Service charges are sums of money payable by lessees because of obligations those lessees have in their leases.
There are a range of restrictions on the recovery of service charges.
The impact of not complying with those restrictions can mean that service charges are not be payable by the lessee until such time as obligations have been fulfilled (or a valid demand served). In some cases, the impact is fatal to the recovery and can mean that the service charges will never be payable.
That’s why it’s so important for anyone seeking to recover service charges (and agents who are instructed on their behalf) to ensure that the contractual and statutory restrictions are met.
Our mantra at Property Management Legal Services is “read, understand, and implement”. Our CEO, Cassandra Zanelli, is often on her soapbox talking about the importance of reading, understanding and implementing the terms of residential leases. This is because contractual restrictions are based on the lease. And the lease is the starting point when dealing with services charges.
When reviewing the lease, there are three key points to consider.
- What does the *actually* lease say – does it oblige a leaseholder to pay services charges?
- Is the demand calculated in accordance with the method of apportionment set out in the lease?
- Are there any pre-conditions for payment set out in the lease? If so, have these been complied with?
Understanding the mechanics of the lease, and implementing the service charge recovery process in accordance with those mechanics is essential.
If your leases are unsatisfactory – perhaps they don’t allow for all costs to be recovered or the percentages don’t add up to 100% – then you really ought to consider varying them otherwise you’re perpetuating a constant under recovery.
Beware, too, non-compliance with pre-conditions. Because we know from Skelton v DBS (Kings Homes) Limited that the 18 month rule applies to on account demands for service charges.
In addition to reading, understanding and implementing the lease, statute also places a number of restrictions on the recovery of service charges.
- Identification of landlord. Sections 47 and 48 of the Landlord & Tenant Act 1987 prescribe information regarding the landlord that must be contained within any service charge demand. Our RTM resource explains the implications of sections 47 and 48 for RTM companies.
- Rights and obligations. A demand for service charges and/or administration charges must be accompanied by a summary of rights and obligations for services charges and/or administration charges.
- 18 month rule. Within 18 months of incurring a cost, a landlord must demand those costs as a service charge (unless a Section 20B(2) Notice has been served).
- Consultation. Where qualifying works are undertaken, or a qualifying long term agreement entered into, the relevant contributions of the leaseholders will be limited unless statutory consultation has been undertaken, or dispensation obtained from the tribunal.
- Reasonableness. Services charges are payable only to the extent that they are reasonably incurred, and where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard.