What is a service charge?
Service charges are fees leasehold homeowners pay to the landlord or their lease administrator to cover the costs of maintaining and managing their residential property.
Typically, these charges are for expenses such as general building maintenance, cleaning, garden upkeep, repairs (such as water leaks or broken lifts) and buildings insurance.
The exact items a service charge covers will be stipulated in your lease.
Service charges should not be confused with ground rent, which is a payment to the landlord in return for giving the rights under the lease. The landlord can spent ground rent however they wish.
Fixed and variable service charges
Some older leases allow for the landlord or the lease administrator to recover costs through fixed service charges, regardless of the actual expenses paid by the landlord..
However, in most modern leases, service charges are based on the actual or estimated cost of the services, and so change from year to year.
To differentiate them from fixed service charges, they are called variable service charges.
When are they payable?
The lease usually states the service charge period and the frequency of payments. The period is often one year (i.e. there is an annual charge), but prepayments may be due every three or six months so that the landlord has a fund from which to pay when the costs become due.
In rarer cases, charges may be billed after the costs have been run up.
However, the issue for the landlord in billing after the expenses have become due is the risk of non-payment (on time or at all) by some of the leaseholders.
Your rights as a leasehold homeowner
Rights afforded to leasehold homeowners are framed within the distinct spheres of statutory law and the contractual terms of the lease agreement.
Under the Landlord and Tenant Act, leaseholders enjoy a series of protections and rights that govern the administration of service charges.
Notable are the requirement for costs to be reasonable and for leaseholders to be provided with an annual service charge account. Should you perceive service charges as excessive or unjust, you have a right to challenge them at the First Tier Tribunal (Property Chamber).
The counterpoint to these statutory protections lies within the lease agreement. It sets out the rules governing the service charge imposition, calculation, and collection.
Identifying issues with service charge demands
Does the service charge demand match with your lease obligations?
The lease usually determines whether service charge demands can be based on estimated costs, actual costs, or both.
It's not uncommon for landlords or managing agents to charge based on estimated costs, only to reconcile these with actual costs at the end of the accounting period.
Relevant costs under the service charge are those that have been reasonably incurred and are in line with the services or works carried out. In essence, they must be proportionate to the quality of services provided or works performed. Costs not falling within these parameters might be questionable and worth inspecting closely.
Unfair service charge costs
An element of subjectivity is present when evaluating the reasonableness of costs.
If the cost of services or works seems excessively high compared to the market rate, you may be able to label it an unfair service charge.
Disputes often arise when landlords either fail to provide a reasonable standard of service, or overcharge for services or management services provided.
Or you might have carried out repairs or maintenance to the freehold building under a right to self help, and want the managing agent to reimburse you.
Hidden charges are those that aren't explicitly stated in the lease but are nevertheless included in the service charge demand.
This could range from unexplained administrative charges to insurance commissions.
They might be justified through a sweeping up clause.
It's important to scrutinise your service charge accounts for any costs that you don't recognise or seem out of place.
Are service charges demands made as per the lease terms?
Each lease has specific terms concerning how and when service charge demands should be made.
Failure to comply with these terms by the managing agent or landlord could render the demand invalid.
Does the service charge period align with the lease?
Your lease outlines the service charge period, that is, the period for which you are to pay service charges.
It's paramount to ensure that the service charge demand aligns with this specified period in your lease.
Has the landlord consulted on larger repair bills?
If the cost of a repair is greater than £250, the landlord has a duty to consult the leaseholders before starting any repair or improvement that costs a leaseholder more than £250 (known as 'qualifying work'), or entering into a long-term service contract that costs more than £100 for any leaseholder in any accounting year (known as a ‘qualifying long-term agreement’).
Sinking or reserve funds
Your lease may allow your landlord to create one or more sinking or reserve funds.
These are funds for which money is collected in advance, so that the cost of expensive work can be covered without giving each leaseholder a bill that they may not immediately be able to pay.
Provided that the lease stipulates it, it is not a procedural failing to contribute the surplus of service charges paid to a reserve fund.
Although a reserve fund consists of the leaseholders money, it may not be repayable on the sale of your property. So you may wish to challenge the amounts being put into sinking funds and make sure that there is short-term work planned.
Challenging an unfair service charge
If you're in a situation where service charges seem unjust or exorbitant, you have options to contest these charges and assert your rights.
Disputing a service charge: where to start
Before you can challenge a service charge, you need to understand its components thoroughly.
This involves analysing and scrutinising relevant documents, seeking clarification from managing agents, and facilitating discussions with them to resolve any potential disputes.
It's always wise to revisit your lease and other related documents when you're about to question a service charge. All the information about what can be charged and how should be in a clause known as a service charge provision.
You have a right under the Landlord and Tenant Act 1985 to inspect documents relating to service charge costs. To execute this right, you can request service charge accounts and related documents from your managing agent.
You may also be able to appoint a surveyor to comb through the costs, or have a management audit conducted.
The summary they give you should provide a detailed account of costs incurred and how they have been allocated.
You can also ask for a copy of the latest management audit if the charge fell in an audited period. The accountant's report will show expenses are properly accounted for and fall within the scope of the lease.
Talk to your managing agent to understand amounts, proportions and reasons for a charge
Talking to your managing agents can help clarify any uncertainties you may have.
You could ask about the specific details of the charges, how they've been calculated, and the justification for each item on the demand.
In many instances, an open dialogue may lead to resolution, but if the dispute persists, further action may be necessary.
Consulting with fellow leaseholders
There's strength in numbers, and that applies to leaseholders too. Gathering support from other leaseholders who are also subjected to the same service charges can strengthen your case and provide collective bargaining power.
If there is one, a recognised tenants association (RTA) can negotiate on behalf of all the leaseholders and ensure that their collective voice is heard. The collective power of an RTA can lead to more effective negotiation and potentially favourable outcomes.
Alternatively, there may be a residents management company (RMC). This can provide a strong counterbalance to the professional managing agent in managing a leasehold property.
By participating actively in an RMC, you can gain more control over the management of the property and exert influence over service charge demands.
Seeking legal recourse
When all else fails, seeking legal recourse can be the next step. This process can be a bit daunting, but it's necessary pathway if initial efforts to resolve a service charge dispute have been unsuccessful.
The First Tier Tribunal (Property Chamber)
The First Tier Tribunal, more specifically the Property Chamber, is a judicial body designed to resolve disputes involving leasehold properties. This includes service charge disputes.
The Tribunal has the power to determine whether service charges are reasonable and payable.
It can also ascertain if the landlord has adhered to all the rules while collecting service charges.
However, it cannot arbitrate on matters that involve breach of covenant or changes to the lease terms.
County Court proceedings
When issues are beyond the jurisdiction of the First Tier Tribunal, the case might need to be escalated to the County Court.
County Court proceedings are generally sought when there are outstanding service charge arrears, or if there's a need to enforce the tribunal's decision.
Remember, embarking on legal proceedings should be a last resort as it can often be time-consuming and expensive.
Legal costs: can you recover them?
The matter of legal costs can often be complex.
In some cases, a lease may allow a landlord to recover legal costs relating to the dispute as part of the service charge. That means that legal costs for the landlord for a dispute brought by one or a few of the leaseholders might payable by all of them.
But, each case is unique, and you'll need to check the specific clauses in your lease to understand your obligations and rights.
Professional advice from a solicitor can often help to clarify the legalities surrounding service charges.
Options that might help prevent service charge disputes
Leasehold Advisory Service
A valuable resource at the disposal of leaseholders is the Leasehold Advisory Service.
As a government-funded body, it provides free advice, guidance, and support for leasehold homeowners.
Whether you need clarity on your rights and obligations under your lease, or advice on disputes, their services are comprehensive and accessible.
Using this resource can add to your understanding of your leasehold agreement and service charges, assisting in the resolution of potential conflicts with managing agents.
Right to Manage companies
Exercising your Right to Manage can offer an added layer of protection against service charge disputes.
This right, provided under the Commonhold and Leasehold Reform Act 2002, allows leaseholders to form a Right to Manage (RTM) company.
Taking this step essentially allows leaseholders to take over certain responsibilities from the landlord, such as the management of the building, often including control over service charges.
This proactive approach ensures that leaseholders have a direct say in the management of the property and aids in reducing instances of unfair charges.
Share of freehold
Acquiring a 'share of freehold' is another strategy to prevent service charge disputes. When leaseholders collectively own the freehold of the property (known as enfranchisement), they inherently acquire greater control over service charges and management.
With a share of freehold, you bypass the need for a third-party freeholder, essentially becoming your own landlord.
Find out how freehold differs from leasehold.
Leaseholders can jointly make decisions regarding the maintenance of the property, providing an opportunity to maintain control over service charges.
Keeping informed: scrutinising future service charges
Estimated versus actual costs
Consistently comparing estimated costs with actual costs is a pivotal strategy to keep service charges under control. This involves a keen eye on the service charge budget, and comparing it with the end-of-year accounts to identify any discrepancies.
If you notice that estimated costs consistently exceed actual costs, it might be worth challenging the service charge or seeking advice on how to handle the situation.
Service charges payable: what to expect
Understanding the breakdown of your service charges is key to identifying potential issues.
Generally, service charges cover costs for services such as garden maintenance, buildings insurance, and overall upkeep of common areas. They also cover the management costs of organising this upkeep, including things like fire risk assessments for the property.
They might also include reserve or sinking funds for future major works. If they do, check whether there are plans for the fund to be used. There is no benefit of accumulating money for major repairs and improvements if it is never used.
Having a detailed understanding of each component can help you better comprehend the fairness of charges. Remember, under the Landlord and Tenant Act, you have a right to challenge service charges that you consider unreasonable.
Regularly reviewing your lease
As a leasehold homeowner, it's vital to review your lease regularly. Over time, your obligations or the landlord's responsibilities might change. Being aware of these changes can help prevent future disputes.
Your lease agreement serves as the backbone of your relationship with the landlord and managing agent, so understanding its terms and conditions thoroughly is critical.
Keeping abreast of changes to your lease and property laws
Staying up-to-date with changes in property law is equally important. Legislation and statutory rights affecting leasehold properties are subject to change. These changes can have significant implications for service charges.
Changes to the housing act, local housing authority regulations, or provisions of the landlord and tenant act might impact your rights and responsibilities regarding service charges. Ensuring you are informed about such changes can go a long way in protecting your interests and preventing service charge disputes.