Recent developments relating to residential service charges

March 10, 2023

Before buying a leasehold property, buyers should ensure they understand the main clauses in their lease and it’s very important to find out what the current and future service charges are likely to be.

The lease is a contract between the tenant or leaseholder and the landlord, that among other things includes the landlord’s power to charge a service charge and leaseholder’s obligation to pay it.

Service charges are the payments a leaseholder makes under the terms of the lease towards the costs of running and maintaining the building or estate. The landlord should provide a summary of leaseholder’s rights and obligations with the service charge demand, which should reflect the way the service charge is set out in the lease.

The charge normally covers the cost of services provided to all properties in the building or estate and cost of such other services as general maintenance and repairs, buildings insurance, lifts, porters, and lighting and cleaning shared areas and so on and may also include the costs of management services, provided by the landlord or by a professional managing agent. The charge may also allow for the improvement of the exterior, structure, roofs, foundation, window frames, communal drains and pipes and contributions to a reserve fund, the purpose of which is to build up a sum of money to cover the cost of irregular and expensive work.

The lease will set out details of what the landlord can and cannot charge for and the proportion of the charge that each leaseholder will have to pay. Some old leases provide a fixed charge, but most service charges are based on the actual cost of the services and will be variable. The charge will be estimated initially with a balancing payment or credit at the end of the year when accounts have been prepared.

The lease will state when the service charge is due. It is often payable yearly either at the beginning of the calendar year or, the financial year, sometimes on quarter days or in advance of the landlord incurring the costs, based on an estimate of costs in the coming year.

Usually, a lease allows the landlord to recover their cost for maintaining and repairing the building from the leaseholders, but the law also expects the landlord to behave in a ‘reasonable’ manner. The Landlord and Tenant Act 1985 (as amended) states that a service charge is only recoverable by a landlord so far as the costs have been reasonably incurred and are of a reasonable standard.

A leaseholder can challenge the reasonableness of a service charge if it does not comply with above, ultimately, by applying to the appropriate Tribunal. In England, this is First-tier Tribunal (Property Chamber) and in Wales it is the Leasehold Valuation Tribunal.

Service charges are one of the main areas for dispute between leaseholders and landlords.

The last significant court decision was handed down by The Supreme Court on 8 February 2023 (https://www.supremecourt.uk/cases/uksc-2021-0059.html) where the court considered whether or not landlords have management discretion to vary service charge percentages in residential leases.

S.27A(1) of the Landlord and Tenant Act 1985 (the Act) gives the First-tier Tribunal (FtT) the ability on application to make various decisions about service charges in residential dwellings, including whether it is payable or not. If it is, the FtT may also determine:

– by and to whom it is payable

– the amount payable; and/or

– the date and manner of payment.

S.27A(6) of the Act provides that an agreement is void in so far as it purports to provide for a service charge determination in a particular manner or on particular evidence of any question which falls under s.27A(1). In this case, the lease provided for residential leaseholders to pay a fixed percentage of various costs in respect of service charge but additionally gave the landlord, pursuant to their management functions, an ability to vary the percentage.

Lord Briggs, giving judgement on behalf of the Court, stated that the purpose of s.27A(6) is to avoid attempts to oust the jurisdiction of the FtT to review the contractual and statutory legitimacy of a landlord’s management decisions, in the sense of whether they are legitimately due under the lease and under statute – not to stop the landlord making those decisions. Also, s.27A(6) is not intended to give the FtT special powers or enlarge its jurisdiction beyond that already contained in s.27A(1), or to prevent flexibility in the service charge provisions.

The Supreme Court felt that if the landlord’s discretionary management powers were transferred to the FtT, this would produce the “most bizarre and surely unintended results” that landlords would never be able to safely incur costs without first checking with the FtT that the costs could be charged to its tenants. This could in consequence greatly increase the number of applications made and overwhelm the Tribunal system.

This decision means that the FtT’s role is as a reviewer and moderator – reducing the scope for applications and means landlords can go about their usual management business with less risk of disputes and litigation, so long as they act in a reasonable and rational way. If you are in any doubt about your rights and responsibilities or uncertain if you need to pay a service charge, first check the wording of your lease and get advice. Please contact Wallace Robinson & Morgan on 01217057571 or alternatively, please email to enquiries@wallacerobinson.co.uk if you need further assistance.

Kateryna Knyazyeva
Paralegal – Commercial Department

This article is for general information purposes only. It does not constitute technical, financial, legal advice or any other type of professional advice and is no substitute for specific advice based on your individual circumstances. We do not accept responsibility or liability for any actions taken based on the information in this article. For more information, please click here.