The landlord, as holder of the freehold interest in a property, is responsible for providing utilities and services to their premises. These include maintenance, insurance, heating, lighting, water, gas and electricity. In order to finance such provision, a landlord will almost always include a service charge in the lease agreements with tenants who ultimately benefit.
Forms of lease agreement for service charges
A lease agreement will contain the amount and periods due for service charges. They are ordinarily based upon a tenant’s percentage area of occupation of a property. In any event, they must be calculated in a fair manner and be reflective of each tenant’s use.
If a unit is left vacant, the landlord will cover the cost of maintaining that unit that would have otherwise been paid by a tenant.
In order to achieve financial certainty, a landlord, who in many cases has to purchase utilities and services up front, may require advance payments from tenants.
Where a landlord collects service charge fees in advance, these are often pooled in reserve funds. These funds are used to cover unexpected, costly repairs and essential maintenance, which would otherwise in turn result in an unexpected uptick in service charge fees for that period.
By law, if funds are pooled in such a manner for the benefit of tenants, they must be held in trust by the landlord, with the latter acting as trustee. As trustee for the tenants, the landlord is subject to fiduciary duties of care that require the landlord to act in the best financial interests of the tenants.
Variable service charges
Contemporary practice has moved away from incorporating fixed service charges into rent payments, owed to fluctuating costs of providing such services shouldered by the landlord. Instead, variable service charges are levied on the basis of an annually reviewed estimation.
Limitations on service charges
Whether they are contributions to a reserve fund, or a standard annual service charge, all charges must be reasonable in nature. If a payee feels they are not, they may bring a challenge before the First-Tier Tribunal (Property Chamber). In addition, the landlord must act reasonably with regards their expenditures. The Royal Institute of Chartered Surveyors (RICS) Service Charge Code prescribes several principles relating to procuring services, including prioritisation towards value for money and that landlords must refrain from profiting from collection of service charges.
A court action can be brought not only on the basis of charges already levied, but also cost estimations proposed by the landlord. The First Tier Tribunal (Property Chamber) will consider whether the charges are reasonable in relation to the standard of works proposed. It will also consider the landlord’s conduct in evaluation and budgeting for works.
Alternative Dispute Resolution
It is advisable for lease agreements to include a clause requiring the parties to enter ADR where a dispute over charges arises. ADR can include mediation, and if the parties cannot agree on an independent mediator, the RICS can be requested to nominate one.
Recovery of service charges
A landlord is not permitted to charge tenants for services and utilities that are not featured in the lease agreement. In private sector housing, it is uncommon for tenants to be required to cover the costs of improvements to the premises. If a service provider is contracted for by the landlord for the purpose of cleaning and caretaking the premises, they must be referred to in the lease agreement.
Procedure for recovery
A request for payment of service charges must be made in writing and feature the name and address of the landlord, or a management company that is named on the lease and should receive direct payment.
If sums are owed retrospectively for works, an 18-month time limit applies within which the making of the expense. If the tenant is not given notice that payment is due within this period, the landlord cannot recover.
Rights of the leaseholder
Two key rights held by leaseholders are (1) the right to request the particulars and full accounts pertaining to service charges and (2) to be consulted over works above a certain value.
Particulars of service charges and access to accounts
Leaseholders have a statutory right to demand the particulars of service charges levied against them, made out in writing. The details of charges for up to 12 months prior to the date the demand is made can be requested by the leaseholder. If the premises hold more than four flats, the landlord is required to have the service charge particulars certified by an accountant independent of the landlord.
Upon receiving the particulars of service charges, tenants have a six-month period wherein they can request production of receipts and accounts, which the particulars refer to.
In the event the landlord refuses to comply with a request for particulars or subsequent access to accounts and receipts, they have committed a prosecutable criminal offence, which entails fines of up to £2,500.
If the works to be carried out would entail a cost to each tenant of £250 or more, and there was no prior agreement, the landlord must consult with the tenants. In accordance with the RICS Code, tenants should be proactive and engage with the landlord in identifying the best commercial options.
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A tenant should always be aware of what they are being billed for when the landlord undertakes work relating to the premises. Likewise, landlords must be aware of their accounting obligations or else expose themselves to criminal liability. In the course of dealings, parties to a lease agreement should be fully informed of their statutory obligations and recommendations under the RCIS Code pertaining to service charges.
At Lewis Nedas, our team of Property Litigation Solicitors have broad experience in both commercial and residential property litigation. We have successfully advised clients with highly complex and multi-faceted cases. To speak with one of our Property Lawyers, please contact us on 020 7387 2032 or complete our online enquiry form.