomes insolvent, such money is protected for the benefit of the leaseholders.
What is the imitation period for recovery of service charge costs?
Section 20B of the Landlord and Tenant Act 1985 states that a landlord cannot recover service charge costs that were incurred more than 18 months before any formal demand was issued in respect of them. The exception to this rule is if the landlord has written to the leaseholders, within 18 months of incurring the costs, informing them that he has incurred those costs and that they will be demanded in due course.
Case law suggests that costs are “incurred” when the landlord pays them or becomes liable to pay them (within whatever credit terms are agreed).
Major works and consultation
If a landlord proposes to carry out works that will cost any one leaseholder more than £250, it is required to go through a consultation procedure under section 20 of the Landlord and Tenant Act 1985. This process involves providing leaseholders with notices, allowing them to make observations on the proposals, and sometimes nominating a contractor from whom the landlord is to try to obtain an estimate. The landlord must also notify leaseholders of the estimates.
The major works charge is still a service charge and, therefore, must comply with the reasonableness requirement mentioned above.
