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Residential Service Charges – Landlords beware, there are stings in this tale...

Tue 01 Jul 2014

Service charge disputes are common in the landlord and tenant relationship whatever the nature of the property being leased.  This is due to the tension between the landlord needing to use the service charge in order to comply with their repairing obligations, and the landlord's objective of keeping the premises in the best condition possible, versus the tenant needing to ensure that the landlord only uses the service charge to the extent specifically provided for under the lease, i.e. ensuring that the tenant does not have to pay towards long term improvement of the premises not envisaged under the service charge provisions.  To avoid potentially costly and time consuming disputes, service charge provisions should be carefully and clearly drafted from the outset, having given specific consideration to what the landlord’s foreseeable costs will be during the term of the lease from a repairing perspective (for example, does the landlord wish to specifically be able to recover for replacement as well as repair, rather than only being entitled to replace if repair is no longer possible).  Clearly what is ultimately agreed will depend on the respective negotiating positions of the parties.

The landlord will seek to recover as much as possible from the tenant in order to achieve a ‘clear rent’ income whilst passing as much of the expense of maintaining the premises to the tenant as possible.  The landlord will likely wish to use the best contractors to ensure that the quality of the works or services bring provided are of a high standard in order to protect the property’s value. The tenant, on the other hand, will seek to pay as little as possible to minimise their expenditure.   

The rules governing residential service charges are largely found in the Landlord and Tenant Act 1987 (‘LTA 1987’) and Section 18 defines a ‘service charge’ as, “a variable amount payable by the tenant of a dwelling as part of, or in addition to, the rent, which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance, or the landlord’s costs of management.”

In a nutshell, the landlord will want to cover the cost of any ‘services’ such as security or heating, ‘maintenance’ such as gardening, ‘improvements’ such as painting or refurbishing and general management costs. In a modern residential development a tenant could expect to have to pay for the provision of more contemporary services such as fibre-optic broadband or digital satellite signal, keyless ‘fob’ entry systems or recycling facilities. 

The first ‘sting in the tail’ for the landlord is that the right to recover money for these items must be expressly reserved in the lease as it creates the contract between the two parties.  If it does not expressly oblige the tenant to make service charge payments then the tenant will not be required to do so.  A prudent landlord should also ensure the lease is broadly drafted as many leases do not make provisions for a landlord to recover costs of management of the property or for the legal costs of pursuing tenants who fail to pay their service charges.  This can make recovering the money a costly exercise in itself.

Furthermore, Section 19 of the LTA 1987 restricts the landlord’s ability to recover service charges by limiting it to services that are reasonably incurred and only for work done to a reasonable standard.   At all times, the key word to be borne in mind is ‘reasonable.’ It will likely be the word emblazoned on a tenant’s application to the First Tier Tribunal or Court if or when they challenge the sum the landlord is asking them to pay.

When making the demand a landlord must also provide the leaseholder with a summary of rights and obligations in a form prescribed by law and failure to do so will mean that the tenant can withhold payment. A tenant is also entitled to examine documents, accounts and other evidence supporting the landlord’s calculation of the amount of service charge being demanded.  A landlord may consider this onerous to comply with but failure to provide this information may result in the landlord being convicted of a criminal offence.

Before a landlord can carry out works above a certain value or enter into a long term contract with a party who will provide services, an extensive consultation process must be carried out with the tenants. The works are defined as qualifying works where the tenants would have to pay more than £250 each and long term contracts are defined as qualifying long-term agreements where the tenants would be expected to pay more than £100 each in any given accounting year.  The consultation process is strict and has multiple stages and requires multiple notices to be served upon all tenants.  Failure to follow these procedures carefully without having obtained a special dispensation from the First Tier Tribunal could result in the landlord being restricted in the amount that can be recovered for the works or the service and that amount will usually be set at £250 per tenant.  A potential financial calamity. 

Clearly, a commercial compromise will usually be required when drafting a lease with the parties coming to terms about who will pay for what and how much. However, the law is weighted in favour of the tenant in this area and, as a landlord, it is particularly vital that advice is sought early about how to build in protection within the lease and, following that, the relevant statutory procedures that will need to be adhered to during the lifetime of the lease. A landlord who fails to do so is almost certainly going to be stung.

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