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Service charges
Your at-a-glance guide to service charges
Leaseholders living in residential blocks are under an obligation to pay an annual service charge to their landlord to cover the cost of providing services and maintaining the common parts of the building they occupy, writes Lesley Davies. Residents commit to pay a proportion of these running costs, which will vary depending on your lease terms and the level of service and maintenance provided.
WHAT DOES THE SERVICE CHARGE COVER?
Service charges differ from lease to lease, depending on the size and quality of the building in question. A typical service charge might cover any or all of the following:
maintenance and windows as grass-cutting and gardening insurance (even if you live on the ground floor) insurance - although this may be paid separately charges
Details of what is in included in the service charge are included in the lease. This will give details of:
for and when; apportioned between residents; calculated; the charges; and sinking fund in place.
The lease will probably also contain a ‘sweeping clause’. This is designed to cover any services not specified in the lease. If the lease doesn’t have one of these, residents are only legally obliged to pay for the services that are listed.
HOW MUCH IS THE RIGHT AMOUNT?
The amount leaseholders pay in service charges can vary from year to year and will undoubtedly rise with inflation. Landlords are entitled to add a reasonable management fee to the charge but should not make a profit. If the lease doesn’t provide enough information about service charges for residents to determine whether or not they are paying a fair rate, they are entitled to a breakdown of costs to check whether they are acceptable. Landlords are legally obliged to allow residents to inspect and take copies of accounts, receipts and other relevant documents. If this information isn’t forthcoming or leaseholders feel they have been unfairly treated, they should take professional advice from a chartered surveyor who specialises in residential leasehold property, or from a housing lawyer.
WHAT IS A SINKING FUND?
Leaseholders only have to contribute to a sinking or reserve fund if this is stated in the lease. However, having one in place
can be of positive benefit to both landlords and residents as it should ultimately save either party having to find large sums of money at short notice for major items of repair. As buildings age, more maintenance will inevitably be needed.
For example, in ten years’ time a new roof, downpipes or heating system may be required. The benefit of a sinking fund is that each resident contributes a set amount of money each year to this fund via their service charge, which then covers the cost of major repairs when they are needed. However, as Shelter points out on its website (www.shelter.org. uk) if leaseholders sell their home before the money has been spent on repairs, the landlord is under no obligation to refund the monies. If you don’t already have a sinking fund for your building and want to set one up, a formal agreement must be established between the landlord and all the other leaseholders.
CHALLENGING CHARGES
If leaseholders are unhappy with the cost of their service charge or believe they are getting little in return, they are entitled to write to their landlord/freeholder and try to negotiate a lower charge or improved service. If this does not produce results, the next step is to go to a Leasehold Valuation Tribunal (LVT), which comprises three members including a legally qualified chairperson and has the power to decide whether or not the services the landlord is charging is a reasonable rate for the service delivered. It is not advisable for residents to withhold their service charge because if it is not paid they could end up in court or - in extreme cases – be threatened with eviction.
THE LEGAL FRAMEWORK
Under the Commonhold and Leasehold Reform Act 2002, landlords are obliged to provide tenants with detailed information including:
details of service charges incurred and obligations in relation to service charges insurance for the building
In some circumstances the tenant may withhold payment until the landlord complies with these requirements. (source: The Service Charge Company)
Under the Act, Landlords must also consult with tenants if expensive work is needed and the landlord wishes to:
costing more than £250 per tenant per year; or service (such as gardening/ cleaning) which will cost more than £100 per tenant per year
If the landlord doesn’t meet his obligations under the Act, the tenant will not have to pay more than either £250 or £100, unless the LVT rules that he has to.
When things go wrong with service charges…
John Mills, a technical consultant to ARMA, looks at some typical situations where things can go wrong for directors of resident management companies (hereafter RMCos) illustrated with cases that went to the Leasehold Valuation Tribunal.
irectors of RMCos are in the position of having to wear
Dtwo hats at the same time. They are directors of a limited company and so responsible to the shareholders; and responsible for the management of a block of flats and so have to comply with the leases granted to the lessees and landlord and tenant legislation. These two roles often cause confusion for directors and can lead to costly mistakes.
This article looks at some typical situations where things can go wrong illustrated with cases that went to the Leasehold Valuation Tribunal.
When the lessees of a small block of seven flats in Huntingdon took on self-management of their small block in 1990 it was admitted at the tribunal that ”nobody looked at any leases which were mostly held by banks. Although nobody seems to recall precisely how this came about, the decision was taken to apportion charges equally between flats”. Things went well for many years; the lessees met at their AGM and decided the budget for service charges at their AGM. But when major expenditure was needed for repairs one of the lessees, who was not one of the lessees when the company was formed, got his solicitor to check his lease. He found that his lease only required him to pay a 9.5% share of service costs, not one seventh. He took his case to the tribunal.
PAYMENTS ADJUSTED
The tribunal decided that the RMCo had no right to go against the leases and that the lessee was entitled to have his service charge payments adjusted to the correct percentage of costs; and that he
was entitled to backdated adjustment for the last 10 years that he had been in residence. The moral is that no decision of the directors of a company or its shareholders can overturn the requirements of the leases.
Things also go wrong with annual statements of account for service charges.
This RMCo had brought a case to recover arrears. The lessee paid minimal interim service charges but had not paid any balancing deficits due for four years. The lease was quite specific about what was required for the annual service charge statement; one requirement was for certification as a fair summary by an accountant. The RMCo had agreed that to save costs certified accounts were not necessary.
The LVT found the actual service charges were reasonable but that the RMCo could not recover the shortfalls due because it had failed to follow the terms of the leases; no certification, no total of interim service charges, no indication of a positive or negative balance. So the LVT decided that there were no arrears owing until the annual service charge statements for those years had been correctly issued. The moral is that to satisfactorily demand service charges at a tribunal or court an RMCo has to show that it has produced annual statements of account for service charges in accordance with the leases.
In this next case an RMCo thought that producing annual accounts for the company audited by an independent auditor should suffice for the purposes of service charges.
The leases of this block in London provided for an annual payment in advance of £100 but at the end of each financial year any deficit could be demanded from leaseholders as a one-off payment by the RMCo serving a statement certified by a surveyor. Further it was possible to increase or decrease the £100 in advance if the new figure was also certified by a surveyor.
The RMCo of this block of 10 flats had never issued any surveyor’s certificates. Each year the service charge to be levied had been agreed by a resolution at a company meeting after looking at the company’s annual accounts.
VIGOROUSLY PURSUED
One lessee challenged the service charges demanded over a fiveyear period. Her claim was that no more than £100 per annum was payable. This was despite the facts that the lessee was a previous chair of the RMCo, had paid more than £100 per annum when she was the chair, and she had vigorously pursued other lessees for the service charges demanded by the RMCo when she was chair. A leasehold valuation tribunal had some sympathy with the RMCo and decided that the lessee and ex-chair of the RMCo should not be able to overturn what had happened because her actions had shown she agreed with what had been done.
The lessee appealed to the Lands Tribunal and it decided that the terms of the lease were paramount. So the service charge payable for each of the five years in question was £100.
The lessee then went on to argue that the RMCo was not in a position to retrospectively issue any surveyor’s certificates and so demand higher sums. The Lands Tribunal decided that this was possible; there was nothing in the leases that set a time limit on how long after each financial year the RMCo could issue the statement with a surveyor’s certificate. However if the RMCo did decide to do this one assumes that the 18-month’s rule would come into play; it would also be difficult to find a surveyor to certify accounts from several years ago.
The moral of this case is that just because an RMCo produces independently audited accounts of the company for Companies House, which include income and expenditure for service charges, does NOT mean that is sufficient to correctly demand service charges. The RMCo needs to comply with what the leases require for an annual statement of account for service charges. There is a clear difference between a service charge statement and a company statement of account; most leases do not require that a set of accounts in the format for Companies House is what is required for service charges.
CHALLENGED BY LESSEES
And what of expenditure on major works and the requirements to consult under Landlord and Tenant Law-S20 consultation? Reddings Court Management Company in Birmingham was challenged by lessees about major works to install security lighting. The RMCo’s evidence was that the matter had been agreed at a shareholder’s meeting. The LVT decided that this was not a good reason to fail to do what the law required and so the cost of works was limited to £250 per leaseholder.
The moral is that decisions taken by directors or shareholders of an RMCo, even if unanimous, cannot override Landlord and Tenant Legislation.
In summary as one tribunal put the matter so well (with the exception of the use of tenant for lessee):
“The Tribunal would draw the attention of the parties to the importance of a clear distinction being made between the operation of the leases and the role of tenants as tenants on the one hand, and the operation of the Management Company and the role of the tenants as shareholders on the other. The Tribunal is only concerned with the operation of the lease and therefore resolutions and minutes of the Company carry little if any weight.”
