Challenging unreasonable service charges
This month's blog post is a little overdue as I have been super busy over the past month dealing with party wall disputes, advising on restrictive covenants and leasehold disputes to name but a few. This blog post will focus on challenging unreasonable service charges and will also address the issues affecting leaseholders who may be liable for the costs associated with replacing unsafe fire cladding. This area of law is extensive and so this post will provide an outline of the law. Please note that the law stated in this blog post is only applicable in England and does not constitute legal advice.
What are Service Charges?
Service Charges and relevant costs are defined in Section 18, Landlord & Tenant Act 1985 as:
An amount which varies or may vary payable by a leaseholder as part of or in addition to the mortgage which is payable, directly or indirectly, for services, repairs, maintenance [improvements] or insurance or the landlord’s costs of management.
The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable.
Service Charges allow a freeholder to recover the reasonable costs from the leaseholder that they incur in providing services to a building. These charges can include maintenance and repair and sometimes improvement of the exterior, structure, roofs, foundations, window frames, guttering, communal drains, pipes and common areas. Service charges can also include insurance of the building and the costs of a management company if the property is managed on behalf of the freeholder.
When I am approached to provide advice on service charges and whether they are payable or nor my first response is always, "What does the lease say?". The lease is a contractual document and most leases will contain a service charge provision which provides a full breakdown of when, how and what service charges are recoverable and the steps that must be followed to recover service charges.
A practical word of advice for homebuyers looking to purchase a leasehold property is whilst they will be advised by the sellers solicitors of the current annual service charges it is advisable to request details of service charges from previous years to understand if the charges are increasing at a disproportionate rate. This will assist leaseholders in making an informed decision about proceeding with the purchase and factoring in the possibility of increasing costs.
The requirement to pay service charges is a contractual obligation and failure to do so is a breach of the lease which can result in the freeholder taking legal action, which can include forfeiture proceedings to take possession of a leaseholder's home. However, this does not mean that the freeholder can charge what they want and leaseholders are advised that they are only liable to pay service charges which are reasonable.
Reasonableness is defined in Section 19, Landlord & Tenant Act 1985, which provides that:
(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—
(a) only to the extent that they are reasonably incurred, and
(b) 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;and the amount payable shall be limited accordingly.
(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.
In summary the service charges payable must have been reasonably incurred and the works must have been done to a reasonable standard.
The most common complaints about service charges by leaseholders are the management fees chargeable, having no control over the work that is done, lack of transparency about costs, unfair service charges and escalating ground rents to name but a few. A leaseholder who feels that the service charges payable are unreasonable and/ or the works have not been done to a reasonable standard can make an application (Form: Leasehold 3- Application for a determination of liability to pay and reasonableness of services charges) to the First Tier Property Tribunal under Section 27A, Landlord & Tenant Act 1985, for a decision on:
Whether the leaseholder is responsible for paying the service charges;
Who they should pay the service charges to;
How much they should pay;
When they should pay the services charges; and
How they should pay the service charges.
Once all factors of reasonableness have been considered in full the Tribunal will make a Decision as to whether the service charges demanded must be paid in full or only the sum it has decided is reasonable.
A word of warning, some leases entitle the freeholder to include the legal costs that they have incurred when a leaseholder brings proceedings, and claim it as part of the service charge or an administrative charge . Section 20C, Landlord & Tenant Act 1985 gives the Tribunal (or Court if the claim is in the County Court) power on an application by the leaseholder to make an order that the costs of the proceedings are not to be included in the service charges. Section 131, Housing & Planning Act 2016 is the applicable statute for administrative charges.
Fire Cladding & Service Charges
Following the Grenfell Fire tragedy all identified high rise buildings and publicly owned buildings in England were required to arrange to have removed Aluminium Composite Material (ACM) Cladding which did not meet Building Safety Regulations.
The cost of the removal is in some instances being passed on to leaseholders even though fault lies with those involved in the initial construction of the building, i.e. the architects, building inspectors and developers who were required to comply with the building regulations. Whether the cost of the removal is payable by the leaseholder will depend on whether the building owner or its managing agent has applied for financial assistance with a remediation fund, whether there is a new home warranty in place and lastly what is included in the terms of the residential lease. If a leaseholder residing in a high rise building or a building identified as having ACM Cladding is concerned about their service charges they are advised that:
The remediation fund is available for the benefit of leaseholders whose buildings are eligible to receive funding and who would otherwise have an obligation to meet the cost of cladding due to the service charge clauses in their leases. The funding only applies to residential buildings over 18m tall and is for the removal and replacement of ACM Cladding Systems only. Other costs associated with complying with new Building and Fire Safety legislation will not be covered by the Fund and freeholders may seek to recover these costs via the service charge.
New-Build homes will be subject to a 10 year warranty which will entitle leaseholders to recover any costs via this warranty for defects and faults.
Terms of Lease:
Whether a leaseholder can challenge service charges which have arisen as a result of the freeholder complying with Building and Fire Safety Regulations will depend on the wording of the lease and so will be determined on a case by case basis. However, leaseholders should refer to their leases and look for service charge provisions such as “complying with the requirements of a competent authority” or “complying with the provision of statutes” as this is typically the type of clause the freeholder will rely on to recover these costs as a service charge. The lease may also include catch all terms that will usually cover money spent for the “benefit of the building” or “good estate management” and may allow a landlord to recover fire safety costs from the leaseholder. Any costs that are recoverable will however still have to be 'reasonable' and 'reasonably incurred'.
For help or advice on service charge recovery or any other property management disputes, please click here to contact me.
This blog post is not a substitute for legal advice and is produced purely for educational purposes.