Service charges: are they a bit demanding?

Put simply, if they are not demanded in accordance with the lease and the statutory requirements placed on landlords, they may not be payable until the problems have been rectified. In some cases, the money may never be recovered.

Service charges are payments made for services, repairs, maintenance, improvements, insurance, or the costs of management. Leaseholders have a duty to contribute, but there are restrictions on the recovery of the fees.

Contractual restrictions

Most appropriately worded leases will require the payment of services charges to the landlord or management company, but not all take the same format.

When reviewing the lease, check the following:

When are payments to be made? Does it allow for payments on account and how are these calculated? Are service charges recoverable in arrears?

Does it allow for one off payments, sometimes called a ‘cash call’?

There are various methods of apportioning service charges and any demand must comply with your lease. In some cases, there is an obligation to pay a ‘fair proportion’ determined by a third party whose decision is deemed final.

Beware of third party clauses, as the Upper Tribunal recently held in Windermere Marina Village Ltd v Wild and Others that this kind of contractual mechanism was void.

Statutory restrictions

There is also legislation in place that puts a number of restrictions on the recovery of service charges. It is all too common for demands not to meet these legal requirements and therefore, leaseholders are entitled to withhold payment. In some situations, service charges could become ‘stale’ and unrecoverable, as explained below.

Sections 47 and 48 of the Landlord and Tenant Act 1987 set out information that should be contained within a demand. This includes the name and address of the landlord, and an address in England and Wales to which notices can be served. If these details are not provided, the money is not due until the error has been rectified.

All demands must also be accompanied by a summary of the rights and obligations for service charges or administration charges. Check that up-to-date versions of this prescribed information are being used, as they were changed following the introduction of the First Tier Tribunal (Property Chamber) on July 1 last year.

The Landlord and Tenant Act 1985 makes it clear that a landlord must demand a service charge or warn leaseholders that they will be required to make a payment within 18 months of incurring the expenditure. There is a lot of case law on when costs are deemed to be incurred, but failure to adhere to this rule will cause the payment to go ‘stale’ and it will then be unrecoverable.

The moral of this story is that all parties should review the procedures in place for your development. Make sure demands are not only issued in accordance with the lease, but also meet each of the statutory requirements.