The Landlord and Tenant Act 1985 sets out the basic rules for service charges. It defines what is considered a service charge, and sets out requirements for making sure costs are reasonable and for landlords to consult leaseholders before entering into any agreement for work or services which would lead to a service charge.
Landlords charge service charges to recover their costs in providing services to a building. The way in which your service charge is organised (for example, what it covers and how it is worked out) is set out in your lease or tenancy agreement. The charge normally covers the cost of services such as general maintenance and repairs, buildings insurance and, if these are provided, central heating, lifts, porters, and lighting and cleaning shared areas and so on. The charges may also include the costs of management services provided by the landlord or by a professional managing agent, and contributions to a reserve fund.
The lease will set out details of what the landlord can and cannot charge for and the proportion of the charge that you will have to pay. The landlord, or sometimes a management company named in the lease, provides the services and you and any other leaseholders pay for them. The landlord will generally make no financial contribution to the services, but sometimes they have to pay for the services before recovering their costs from leaseholders.
Estate management scheme charges
An estate management scheme allows landlords to keep some management control over properties, facilities and shared areas if the freehold has been sold to the leaseholders. These schemes are quite rare. Since 1976, it is no longer possible to create new ones for houses, and since 1999 they can only be created for flats in very limited circumstances.
In many cases, the aim of a scheme will be to make sure that the appearance and quality of the area as a whole is kept to the same standard. However, a scheme can also include conditions relating to the upkeep of shared gardens or other shared facilities or areas. If this is the case it may allow the landlord to recover certain charges.
You can challenge charges made under a scheme in a similar way to service charges. You can apply to the property tribunal to vary the scheme itself on the grounds that a charge made under the scheme is unreasonable or that any formula used to calculate the charge is unreasonable. You and the landlord can also apply to the tribunal for a decision as to whether or not a charge should be paid and, if so, how much the charge should be, who should pay it and who they should pay it to, and how it can be paid.
Service charge structure
Generally, the landlord must provide certain services under the lease, and can charge a service charge for doing so.
The lease will usually give the dates of the service charge period and how often the payments are due. The service charge period is often a year, but payments may be due every six months or every three months, or in some cases may be charged after the costs have been run up. Your lease will usually set out the percentage or proportion of the service charge that you must pay. For example, you may have to pay a share of the charge based on the square footage of the flat as a proportion of the whole building. Or, your share of the charge may be based on a simple percentage of the total service charge or, in older leases, it may be based on the rateable value of the flat as a proportion of the rateable value of the whole building. Sometimes the lease just states that each leaseholder must pay a ‘fair’ or ‘just’ proportion of the service charge. If different groups of tenants benefit from different services, there may be different service charges for the different groups.
Your lease will say whether you must make advance payments and, if so, whether these are based on the previous year’s cost or an estimate of the cost in the year to come. There will often be a final charge due at the end of the year when the actual costs are known, if these are not covered by the payments you (and any other leaseholders) have made. In this situation, the landlord will send you a bill asking for your share of the shortfall. If the total payments leaseholders have already made are more than the actual costs, depending on what it says in the lease the extra money may be:
- used to reduce next year’s charge;
- refunded; or
- paid into a reserve fund.
Limits on service charges
Service charges can go up or down without any limit, but the landlord can only recover costs which are reasonable. You have the right to apply to the property tribunal to challenge any service charges that you feel are unreasonable.
When considering buying a leasehold flat, it is important to find out what the current and future service charges are likely to be. Your solicitor will normally ask the seller for this information.
The power to recover service charges
It is important to understand that your landlord’s power to charge a service charge and your obligation to pay it are governed by the conditions in the lease. The lease is a contract between you and your landlord, and you do not have to pay anything that is not included in your lease.
Your lease may contain specific terms which say your landlord must carry out certain work or provide certain services. You only have to pay a service charge for the work or services if the lease contains a clause giving your landlord the power to recover the cost of the work or services from you. If the costs can be recovered through a service charge, the lease should say whether you should pay this before or after the work is carried out or the services are provided, and whether you should pay it as regular payments, perhaps once a year or on a set day every three months, or whether it should be charged once the costs have been run up. Your lease may be very specific in its wording, setting out quite precisely which work or services your landlord can charge for. Or, the clauses may be very general and simply refer to the costs of repairing and maintaining the structure of the building.
You can generally assume that a service charge will apply and that it will cover the costs of repairing and maintaining the fabric of the building, the lift, the boilers and so on, as well as cleaning, lighting and maintaining shared areas. What else the service charge covers will depend on the type of services provided. In some cases, the service charge is worked out simply by referring to the landlord’s costs in meeting their obligations, as set out in one of the schedules to the lease.
There are a number of issues to consider if your lease allows your landlord to apply a service charge to recover their costs.
- Improvement work: As a general rule, leases in the private sector do not state that leaseholders must contribute to costs of work to improve the building. However, leases from local authorities and housing associations often do contain such clauses.
- Management costs: The fact that the landlord, or a managing agent acting on their behalf, manages the building does not automatically mean that they can recover management charges. They can only do this if the lease says they can. Your lease may state that the landlord can recover a percentage of their costs, or may just refer to a ‘reasonable’ amount.
- Legal costs: As with management costs, these must be included in the lease. If your lease allows your landlord to recover legal costs through a service charge, they may well include the cost of recovering arrears.
- Caretaker and porter: If your lease allows your landlord to recover the costs of employing a caretaker or porter, it should be clear what is included in the service charge. For example, it should state whether or not the caretaker or porter will live on the premises, and if they will, whether their accommodation must be provided rent-free. The cost of a live-in caretaker or porter will normally be higher than if they don’t live on the premises.
- Heating, cleaning, garden maintenance and alarm systems: Again, if your landlord must provide these services, and you must pay for them, this should be included in your lease (and usually will be). In some cases, this may be done simply by referring to the landlord’s obligations, as set out in one of the schedules to the lease.
The general principle of a lease is that the landlord does not have to provide any service which is not covered by the lease, and the leaseholder does not have to pay for anything that is not specifically set out in the lease.
If you are in any doubt about whether you need to pay a charge, check the wording of your lease and get advice, if necessary, from a solicitor who specialises in this area of the law.
The need to be reasonable
Usually a lease simply allows the landlord to recover their costs for maintaining and repairing the building (including any management costs), and for general upkeep, from the leaseholders. They can claim back any money they have spent, but cannot normally make a profit from managing the building.
The law also expects the landlord to behave in a ‘reasonable’ manner regarding spending on the building. The landlord has a long-term interest in maintaining the condition and value of their investment. You may have a much shorter-term view if you only intend to live in the property for a few years. These different viewpoints often lead to dispute.
A landlord does not usually have to keep the costs to a minimum. However, the law states that service charges must be ‘reasonable’ and, where costs relate to work or services, the work or services must be of a reasonable standard.
Demands for service charges
Demands for service charges which you must pay to your landlord must be in writing and must contain your landlord’s name and address. If your landlord’s name and address are not on the demand, you do not have to pay the service charge until you are given this information. (The name and address of the managing agent will not count unless they are also the landlord.) If your landlord’s address is outside England or Wales, the demand must contain an address in England or Wales which you can use to send notices to your landlord.
This does not apply if you must pay the service charge to a management company named in the lease, rather than directly to your landlord. The demands must still be in writing, but they do not need to contain your landlord’s name and address.
Normally the lease will allow landlords to ask for the service charge before work is carried out or services are provided, but there will be times when the demands are issued afterwards. In these cases, your landlord must issue the demand within
18 months of when they become liable to pay for the works undertaken or the services provided, which may be either by the presentation of an undisputed invoice from the contractor or supplier or actual payment of the invoice. If they issue the demand later than this, they cannot recover the costs unless they serve a notice on you within 18 months of the landlord becoming liable to pay for the works undertaken or the services provided , stating that they have run up the costs for the work or services and that you will have to contribute to those costs by paying a service charge (section 20B of the Landlord and Tenant Act 1985).
With any service charge demand, landlords must provide a formal summary of rights and obligations (the content and form is set by Parliament).
Summary of service charges accounts (section 21 of the Landlord and Tenant Act 1985)
Leaseholders, or the secretary of a recognised tenants’ association, have a legal right to ask the landlord for a summary of the service charge account. The request must be in writing and can be sent directly to the landlord or to the managing agent. It can ask for a summary of the relevant costs relating to the service charges for the last accounting year or, if accounts are not kept by accounting years, the past 12 months.
If a landlord receives a request for a summary of the service charge account, they must provide it within one month (or within six months of the end of the 12-month accounting period, whichever is later).
The summary should show:
- how the costs relate to the service charge demand, or that they will be included in a later demand (if this applies);
- any items which the landlord did not receive a bill for during the accounting period;
- any items which the landlord received a bill for but which they didn’t pay during the accounting period;
- any items which the landlord received a bill for and which they paid during the accounting period; and
- whether any of the costs relate to work for which an improvement grant has been or will be paid.
If the service charge must be paid by the leaseholders of more than four homes, the summary must be certified by a qualified accountant as a fair summary and the landlord must give the accountant adequate accounts, receipts and other documents to support this. If the landlord is a local authority one of their officers who is a qualified accountant may certify the summary, but in all other cases, the accountant must be independent of the landlord.
Rights to further information (inspecting accounts and receipts) (section 22 of the Landlord and Tenant Act 1985)
Leaseholders also have the right to inspect documents relating to the service charge to provide more detail on the summary. Within six months of receiving the summary, leaseholders (or the secretary of a recognised tenants’ association) can write to the landlord to ask if they can access and inspect the accounts, receipts and any other documents that are relevant to the service charge information in the summary and to ask them to provide facilities to copy these.
The above right applies even if the summary was provided as end-of-year statement of account, rather than in response to a formal request for a summary under section 21 of the Landlord and Tenant Act 1985.
Landlords must provide facilities for inspecting the documents within one month of the leaseholder’s or secretary’s request, and these facilities must be available for two months.
Leaseholders have other rights to investigate the service charges and the way the building is managed – the Leasehold Reform Act 1993 gives them the right to ask for a management audit, and under the Housing Act 1996 they have the right to appoint a surveyor. Full details of those rights are set out in the LEASE advice guide Appointment of a Surveyor, Management Audits.
What happens if my landlord fails to provide a summary or allow access to further information?
If your landlord fails to provide a summary or access to inspect and copy supporting documents following a request from you or the secretary of a recognised tenants’ association, and they do not have a reasonable excuse for this, they are committing a summary offence and are liable for a fine of up to £2,500 (level 4 on the standard scale of fines for summary offences) if they are convicted. Ashford Borough Council has the power to start legal proceedings against the landlord, or you can start them. Local authorities are exempt from prosecution, but registered providers (housing associations) are not.