A common element of property management that can often lead to disagreement between landlords and tenants is service charges. Service charges cover repairs, maintenance, and services for the property, and disputes are common because of a perceived lack of clarity or unexpected price increases.
What is a service charge?
A service charge is a payment made by a tenant to their landlord, usually in addition to rent, as a contribution to the costs incurred in providing services to a property. The lease will specify a list of services, which may be divided into services the landlord is required to provide and services the landlord may provide (but without being under any duty to do so). The tenant must reimburse the landlord through the service charge regime if the landlord provides these services.
A service charge is defined by s18 of the Landlord and Tenant Act 1985 as an amount which:
- Is payable by a tenant of a dwelling as part of, or in addition to, the rent.
- Is payable directly or indirectly for services, repairs, maintenance, improvements, insurance or the landlord's management costs.
- Varies, or may vary, according to the relevant costs.
What can a landlord recover as a service charge?
When considering whether a particular item of service charge is payable, it is first necessary to consider whether it falls within the service charge provisions in the lease.
Service charge clauses in leases are not subject to special rules of construction and the normal rules of contractual interpretation.
Leases often include "sweeper" provisions, which allow the landlord the flexibility to introduce additional services during the lease's term.
The Royal Institute of Chartered Surveyors has published the Service Charge Residential Management Code, which was approved by the Secretary of State under section 87(1) of the Leasehold Reform, Housing and Urban Development Act 1993 for England only.
The Code applies to leasehold properties where a service charge is payable, and the following sections are of particular interest:
- Part 6: Accounting for other people's money.
- Part 7: Service charges, ground rent and administration charges.
- Part 9: Repairs and other services.
- Part 12: Insurance.
- Part 13: Provision of information.
Compliance with the Code is not compulsory. However, it does include several requirements based on legislation. A breach of the Code is admissible as evidence in any civil proceedings. It may be taken into account by a tribunal or court when determining, for example, the reasonableness of service charge costs.
The Landlord and Tenant Act 1985 and the 1987 Act of the same name provide several key rights for residential tenants regarding service charges and administration charges.
These include:
- Landlords may only include costs in the service charge to the extent that they were reasonably incurred and the relevant works or services were carried out to a reasonable standard. The amount of any advance payment of the service charge must also be reasonable.
- Tenants can apply to the First Tier Tribunal (in England) to limit the landlord's recovery of litigation costs as service charges.
- Tenants do not have to pay service charges unless the landlord includes key information in the demand for those charges.
- Tenants do not have to pay service charges for costs that were not demanded within the statutory deadline (generally within 18 of incurring them).
- Tenants have the right to obtain information about costs that form part of the service charge.
- Landlords must hold service charge monies on trust for the contributing tenants.
- Landlords must consult with their tenants before entering into an agreement for more than 12 months or carrying out works where the costs involved exceed a certain threshold unless the landlord obtains a dispensation from the consultation requirements.
- Under s27A of the Landlord and Tenant Act 1985, tenants can apply to the First Tier Tribunal for a determination as to whether a service charge is payable.
What are common causes of service charge disputes?
- A failure to have consulted the leaseholders upon qualifying works, or qualifying long term agreements.
- The level of charge for a particular service.
- A failure to have provided a service, or the service to a reasonable standard.
- Whether a landlord's costs (for example solicitors fees) are recoverable.
- Previous defective works, or inherent defects in the property.
Can a tenant dispute a service charge?
Under s27A of the Landlord and Tenant Act 1985, tenants can apply to the First Tier Tribunal for a determination as to whether a service charge is payable.
There may be several challenges around the reasonableness of the costs (both as to the level and inclusion at all), the provision of information, or a failure to consult.
Does the lease allow recovery?
The extent of each parties rights and obligations should be expressly stated within the lease. Certain statutory obligations may be implied.
Recovery is generally a matter of contract, and in the absence of a specified right, the claiming party will need to establish the right by other means.
Does the charge relate to the correct period of time?
Generally speaking, service charge accounts will be run yearly, with any cost estimation (and advanced costs sought) at the beginning of a service charge year and reconciliation at, or shortly after, its conclusion. Reconciliation may include balancing payments being demanded in addition or returned, and certified accounts may, in some instances, be required.
S20B Landlord and Tenant Act 1985 does limit a landlord's ability to demand recovery of costs incurred more than 18 months ago.
If in doubt, accounting information can be requested and must be provided within statutory timeframes.
Have the procedural requirements of the lease been met?
The contractual requirements of the lease are as important as those imposed by statute. Each case will have to be considered on its own facts, but any default will generally be fatal to any action pursued by the party in breach.
Have the charges been correctly apportioned?
The lease should expressly deal with how service charge costs are to be apportioned. These may be at the landlord's discretion or could be a defined percentage.
Where the provision is to pay a fair proportion of the costs, as determined by the landlord (which is common), there is authority to say that such apportionment decisions may be subject to a challenge of reasonableness under s27A Landlord and Tenant Act 1985.
An apportionment decision should accord with current guidance (methodology provided by the Royal Institution of Chartered Surveyors Code of Practice on Residential service charges) and should ideally be consistent with previous unchallenged practices. Have there been other incidences of apportionment decisions, and have the same factors been applied in making the decision?
The authority referred to confirms that, particularly in developments with different user groups, where there is room for genuine differences of opinion over the benefit that a Service provides to one set of users relative to another set of users, a landlord's discretion can be challenged.
Is there a history of property disrepair?
If so, this may give rise to a breach of contract claim against the party with the obligation to keep that particular item in repair.
In cases where the landlord has that obligation, the costs of repair may only be passed on to the tenants via the service charge regime to the extent that those costs are reasonable. The landlord will be able to recover a level of those costs, but if the tenants can show that the costs or the required works have increased, the landlord's recovery may be reduced accordingly.
What is a reasonable increase in service charges?
Where percentage contributions are specified in a lease, these cannot be varied unless by agreement, or Court or Tribunal order.
The service charge is an account of what has been spent on the provision of the expressed 'services' or a reasonably estimated amount of future expense. What has been spent is a matter of fact, but what is reasonable will be a matter of interpretation in each case.
What are the legal options for service charge disputes?
The landlord or tenant may apply to the Tribunal under section 27A of the Landlord and Tenant Act 1985 for the amount of service charge payable to be determined by the Tribunal.
The Tribunal can decide whether a service charge is payable and, if it is:
- the person by whom it is payable.
- the person to whom it is payable.
- the date at or by when it is payable.
- the amount that is payable.
- the manner in which it is payable.
Residential tenants benefit from certain other rights and remedies that might assist in dealing with service charge issues. These include rights:
- To apply for a lease variation
- To apply for the appointment of a manager
- To apply for compulsory acquisition of the freehold
- For a Recognised Tenants Association to be consulted in relation to the appointment and employment of managing agents.
- For a Recognised Tenants Association to appoint a surveyor to advise on service charges
- To have a management audit carried out
Applying to the First-tier Tribunal (Property Chamber)
Before applying to the first-tier Tribunal, it is recommended that you seek specialist legal advice from a solicitor specialising in landlord and tenant disputes.
The process and timetables will vary depending on the application made.
However, many applications can proceed on paper only, without the need for attendance, provided that specialist advice and evidence are provided regarding any legal, surveying, or accounting aspects.
Although less formal than a Court, Tribunal direction timetables can be tight, and matters are generally processed far quicker.
Forfeiture for non-payment of service charges
A landlord's ability to forfeit a lease of premises, let as a dwelling, for failure by a tenant to pay a service charge is limited.
Briefly, a landlord may not exercise a right of forfeiture or re-entry (or serve a section 146 notice, if required) for failure by a tenant to pay a service charge unless one of the following conditions is satisfied:
- Either a court, the First Tier Tribunal, or an arbitral tribunal in proceedings under a post-dispute arbitration agreement has finally determined that the amount of the Service charge is payable by the tenant.
- The tenant has admitted that the amount is payable by the tenant.
