Service Charges – Why the Lease Matters
A lease is a contract. As with any contract, it creates rights and obligations between the parties.
In most residential leasehold properties, the lease will require the landlord or management company (or right to manage company) to provide certain services in relation to the building and common parts. In return, leaseholders are required to contribute towards the cost of those services through the payment of a service charge.
The starting point in any service charge dispute should therefore be the lease itself.
What Services Can Be Recovered?
A well drafted lease should set out both:
- The services that can be provided; and
- The mechanism by which the costs of those services are calculated, demanded and recovered.
If a particular service is not authorised by the lease, the landlord will generally be unable to recover the cost through the service charge, even if the service has been provided and appears beneficial to the building.
This can create genuine difficulties for landlords and management companies. There may be occasions where a service is sensible, desirable, or even considered best practice, but unless the lease permits recovery of the cost, leaseholders cannot usually be required to contribute towards it through the service charge.
Common examples can include:
- Directors’ and Officers’ Insurance for resident directors;
- Certain professional fees;
- New services introduced after the lease was originally granted.
Over the years we have encountered numerous examples of service charge funds being used for purposes that were not authorised by the lease. Whilst the expenditure may have been well intentioned, costs that fall outside the scope of the lease are vulnerable to challenge and may ultimately be disallowed by the First-tier Tribunal.
Recoverability Is Not the Only Test
Even where a lease allows a particular cost to be recovered, that does not automatically mean the charge is payable.
Under section 19 of the Landlord and Tenant Act 1985, service charges must generally be reasonably incurred, and any works or services must be carried out to a reasonable standard.
In practice, a landlord usually needs both:
- Contractual authority under the lease; and
- Compliance with the statutory requirements governing service charges.
Failing either test can create difficulties when seeking to recover costs from leaseholders.
Service Charge Mechanisms Matter Too
It is equally important to understand the service charge provisions within the lease.
The lease will usually dictate when and how service charges are payable. Unless the lease is varied, those contractual provisions remain binding.
For example, if a lease only permits the recovery of expenditure after costs have been incurred, it may not be possible to demand payment in advance. Equally, if a lease requires payment of the annual service charge in full, a landlord’s previous willingness to accept monthly instalments will not necessarily prevent them from insisting on compliance with the lease provisions in the future.
For both landlords and leaseholders, understanding the service charge mechanism is just as important as understanding what services can be recovered.
Always Check the Lease
Before spending service charge funds, landlords, directors, and managing agents should ensure that the expenditure is authorised by the lease.
Using service charge monies for unauthorised purposes can expose those responsible to challenge and, in some circumstances, may amount to a breach of trust.
A careful review of the lease at the outset can often prevent costly disputes later.
What If the Lease Is Defective?
Some leases contain significant omissions, outdated provisions, or service charge clauses that are no longer workable in practice.
Where the lease fails to provide an effective mechanism for managing the building, it may be possible to apply to the First-tier Tribunal for a variation of the lease so that it can operate fairly and effectively.
Summary
Before providing a service, spending service charge funds, or demanding payment from leaseholders, it is essential to ensure that the lease authorises both the expenditure and the method of recovery.
If you are unsure whether a cost can be recovered through the service charge, or if you are facing a dispute regarding service charge demands, please feel free to get in touch.