18 minute read
Service charges in the spotlight
Plan ahead to avoid SurPriSe chargeS
Some leaseholders may pay a higher service charge than others in their building
Use a properly costed maintenance schedule to avoid being hit by unexpected repairs and one-off bills, says StEVE
BREwER
Service charge arrangements for your f lat are determined by your lease, as CHRIStopHER LASt explains
*A SERVICE CHARGE is an amount of money paid by leaseholders for services provided by their freeholder or management company. The obligation to pay service charges should be set out in the lease; if not there will be no requirement to pay.
The service charge covenants in a lease may provide for leaseholders to pay an equal share of the total cost of the services provided for the building or estate, or instead set out a formula for calculating the individual leaseholder’s liability such as floor space or rateable value. This means that some leaseholders may pay a higher service charge than others in the same building.
Service charges must be ‘reasonably incurred’ and be of a reasonable standard. There are ways to hold your freeholder or manager to account. You can request from the freeholder a written summary of costs incurred during the last accounting period. They must send it to the leaseholder within six months of the end of the last accounting period or within one month of the request whichever is later. If you wish, you can then send a written request to the freeholder asking to inspect the accounts and receipts within six months of receiving the summary.
Failure to comply with either request is potentially a criminal offence and the freeholder risks being prosecuted and fined up to £2,500. Local authorities are exempt from these provisions but can bring a prosecution.
If you believe your service charges are not reasonable and you wish to challenge the amount you are being charged, the Leasehold Valuation Tribunal (LVT) can determine the amount of any service charge demand you are liable to pay. However, do regard applications to the LVT as a last resort and first consider negotiating with your freeholder or inviting them into mediation on a dispute.
Should you require any advice on service charges, the Leasehold Advisory Service (LEASE) is able to assist. A range of advice guides and FAQs are available to download from the website at www.lease-advice.org.uk ●
Service chargeS are defined by Section 18 of the Landlord and Tenant act 1985 as: “…an amount payable by a tenant of a dwelling as part of or in addition to the rent — (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the freeholder’s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs.”
StEVE BREwER, a building surveyor withwith Watts GroupWatts Group PLC hasPLC has justjust finishedfinished doingdoing a a conditioncondition surveysurvey on on 790 apartments in London790 apartments in London Docklands.Docklands. The propertThe property managers were keen toy managers were keen to determine thedetermine the condition of thecondition of the buildingbuilding fabricfabric and serand services andvices and are putting aare putting a ‘no surprises’ maintenance schedule‘no surprises’ maintenance schedule in in placeplace to to avoidavoid residentsresidents beingbeing hithit by by unexpectedunexpected hikeshikes in in theirtheir serviceservice charge. “Maintenance schedules are a vital tool not only for keeping your block in good repair and spreading the bills but also for peace of mind that RMCs are meeting their health & safety obligations”, says Steve. “If the roof of your block is in poor repair and starts to leak, you and your fellow leaseholders will have more to deal with than simply replacing the slates or tiles. Residents may find themselves with massive bills to cover the cost of repairing water damage to internal finishes and contents and facing a hike in insurance premiums. Even more serious is the prospect of electrical faults or concrete failure causing balconies to crack or collapse. SuchSuch problems canproblems can leadlead to to seriousserious accidents or even loss of life for CHRIStopHER LASt is a legal adviser at LEASE which RMCwhich RMC directorsdirectors could findcould find themselvesthemselves personally liable.”personally liable.” See page 23 of of this issuethis issue for more on maintenancefor more on maintenance schedules andschedules and how to puthow to put one one in in place forplace for youryour block. What starts off as a bit of a leak could end up being expensive
Can’t pay, won’t pay
So you’re in dispute with your landlord over your service charge. Now what do you do? elaine dobson and helen MattheWs talk readers through the legal process
Most long leases of flats include provisions by the landlord to repair, maintain and insure the building and by the tenant to pay their share of the cost in the form of a service charge. The wording of the lease is crucial in determining what tenants are liable to pay for but service charges must be reasonably incurred and any services or works carried out must be of a reasonable standard, as specified in Section 19 of the Landlord and Tenant Act 1985.
Consulting with residents
Freeholders and management companies are also required by Section 20 of the Act to carry out detailed consultation with leaseholders before any work to blocks of flats is started. Failure to follow these requirements rigorously can result in a landlord only being able to recover £250 per flat, even if the costs are very substantial indeed. In the recent case of Daejan Investments v Benson [2011] EWCA Civ 38 (see Flat Living, issue 7, p31) the landlord went through the first steps of the consultation procedure required by the Act but did not comply with it strictly enough. As only one of four estimates obtained were circulated to the five tenants, the Court of Appeal decided the landlord could only recover £250 per flat as against a total bill of £270,000.
in dispute
It is easy to see how disputes can arise. A landlord, perhaps blissfully unaware of the consultation requirements, decides it is high time his building with 12 flats has a makeover. He goes ahead and instructs his builder to “do whatever needs to be done” in the expectation that, under the lease terms, he will be able to pass on the cost to the tenants. Imagine his surprise when his builder arrives at the property to erect scaffolding and the tenants ring him and ask what is going on. He tells them that he has already entered into a contract with the builder costing £300,000 so the works must go ahead.
Finding the right solicitor how do you go about appointing the right person for the job? Make sure any solicitor you choose is familiar with current leasehold legislation and has relevant experience in the leasehold sector. it is vital to n ask about their experience n seek references n determine how much they will charge if you don’t get a satisfactory response to your questions – find someone else.
what next?
So what should the tenants do, given the huge bill with which they might be faced? In the first place the tenants should meet up, appoint two or three residents to take the lead and agree on a way forward, including appointing a suitably qualified solicitor to advise.
The solicitor consulted by the tenants is likely to advise them that a letter should be sent urgently to the landlord saying that unless he goes through the required consultation procedure they will not be prepared to pay the costs, and if necessary they will apply to the Leasehold Valuation Tribunal (LVT) challenging the amount of money spent on their behalf.
using the lVt
Supposing the landlord will not back down, carries on with the work regardless and invoices the tenants for some £25,000 each? The tenants can apply to the LVT to determine the reasonableness of the service charges. They can seek to rely on the landlord’s failure to follow the section 20 consultation procedure to have their contributions limited to £250 each. The LVT can however order that the landlord was entitled to dispense with the consultation procedure. If the tenants’ solicitor advises that this may happen, a building surveyor should be appointed to act as expert witness. The surveyor can inspect the building and the works which the landlord has done and set out in an itemised report his expert opinion as to whether the works are of a reasonable standard and what would be a reasonable cost for them. The LVT will consider this report at a hearing, along with any expert evidence from the landlord and decide what the tenants must pay to the landlord as service charges for the works, the optimum result being their only having to pay £250 each.
This can be a costly exercise for the tenants if it proves necessary for there to be an LVT hearing to settle the matter, perhaps around £15,000/£25,000 plus VAT between them. Even if successful the LVT can only award a maximum £500 costs against the losing party, but this is rare. If however the end result is that the tenants pay only £250 each instead of £25,000 each then it will be money well spent. The tenants can ask the LVT to make an order that the landlord cannot add his costs of the LVT application to the service charges (a “section 20C” application). ●
elaine dobson is a Real Estate partner and helen Matthews a Senior Associate at Bircham Dyson Bell LLPMatthews a Senior Associate at Bircham Dyson Bell LLP tel 020 7227 7000 Website www.bdb-law.co.uk
ThaT Sinking feeling The last tThe last thinghing any leaseholderany leaseholder wants is to find twants is to find that that theirheir servservice charge isice charge is suddenly ramped up to pay for unforeseen repairs. So what’s the solutsuddenly ramped up to pay for unforeseen repairs. So what’s the solution?ion?
Leases often call for landlords to establish a ‘sinking ’ or ‘reserve ’ fund which allows residents to build up a sum of money to cover the cost of expensive works such as structural repairs, external decoration or wholesale window replacement. There are several advantages to maintaining a reserve fund, even if your lease doesn’t call for one. Sinking funds: n earn interest as they are held for a longer period than regular service charge monies which increases the fund and helps ease the impact of rising repair costs; n allow payments to be spread, in some cases, over many years; and n even out annual charges, avoiding one-off bills and helping leaseholders to budget in advance.
If your lease calls for a sinking fund, it may also determine how much is to be paid by each resident. If this is not the case, the charge levied by the landlord must be ‘reasonable’ and having a maintenance schedule in place (see page 53) makes contributions to a sinking fund transparent. However, leaseholders have the same right to challenge unreasonable charges via the LVT as with annual service charges.
Any unused payments made to a sinking fund are not normally repaid to leaseholders if they move out of the block, but all leases are different and this may be the case if the lease specifies it.
There is more information on service charges and sinking funds on our web site at www.flat-living.co.uk and on the lease website at www.lease-advice.org
Changing your Articles of Association to tackle nonpayment of service charges could be a dangerous tactic,
says bruce maunder-Taylor Who are the real rOGues?
There are some blocks of flats run by resident-controlled management companies in which one leaseholder is claimed to be holding everybody else to ransom and who in turn claims victimisation by the Board of Directors.
To voluntary unpaid directors of a Residents’ Management Company (RMC) with no capital assets of its own, no profits to rely on, and only a self-balancing service charge account, any legal proceedings that result from this situation can be a nightmare - as they can be for the leaseholder who feels victimised. In a typical case of this kind, the RMC will issue County Court proceedings for recovery of whatever is owed; the matter will be referred to the LVT for a determination; the matter will return to the County Court (if not settled); and substantial costs - often running into tens of thousands of pounds - will have to be paid. This does not only apply to recovery of service charges but also to alleged breaches of a lease and other litigation affecting residential block management.
In an attempt to tackle this problem and avoid litigation, there is now an emerging tendency for solicitors to advise RMCs to change the Articles of Association (the rules which govern the management of their company) to enable the RMC to collect money from the shareholders, either collectively or individually, if the directors decide to make a demand. The expectation is that if one resident, who is accused of being a ‘rogue’ leaseholder, puts the company to substantial cost, the Directors can legitimately demand those costs from that leaseholder as a shareholder or member of the Company and expect to recover them that way.
TesT case
The ability for a company to do this was tested all the way to the Court of Appeal in the case of Di Marco –v- Morshead Mansions Limited in 2008, when it was decided that whatever is payable by way of service charges through the lease is quite separate and distinct from what is payable through the Articles of Association of the Company. The Court determined that this is the case even if the sums being demanded are, effectively, service charges. In the case of Morshead Mansions, it is understood that a General Meeting of the Company is now held each year for the majority to vote on a budget necessary to manage the block of flats. No service charges are collected through the lease mechanism and all funds are collected through the Articles of Association from the shareholders of the Company (every lessee being a shareholder). If anyone wishes to challenge the demand, it is not a service charge, therefore the leasehold legislation does not apply and the LVT has no jurisdiction.
There are also some RMCs which still collect service charges through the lease, but have varied the Articles of Association so that they
can demand from a particular leaseholder, a group of leaseholders or all leaseholders, litigation or other costs, sometimes on a collective basis, sometimes on an individual basis. As far as is known, individual demands have not been tested in the Courts, but the threat of using such a provision in the Articles of Association is, frankly, frightening and tends to bring a rapid conclusion to the dispute.
Open TO abuse
The problem is that these provisions in Articles of Association are open to obvious abuse if used unfairly and threaten to put us back to where we were with rogue landlords before the Landlord and Tenant Act 1985 and subsequent legislation. This time, the leasehold sector could be faced not with rogue landlords, but with alleged rogue directors of RMCs.
It is now not uncommon for RMCs to find themselves in a financially embarrassing position when dealing with a difficult leaseholder issue as they do not often have the financial resources to see the dispute all the way through. Lawyers with or without expert witnesses are expensive, and the litigation process is not only two layers (County Court and LVT), but now often includes mediation as well, imposed as a third layer. There are many ordinary people (leaseholders as well as directors of RMCs) who find this surprising and unacceptable. It means they start looking for alternatives. Is one leaseholder in your block holding the rest to ransom?
Is cOmmOnhOld The answer?
It had been hoped that Commonhold tenure would help to resolve this matter as the Commonhold provisions effectively allow for the budget to be agreed by the Commonhold members at a General Meeting, by majority decision, and that decision is then enforceable. However, to transfer from a freehold block of flats with each flat held on lease to Commonhold tenure requires unanimous agreement, which is rarely achievable. Unless and until Parliament changes the unanimity rule (for example, at present to vary all leases under S.37 of the 1987 Act requires 75% in favour and not more than 10% against), then Commonhold tenure is out of reach of most blocks of flats.
That leaves changing the Articles of Association of the Management Company in the way described above, and putting a lot of power in the hands of the directors who do not need to see majority decisions unless the Articles of Association also provide for that. On the other hand, if one individual or a small group of leaseholders is putting everybody else to vast expense on what ought to be unnecessary litigation, what other choice is there? ●
bruce maunder Taylor is senior partner of Maunder Taylor. Tel 020 8446 0011 Website www.maundertaylor.co.uk
FREQUENTLY ASKED QUESTIONS
What happens if the flat I want to buy has service charge arrears associated with it? The previous owner is responsible for the arrears – they must be paid off prior to sale or included as an additional payment with the completion monies. Why is my service charge so high? others in the block aren’t paying. What can I do? The Leasehold Valuation Tribunal (LVT) can determine whether you are liable to pay a service charge. Be sure to check your lease before applying –it may be that you are obliged to pay a greater share than your neighbours under your lease terms. I can’t pay/won’t pay. What now? You should never flatly refuse to pay your service charge. Try negotiating with your freeholder/management company. Failing that, apply to the LVT for determination of your liability to pay. The money is not used in the way I would like. What can I do? Your freeholder / management company is obliged to spend service charge monies on carrying out their obligations as described in your lease. It is not for a leaseholder to decide if the right decisions are being made. If you think a cost is not reasonably incurred, the LVT can determined whether the charge should have been paid. Can the managing agent/ freeholder keep increasing service charges? A service charge must reflect the true cost of providing the relevant service. If this is not the case, the LVT can determine whether the charge is payable. We pay the service charge but the work is not done or done, but of a poor quality. What now? Try to negotiate a reduction with the freeholder / management company. If this fails, apply to the LVT for determination. If there is a dispute between the managing agent or freeholder and one or more of the leaseholders, resulting in non-payment, how can we make sure that emergency works are carried out? The obligation to carry out repairs and maintenance will be described in your lease and often exist exclusive of the leaseholder’s obligation to pay the service charge. The County Court can enforce the freeholder / management company’s obligations to carry out repairs or maintenance works. Can we use a mediation service to resolve our problems? Indeed. Mediation is a voluntary process whereby the participants seek to agree out-of-court how they are going to resolve their dispute. It is often cheaper to enter into mediation than take a matter to court or tribunal. We can’t agree on the right service charge level. What now? Apply to the LVT for determination. The management element of the service charge is too high. What can I do? The LVT is also empowered to determine administration charges, such as management charges. An application to the LVT can result in a decision of the level of management charge you are liable to pay. ●
Mediation is a voluntary process
Who writes the rulebook?
The RICS Service Charge Residential Management Code (the RICS Code) is the industry standard code of practice for anyone managing leasehold property in
England, explains GeoRGIana hIbbeRd
The RICS Code is endorsed by the Government. All RICS and ARMA members must abide by the code and it is also followed by the Leasehold Valuation Tribunals when determining service charge cases.
Property managers governed by the RICS Code must know and work within the law. They are expected to be familiar with the terms of leases for the properties they manage and will have client money protection. In addition they will ensure that service charge monies and reserve funds are held in a trust account and used only for appropriate purposes. They are expected to undertake regular inspections, ensure the property is adequately insured, and not to ignore arrears. In all their dealings they should treat the parties fairly, ensure confidentiality and have a policy for dealing with disputes between occupiers.
The RICS also publishes Residential Property Standards (known as the Blue Book) which provides best practice guidance for estate and letting agents. A new edition is due to be published in October to include block management and will complement the Service Charge Residential Management Code. ●
Georgiana hibberd is Associate Director Residential at RICS. Tel 0207 222 7000. Website www.rics.org
Go to www.flat-living.co.uk/information-servicecharge-residential-management-code for a link to purchase a copy of the code
WhaT IS The RICS? The RICS is an independent organisation, acting in the public interest. It sets and regulates the highest standards of competence and integrity required of its members and provides impartial, authoritative advice on key issues for business, society and government.
AMERGER BETWEEN BIGWOODAND CURRY & PARTNERS
When It Comes To Property Management We STILL Place Quality AboveAll Else.
Regulated by RICS
