Great demand

A service charge allows a “landlord” (which may for statutory purposes include a freeholder, headlessee, management company or right-to-manage company) to demand a contribution from a leaseholder towards the relevant costs the landlord incurs on services and works to a property.

There are five questions a residential leaseholder should consider before disputing a service charge demand. Similar principles apply to individual charges imposed on leaseholders for default, which statute describes as “administration charges”.

1. Does the demand comply by the lease provisions?

The lease may:

• provide for advance or interim charges to be paid on account of the landlord’s expenditure, before those relevant costs have been incurred
• list the items of relevant cost the landlord may properly include in the service charges
• state the proportion of these costs the leaseholder must pay (as a fixed percentage, as a fraction, or by reference to some machinery for establishing the correct apportionment)
• require the landlord to prepare end-of-year accounts setting out the relevant costs it has actually incurred
• provide for the service charge (or the relevant costs) to be certified by the landlord’s surveyor or accountant
• require the leaseholder to pay a final or balancing charge – or for the leaseholder to be credited or repaid any excess – at the end of the accounting year.

The landlord’s relevant costs will generally change from year to year. Under section 18 of the Landlord and Tenant Act 1985 (LTA 1985), this will make the service charges “variable” charges, which are subject to various statutory controls. Note that if the service charges are fixed or subject to specific increases in each year, those controls will not apply (see Arnold v Britton [2015] UKSC 36).

Very large service charge bills often relate to major works, and section 20 of the LTA 1985 requires landlords to undertake detailed consultation with leaseholders. There is not enough space here to cover these consultation requirements, but you should be aware that if the lease provides for interim service charges, landlords can often demand that they should be paid even before any consultation begins.

Whether it is fatal for the landlord not to follow the letter of the lease terms may well depend on legal issues – such as whether the requirement in the lease is treated as a condition precedent

If the landlord has not followed the terms in the lease, the leaseholder is not generally liable to pay. Whether it is fatal for the landlord not to follow the lease terms to the letter may well depend on legal issues – such as whether the requirement in the lease is treated as a condition precedent, or whether the parties can rely on equitable principles such as estoppel by convention. The landlord can often remedy non-compliance, but until this is done, the leaseholder has a right to withhold payment.

There is no legal requirement for the leaseholder to inform the landlord of non-compliance, but it may be prudent to explain to the landlord the reason for withholding payment. The leaseholder may also put the landlord on notice that the leaseholder is not liable for any administration charges which would otherwise be triggered by late payment.

Practical tips

• The court or tribunal will ask if the wording of the lease covers the service charge demand. If the wording is unclear, check the guidance given by the Supreme Court in Arnold v Britton, the leading case on interpretation of service charge provisions.
• Many leases include catch-all provisions, known as ‘sweeping up’ or ‘sweeper’ clauses, that may cover items of relevant cost that are not explicitly spelt out.
• If landlords get it wrong, they may frequently be able to remedy their mistake as soon as practicable (see Leonora Investment Co Ltd v Mott Macdonald Ltd [2008] EWCA Civ 857).

2. Is the demand paperwork compliant?

Any demand for payment of service charges must state the name and address of the landlord in England or Wales (section 47 of the Landlord and Tenant Act 1987 (LTA 1987)). If the landlord is a company, it must provide its registered address or a place where it carries out business (seeBeitov Properties Ltd v Martin [2012] UKUT 133 (LC)). Further, the landlord must give an address in England or Wales where notices can be served (section 48 of the LTA 1987).

Demands for service charges or administration charges must be accompanied by a summary of the leaseholder’s rights and obligations in prescribed form (under section 48 of the LTA 1987). There are different versions which apply in England and Wales. If there is no summary, the leaseholder has the right to withhold payment of the service charges in the demand until such time as a proper summary is served.

If the landlord fails to comply with the requirements above, leaseholders are not liable to pay the service charges or administration charges until there has been compliance.

As with non-compliance with the lease, there is no legal requirement for the leaseholder to inform the landlord of non-compliance, but it may be prudent to explain to the landlord the reason for withholding payment. The leaseholder may also put the landlord on notice that the leaseholder is not liable for any administration charges which would otherwise be triggered by late payment.

3. Is the demand out of time?

Time limits may apply. For older claims, the leaseholder may consider the limitation periods in the Limitation Act 1980.

More importantly, under section 20B of the LTA 1985, the service charge must have been served within 18 months of the landlord incurring the relevant costs.

The landlord can avoid the consequences of section 20B by giving the leaseholder notice that relevant costs have been incurred and that the tenant will subsequently be required to contribute to them by way of service charges (section 20B(2)).

4. Does the demand breach the service charge code?

The Royal Institute of Chartered Surveyors (RICS) ‘Service Charge Residential Management Code, 3rd Edition’ (the RICS Code) offers comprehensive, government-backed guidance about residential property management in England. It provides that “all service charge demands should be clear, easily understandable, relate to available budget estimates or actual accounts and be served in accordance with the lease”.

The core principles of the RICS Code also provide that landlords and managing agents must “conduct business in an honest, fair, transparent and professional manner”, and “carry out work with due skill, care and diligence, and ensure that any staff employed have the necessary skills to carry out their tasks”.

The tribunal will usually have regard to the RICS Code when deciding whether service charge costs have been reasonably incurred (see below).

5. Should the leaseholder pay under protest?

Leaseholders frequently pay service charges under protest. By doing this, the leaseholder prevents the landlord from adding administration charges for non-payment, and also ensures they (the leaseholder) are not in breach of the lease.

This does not prevent the leaseholder from taking tribunal action to contest the charges in the future (section 27A(4) of the LTA 1985).

The two-stage test

Legislation imposes various restrictions on the recoverability of residential service charges. The most important is that landlords may only recover relevant costs to the extent they are “reasonably incurred”. If the service charges are for works or services, they must be undertaken to a reasonable standard (section 19 of the LTA 1985).

There is a two-stage test (see The London Borough of Hounslow v Waaler [2017] EWCA Civ 45) to determine whether a service charge element is reasonable.

1. Were the landlord’s actions appropriate, and properly effected in accordance with the requirements of the lease, the RICS Code and the LTA 1985? In particular, did the landlord ‘test the market’ for alternative quotes?
2. Was the amount charged reasonable in the light of that evidence? In effect, is the amount charged grossly out of line with the market norm?

The law (and perhaps the lease as well) provides that the leaseholder can demand the landlord supplies information about the service charges (under sections 21 and 22 of the LTA 1985).

The next steps

If the leaseholder decides to dispute the amount, they have three options.

The first is to negotiate with the landlord. As Churchill famously said: “To jaw-jaw is always better than to war-war.”

The second is to complain, under the complaints procedure operated by the landlord or its managing agent, before taking legal action. It may be a good idea to identify the items of expenditure which are in issue and to apply the two-stage test (above).

A Scott Schedule may often be the best way t set out the complaint and explain the figures.

If the matter relates to poor workmanship, photographic evidence may be useful. A surveyor’s report may also assist, but the cost of a report will probably have to be borne by the leaseholder.

The third option is to take the matter to tribunal or court. This should be considered the very last port of call.

Most service charge litigation is dealt with by the First-tier Tribunal (Property Chamber) in England, and the Leasehold Valuation Tribunal in Wales. Both tribunals are a (generally cost-free) forum for resolving residential property disputes. Much of their work concerns service charge disputes. The website for the First-tier Tribunal in England includes forms for issuing applications of many kinds. Form Leasehold 3 is commonly used to start service charge proceedings.

Practical tips

• A Scott Schedule is often the best way of setting out the complaint and explaining the figures (see above).
• The landlord may try to pass on to the leaseholders any legal costs it incurs in connection with the proceedings through the service charge. Section 20C of the LTA 1985 enables a leaseholder to apply to the tribunal to prevent the landlord from doing this.
• The landlord may alternatively try to make a leaseholder pay its legal fees personally under a provision in the lease which entitles it to do so. Tribunals have a discretionary power to limit the ability of a landlord to recover this kind of administration charge (paragraph 5A of schedule 11 to the Commonhold and Leasehold Reform Act 2002). The leaseholder is entitled to apply to the relevant court or tribunal for an order reducing or extinguishing their liability to pay such charges.
• The tribunal can award costs against a particular party if it acts “unreasonably” in connection with the proceedings (rule 13(1) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013).