Service charges – the legal position with residential flats
Service charges – the legal position with residential flats
Service charges are an extremely common feature of modern residential flat leases. Disputes and problems in this area of law are also common so it’s important, whether as freeholder or leaseholder, to understand the legal position.
What is a service charge?
A service charge is an amount payable by a tenant holding a lease of a residential flat and it as part of, or in addition to, rent. The law protects such tenants from excessive service charges.
Service charge provisions will be contained in a long residential lease but often, deliberately from the freeholder’s perspective, the terms will be fairly generic and favourable to the freeholder. The detail is often found in past service charge accounts and specific enquiries of the freeholder or any appointed Managing Agents.
Many buyers of flats in a block, whether new build or an existing lease, are also surprised to find out that freeholders will often require contingency funds to be added to amounts spent and that the leaseholder may be faced with a significant bill for major works to the block.
Notwithstanding the above, there are some legal protections for leaseholders.
Service charges must be reasonable and work must be of reasonable standard
- Costs must be reasonably incurred with all relevant factors taken into account including the financial impact on tenants and whether works should be phased to spread cost, although tenants cannot insist on costs being spread where major works are planned.
- The work or services must be of a reasonable standard.
How to challenge service charges
Leaseholders have the legal right to challenge service charge costs by applying to the Property Chamber of the First-tier Tribunal (FTT) (this Tribunal is part of the English Court system but as a Tribunal, the level of formality tends to be less than in the County Court or High Court) – see more on the Tribunal here, to determine whether:
- charges were reasonably incurred;
- the standard of work undertaken; and/or
- in relation to estimated service charges, where the freeholder demands upfront payment in part or full, whether this is reasonable.
Whilst it is understandable, especially where a leaseholder has relatively little notice of unforeseen expenses or where the cost is high, for that leaseholder to claim financial hardship as a reason for not paying, in legal terms, this is not a ground for challenging the service charge. It may however be possible to negotiate on payment terms and professional help and advice may facilitate this.
Service charge consultation
The law is clear that Landlords must consult with tenants before entering into long term or higher value contracts which will result in service charge payments by tenants. There are several important reported cases where Landlords failed to consult properly before undertaking major works and were unable to recover the costs from the tenant, so process is important.
In one of these cases, Daejan Investments -v- Benson, the freeholder recovered only £1250.00 from tenants from a £270,000.00 sum spent on major works to the block because the freeholder failed to comply with the requirements of the consultation process in the Landlord and Tenant Act 1985
Consultation is required where :
- the amount payable by any one tenant for services will exceed £100.00 in any one year under a Qualifying Long Term Agreement (QLTA which means an agreement lasting more than 12 months); or
- the total contribution towards qualifying works will exceed £250 for any one tenant.
Where a landlord does not comply with the above requirements he, she, they or it can only recover the statutory maximum (£100.00 for each tenant for each year for QLTAs and £250 for each tenant for qualifying works) unless receiving dispensation from the FTT.
What form must service charge consultations take?
Where consultation is legally required, the process involved is as follows:-
- Tenants, and any recognised tenants’ association (RTA), must be given a document explaining why the proposed works are necessary and inviting written observations on the proposals Consideration should be given, and documented, in relation to any responses received.
- Estimates must be obtained – tenants and the RTA have a right to nominate alternative contractors and the landlord will be required to then obtain an estimate from the alternative contractors nominated by the tenant.
- Provide information – the landlord must issue a statement setting out the estimated costs from at least 2 of the estimates, with a summary of written observations received and the landlord’s responses to them.
- Provide a notice setting out when and where all the estimates can be inspected and 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.
Dispensing with the consultation requirements
The Landlord/freeholder may apply to the First Tier Tribunal to dispense with the consultation requirements and the Tribunal has powers to set aside the consultation obligations where satisfied it is reasonable to do so. Before doing so, the Tribunal considers whether the tenants suffered any relevant prejudice because of the landlord’s failure to comply and even where dispensation is granted it may be subject to conditions.
Time limits for making service charge demands
A landlord is legally obliged to issue a service charge demand within 18 months after the works are completed. If the Landlord misses this timescale, the freeholder will be unable to recover the service charge 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.
This note only provides an overview of the law in this area. You should consult IBB Solicitors on how it may affect your particular circumstances.
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