A Service Charge is a contribution payable by a tenant typically to a landlord, for a share of the cost of insuring, maintaining, repairing, cleaning, etc. the building. The lease determines those services which may be charged to the tenant, and any costs which are attempted to be recovered are not permitted unless the lease allows it.
Service Charge disputes are one of the main causes of landlord and tenant disputes – and landlords are obliged by law to present the Service Charge under the terms of the lease and also make available to tenants the accounts which comprise the annual services charge. The Service Charge should reflect the true costs of expenditure on a property, with tenants paying a percentage under the lease.
Some concerns that tenants have in regard to a Service Charge is a feeling that the landlord and its agents are profiting by overcharging for maintenance, services or administration. These disputes can be highly contentious when tenants cannot easily see or understand where the sums charged are being spent, and whether they are reasonable. The sorts of disputes that may arise in regard to a Service Charge include:
- Charges for works and items not specified in the lease as recoverable from the tenant;
- Costs incurred outside of the accounting period allowed by the lease for recovery – these costs can only be recovered after the end of the next accounting period;
- When the landlord has not complied with conditions imposed by the lease;
- When the costs have not been correctly apportioned: for example, if the landlord has historically neglected the property then this cannot be passed to the tenant through a Service Charge;
- The result of a demand that will lead to a ‘double recovery’: for example, when a third party contributes to the payment of a Service Charge.
The starting point then is to examine the lease document. Usually, there will be a dedicated clause or schedule which will detail the services and repairs that the landlord is permitted to carry out, and for which the tenant will have to contribute towards in monetary value.
Though, it is important to note that no Service Charge is payable until the landlord demands the payment and that there are certain formalities which must be observed in regard to any Service Charge agreement. A landlord must provide the tenant with a name and an address located in England or Wales where the tenant can serve any notices (for example ‘to repair’) (s.47 Landlord and Tenant Act 1987; Beitov Properties Ltd v Martin subnom Flat 22 Cornish Court, Bridlington Road, London N97RS [2012] UKUT 133 (LC)).
Then in issuing a demand for a payment from the tenant the landlord must provide a statutory notice of the tenant’s rights with the demand, and if the landlord fails to so this then the money does not have to be paid until a demand with the notice has been given (s.21B Landlord and Tenant Act 1985, as inserted by s.153 Commonhold and Leasehold Reform Act 2002). The tenant should also have been provided with copies of all estimates for the costs of the work, and it is insufficient for a landlord merely provides his own summary of the estimates (Islington LBC v Abdel-Malek [2007] EWLands LRX 90 2006). Though, if the demand lacks absolute clarity or contains minor errors, this will not compromise the validity of the demand as long as the tenant suffers no prejudice as a result of the error (Mannai Investment Co Ltd v Eagle Star Assurance [1997] UKHL 19; Newham LBC v Hannan and others [2011] UKUT 406 (LC)).
A demand from a landlord will be valid if the landlord satisfied both requirements of the Landlord and Tenants Act 1985 and of the lease (Brent LBC v Shulem B Association Ltd [2011] EWHC 1663 (Ch)). The demand must be served in accordance with the lease, and most leases incorporate the terms in section 196 of the Law of Property Act 1925, which governs the service of notices. Under this Act a notice is lawfully served when it is:
- Left at the last known address of the tenant, or affixed to that property;
- Sent by registered post addressed to the tenant at their last known address and that letter is not returned undelivered.
On a dispute as to whether the Service Charge demand complies with the terms of the lease the question for the court will not be whether the tenant has received the demand, but whether the landlord can show that on the balance of probabilities that the demand was delivered in accordance with the lease (38/41 CHG Residents Company Limited v Hyslop (Landlord and Tenant – Service Charges’) (2020) UKUT 21 (LC)). If a tenant has paid for a Service Charge and has not protested this charge for a period of five years, then an agreement to the Service Charge will be inferred (s.27A(4) and (5) Landlord and Tenant Act 1985; Marlborough Park Services Ltd v Leitner [2018] UKUT 230 (LC); see also Cain v Islington LBC [2015] UKUT 542 (LC)).
Any person may dispute a Service Charge by applying to the First-tier Tribunal (Property Chamber) which will determine whether or not a Service Charge is payable ( s.27A Landlord and Tenant Act 1985, inserted by s.155 Commonhold and Leasehold Reform Act 2002; Oakfern Properties v Ruddy [2006] EWCA Civ 1389; Gateway Holdings (NWB) Ltd v (1) McKenzie (2) Geeenfield [2018] UKUT 371 (LC))
An application for a ‘determination of liability to pay and reasonableness of Service Charges’ may also be made in advance of costs being incurred – this allows landlords to check whether their proposed works are reasonable.
The Tribunal may also determine:
- by whom and to whom the charge is payable
- the amount payable
- the date and manner by which the charge is to be paid.
Under this provision, the Tribunal’s jurisdiction is restricted to determining the reasonableness and payability of Service Charges’ (s.27A Landlord and Tenant Act 1985, inserted by s.155 Commonhold and Leasehold Reform Act 2002; s.176A Commonhold and Leasehold Reform Act 2002).
The applicant must complete an application form and send it the tribunal with the relevant fee, if the applicant wishes to seek a determination. Landlords and tenants often represent themselves, although if a complex legal issue is in dispute a competent barrister will tend to do a better job of representation. Tribunal hearings typically involve a panel of three persons adjudicating, usually a lawyer, a surveyor and a ‘lay’ person. Hearings can last anything from an hour or two up to several days. Because of this it would be wise for the tenant to consider what the legal process may cost them. Although the application fee itself is relatively low (see https://www.gov.uk/housing-tribunals) the tribunal is able to award costs to a landlord if a tenants makes an application without merit, or if the tenants is acting very unreasonable. Though it happens rarely the tenant must take into account that there is a danger of being left to pay the legal bill of their landlord. Because of this, a tenant should consider their case and the possible costs very carefully before making an application, and talk to their neighbours and their residents’ association if there is one.
If a tenant chooses to go ahead and apply an application to an FTT is fairly simple to make. You fill out the form (and enclose a cheque for the fee) and the tribunal will then write to you with instructions on what happens next.
