Residential service charges

If you are a tenant or a leaseholder in a block of flats or a development, whether in the private or social housing sector, your lease will contain a list of charges for which you will be responsible to pay. These are service charges and can be one of the main areas of dispute between leaseholders and their landlords.

If the charges are not contained in the lease, then there is no obligation to pay them, so detailed consideration of the lease terms is always the starting point. The landlord in most circumstances, must give notice of the charges and leaseholders do have a right to challenge in certain circumstances.

Service charges must be reasonable
Provided adequate provision is made in the terms of the lease, landlords can seek service charges for costs they incur for items such as:
  • services
  • repairs
  • maintenance
  • insurance
  • management.

However, the costs must be reasonably incurred and the work or services must be of a good standard. There is no restriction on the factors that can be taken into account when determining if service charge costs have been reasonably incurred. This means that the financial impact on tenants, and whether the works should be phased to spread the costs, can be taken into account alongside other relevant considerations. However, tenants cannot insist that service charges are phased in to spread the cost of major works.

How can you challenge service charge costs?
Service charge costs can be challenged by asking the Leasehold Valuation Tribunal (LVT) to determine whether
• the service charge costs were reasonably incurred
• the services or works are of a good standard
• an estimated service charge, payable before costs are incurred, is reasonable.

However, you cannot avoid liability to pay service charges on the grounds of hardship. If particular repair work is reasonably required at a particular time and is carried out at a reasonable cost and to a reasonable standard, this must be paid in accordance with the terms of the lease.

When is a consultation required?
Before entering into contracts to provide services or carry out works relating to residential properties, landlords should consider whether they need to consult with their tenants. If a landlord fails to consult when required, they will only be able to recoup the statutory maximum, unless they receive dispensation from the LVT. A landlord must consult with tenants if either:
  • The amount payable by any one tenant for services to be provided under a
    qualifying long-term agreement (QLTA) will exceed £100 in any one year. A
    QLTA is an agreement entered into by the landlord or a superior landlord for
    a term of more than 12 months.
  • The total contribution towards qualifying works will exceed £250 for any one 
    tenant.

What are the consultation requirements?
A landlord must
  • Give notice to tenants and to any recognised tenants’ association (RTA),
    explaining why the proposed works are necessary.
  • The landlord must invite written observations on the proposals and take
    note of any responses.
  • Obtain estimates. Tenants and the RTA have a right to nominate alternative
    contractors and the landlord is obliged to ask for an estimate from the 
    nominated alternative contractors.
  • Issue a statement setting out the estimated costs from at least two of the
    estimates, with a summary of the written observations received and the
    landlord’s responses to them.
  • Provide a notice setting out:
  • when and where all the estimates can be inspected
  • inviting written observations on the estimates within 30 days of the date
    of the notice. Landlords must take note of any written observations provided.
  • Give reasons for selecting the successful contractor.

The LVT has the power to dispense with the consultation requirements, if it is satisfied it is reasonable to do so. It will consider whether the tenants suffered any relevant prejudice due to the landlord’s failure to comply with the requirements and can decide to grant a dispensation subject to conditions.

Time limits for making service charge demands
When service charge demands are issued after completion of the works, a landlord must issue the demand within 18 months and if the demand is provided later than this, the landlord will be unable to recover the costs, unless they have served a notice during the 18 months stating that:
  • costs have been incurred; and
  • the tenant will be required to contribute to them by payment of a service charge.

If the landlord does not know the exact amount of the costs incurred, they should specify a figure for costs that they would be happy to accept as the limit on the costs ultimately recoverable and the notification would still be valid if the actual costs claimed in the service charge demand were less than that stated in the notice.

What are the penalties for failing to comply with the consultation requirements?
If a landlord does not comply with the consultation requirements, and the LVT does not decide to dispense with the requirements, the landlord’s ability to pass on costs to tenants will be limited. The maximum that the landlord will be able to recover is:
  • £100 for each tenant for each year for QLTAs
  • £250 for each tenant for qualifying works.

If you have any questions regarding service charges or any other property related issue, please contact Ian Cox, Gerard Davis or Katie Kearns on 02476 553181.