One of the most common issues I come across is the assumption that simply because expenditure has been or will be incurred for works to a development, it can automatically be recovered through the service charge. Unfortunately, that is not always the case.

As with most service charge issues, the starting point is the lease.

The lease sets out what services can be provided, how those services are funded, when service charges become payable and the procedure that must be followed. Whilst legislation overlays certain aspects of service charge recovery, the lease remains the primary document.

Typically speaking most leases and service charge accounting periods will follow the below procedure, but no always.

Lease → Budget → Demand → Works → Year-End Accounts → Balancing Charge

What Does the Lease Say?

Every lease contains service charge provisions, often referred to as the service charge mechanics.

These provisions answer questions such as:

• Is the landlord required to prepare an annual budget?
• Are service charges payable in advance or in arrears?
• When can demands be served?
• Is a year end certificate or reconciliation required?
• Can a balancing charge be demanded if expenditure exceeds the budget?

As stated above, most modern leases require the landlord or management company to prepare an annual budget based upon anticipated expenditure, with leaseholders paying their contributions in advance.

At the end of the accounting period, the actual expenditure is certified and compared against the sums collected. If the expenditure exceeds the amounts demanded during the year, the difference is usually recoverable as a balancing charge. Equally, if too much has been collected, the lease may require a credit to be carried forward or repaid.

Older leases can look very different. Some require the landlord to provide the services before recovering the costs afterwards. These “payment in arrears” provisions often create cash flow issues because the landlord must fund the expenditure before any service charge can be recovered from leaseholders.

Whatever the wording, the lease must be followed. A demand served at the wrong time, in the wrong amount or using the wrong procedure may not be recoverable.

If the service charge provisions are unworkable, inconsistent or no longer suitable for the effective management of the building, there may be scope to apply to the First-tier Tribunal (Property Chamber) for a variation of the lease.

Legislation

The lease is only part of the picture. Certain statutory requirements either supplement or override the lease, and failure to comply with them can have significant consequences.

Perhaps the best-known example is the consultation requirements contained in section 20 of the Landlord and Tenant Act 1985.

In broad terms, consultation is required where:

• qualifying works will result in any leaseholder contributing more than £250; or

• a qualifying long-term agreement will result in any leaseholder contributing more than £100 in any accounting year.

Even where the lease permits recovery of the expenditure, failure to comply with the consultation requirements may limit recovery to those statutory caps unless the Tribunal grants dispensation. In practice, this usually means recovery is limited to £250 per leaseholder for qualifying works and £100 per leaseholder per year under a qualifying long-term agreement.

The legislation also imposes several requirements in relation to the service charge demand itself. In broad terms, landlords and managing agents should ensure that:

• the demand has been served in accordance with the lease;
• the demand complies with the statutory requirements relating to its form and content;
• the landlord’s details have been correctly provided;
• the appropriate statutory notices accompany the demand; and
• the statutory time limits for recovery have not expired.

Some of the more common statutory provisions that tie in the above list include:

• Section 20B of the Landlord and Tenant Act 1985 – in most cases, service charge costs cannot be recovered if they were incurred more than 18 months before the demand is served, unless the leaseholders have been notified in accordance with section 20B(2).

• Section 21B of the Landlord and Tenant Act 1985 – service charge demands must be accompanied by the prescribed Summary of Rights and Obligations in the correct format.

• Sections 47 and 48 of the Landlord and Tenant Act 1987 – the demand must include the landlord’s name together with an address in England and Wales at which notices may be served.

Finally, where the building falls within the scope of the Building Safety Act 2022, consideration should also be given to the Schedule 8 leaseholder protections. These provisions can significantly restrict a landlord’s ability to recover certain remediation costs through the service charge, regardless of what the lease may otherwise permit.

Final Thoughts

Service charge disputes often arise not because the expenditure was unreasonable, but because the correct procedure was not followed.

Understanding the service charge mechanics within the lease should always be the first step before preparing budgets, carrying out works or issuing demands. Once the lease has been considered, the relevant statutory requirements should be checked to ensure the recovery process is legally compliant.

Getting the mechanics right at the outset is considerably easier, and significantly less expensive, than defending a service charge challenge before the Tribunal.

If you’re unsure whether your lease has been drafted correctly, whether your service charge demands comply with the lease, or whether the statutory requirements have been met, we can review the documentation before demands are issued.

Getting it right at the outset is almost always quicker, cheaper and less stressful than resolving the dispute after proceedings have been issued.