What is a service charge?
Statistically service charge arrears provide one of the main causes of leaseholder/landlord disputes, though on the plus side the vast majority of these disputes are settled before the landlord suffers any knock-on financial embarrassment due to non-payment of the charge by one or more leaseholder or the leaseholder(s) finds themselves legally evicted from their property due to a forfeiture and possession action.
In short term tenancies, service charges are usually included in the rent but owners of long leases (i.e. leases originally granted for at least 21 years) usually pay larger amounts separately. A tenant’s landlord and a leaseholder’s freeholder both have legal duties to ensure that their properties are maintained but they recover their cost in different ways.
What makes up my service charge?
Your service charge will usually consist of:
1. Direct costs: these can either be routine costs which require regular payment such as electricity bills or insurance premiums, or exceptional costs which are rarely required including major repairs (these can be very expensive)
2. The management fee: this covers the administration work carried out be the freeholder and usually doesn’t vary greatly from one year to the next unless particular big work involving different contractors has been done
The service charge itself is basically a charge for providing services to the property, the details of which are set out in the lease. Freeholders levy this charge on their leaseholders to recover their costs arising from providing services to one or multiple dwellings. These costs usually include all or most of the following:
• general maintenance
• provision and servicing of lifts
• provision of heating, cleaning and lighting in shared areas
• freeholder/freeholder’s agent’s management costs
• reserve fund contributions.
The lease must provide full details of the charge, stating whether it is a fixed charge, common to older leases or a variable charge, the amount of which will depend on the estimated or actual annual cost of the services [which is the norm in modern leases].
Is there a limit on my service charge?
The cost of these services can vary without limit, either up or down as long as they fulfill the legal definition of what is considered ‘reasonable’. A leaseholder is free to challenge whether the service cost is reasonable at the First Tier Property Tribunal or FTT (previously known as the Land Valuation Tribunal).
Avoiding service charge arrears
The recovery of service charge arrears can be reduced to the minimum by the landlord/freeholder ensuring that risk and credit control issues are continually addressed in a timely manner to ensure that their cash flow remains healthy. In doing so they ensure that they themselves do not come under pressure from their creditors if that flow is restricted by an accumulation of service charge arrears.
Service charges – getting the demand right
It is essential that the freeholder comply with the law (Commonhold & Leasehold Reform Act 2002) when serving the demand for service charges. The demand must:
1. Be in writing.
2. Include the landlord’s name and address
3. Be accompanied by the prescribed summary of rights and obligations.
4. Be sent to the leaseholder at the property the lease applies to or any other address supplied by the leaseholder.
Service charges – getting the demand wrong
Should the landlord/agent fail to issue the demand in the right way, the demand is invalid and the leaseholder is under no obligation to respond to it. Again, having a specialist solicitor undertaking this process will avoid any mistakes being made.
A solicitor can also monitor the responses of the leaseholder(s) to the demand and if payment is not made on time will routinely issue a firm but polite reminder. Should the reminder also be ignored it is usual to warn the leaseholder of the possibility of legal proceedings being commenced and of their being liable for late payment charges.
What happens with late payment of a service charge?
The late payment charges will cover some of the time and costs expended in chasing the payment and the legislation states that these charges should be reasonable. Modern leases usually also allow interest to be charged to late paying leaseholders, typically 4% above base rate. There are therefore number of ways of for freeholders to prompt payment of service charges.
However, leaseholders do have some level of protection when it comes to late charges. Should the freeholder fail to ask for payment within 18 months of the work being done, the leaseholder will not technically need to pay. Freeholders do have the right to charge the leaseholder within this time and only bill them afterwards though.
Service charges which include 5 or more flats should have the summary approved as reasonable by an accountant. A leaseholder can then ask the freeholder to provide materials needed for inspecting the summary available and a £2,500 fine can be charged to freeholders if these facilities are not provided within 3 weeks.
Service charges – the importance of time limits
If a demand for payment of a service charge is not made within the time limit specified in Section 20B of the Landlord and Tenant Act 1985 the landlord could find him/herself out of pocket. The time limit is 18 months from when the landlord incurs a service charge expense and within that period he must either:
1. Demand payment as a service charge
2. Inform the tenant that payment will be required at a subsequent date.
Failures to issue demands within the time limit are almost unknown when service charge payment collection and arrears recovery are in the hands of a competent solicitor agent.
Service charges – the final result
When the point is reached when a leaseholder has failed to respond to the service charge demand and has ignored all follow-up communication and is therefore in breach of the lease, the freeholder may decide to begin the legal process to forfeit the lease and repossess the property. However if the amount outstanding is less than £350 or has been outstanding in part for over 3 years this option is not available in law and the freeholder will need to pursue the debt through the County Court.
The process of forfeiture and re-possession, especially when it is for an outstanding sum that includes arrears is complex and precise and one that is best undertaken by a specialist solicitor. If the freeholder is not already employing a solicitor, as discussed above, they should hire one without delay. All costs associated with either the process of forfeiture or a County Court action are usually borne by the leaseholder.
Service charge disputes – the potential scope of the problem
In December 2014, the Competition and Markets Authority [CMA] published a market study of the residential property service in England and Wales. The report revealed the following facts about the Service Charges paid by over 3 million
- The total amount paid annually by leaseholders in service charges is between £2.5 and £3.5 billion.
- Overall levels of leaseholder dissatisfaction were highest in privately managed leasehold property (37%) – compared with just 18% in retirement properties.
Challenging a service charge – what will the tribunal consider?
When making a judgement the FTT will consider the dates and amounts involved in the case, whether the work referred to was of an acceptable standard, whether all costs involved were required under the terms of the lease and whether the leaseholder was given adequate notice. If the FTT judges the charge to be unfair, the freeholder will not be able to pursue the costs (under the Landlord and Tenant Act 1985).
Leaseholders need to be careful when refusing to pay service charges.If they build up significant service charge arrears, they could risk facing forfeiture action at the Tribunal – because freeholders retain the right to apply for termination of the lease and repossession of the property if lease terms are breached.
However, forfeiture can only take place if the leaseholder has agreed that the charge is due and is reasonable .
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