The proliferation of new-build apartment developments, probably resulting from demographic and lifestyle changes, means that service charge issues are increasingly becoming more contentious.

Where it is necessary to provide communal services on a development, the lease will invariably require the tenant (lessee) to pay a service charge in order to allow the management company (lessor), if the lease has been drafted in such a way, to recoup the cost of the services provided.

Given that residential leases are usually drafted by the developer’s solicitor, it may be expected that the terms of any provisions in relation to service charges would be drafted to give the management company (or the landlord, depending upon how the lease is drafted) the opportunity to recover service charges from the tenant in almost any eventuality. This may be regarded as unsurprising and, in any event, would appear sensible. The tenant gets the benefits of the service provided, thus maintaining their property as anticipated, and the management company has the ability to recover the costs of the services supplied. Everyone’s a winner! Or so you’d think – what, however, happens when one side fails to perform its side of the contract?

The tenant may, at any time, seek to challenge the service charge. In a climate of customer care, it may be argued that the tenant is fully entitled to see what they are getting for their money. When tenants perceive that the service they are being supplied with is not up to scratch, they may want to question the price of the service charge.

For its part, the management company must ensure that it not only complies with its obligations under the lease provisions, but also the provisions of the landlord and tenant legislation, in order to be able to collect a service charge.

Requirements of the landlord

Section 48 of the Landlord and Tenant Act 1987 states that no rent or service charge will be due from any tenant of premises which are, or include, a dwelling (except those within Part II of the Landlord and Tenant Act 1954 – relating to business premises) unless the landlord has served a written notice on the tenant giving them an address in England or Wales at which notice can be served back on them. The Act also states that service charge demands must set out the name and address of the landlord in England and Wales. If this is not the case, an alternative address must be given within England and Wales. A demand for service charges must contain a summary of tenants’ rights and obligations concerning service charges. If a notice is served without this summary, the tenant can withhold payment of the sum demanded until a new notice is served containing one.

It is important that the landlord ensures that any costs which have been incurred in providing the service are requested from the tenant within 18 months of the date of the expenditure. If costs are incurred after this, written notice must be given to the tenant during the 18 months stating when the costs will be incurred and warning them that they will be required to contribute to the costs by operation of the service charge. If the landlord fails to do this, it will be unable to recover these costs.

Residential leases – interim service charge

A common provision in residential leases is that the landlord renders an interim charge on account of the service charge. Provision may be made for a surveyor to suggest the expenditure that should be incurred. Thereafter, at the end of the relevant accounting period, certification must state the amount by which the estimate has exceeded or fallen short of actual expenditure. Following this, provision may be made for the landlord to serve a copy of the certification on the tenant in order to demand any shortfall or carry over any excess paid (if the lease allows). It is important the landlord fully complies with the lease when collecting interim service charges and certifying the final service charges, in order to avoid challenges from tenants over the amount they are being asked to pay. Far too often landlords overlook the terms of the lease, which creates difficulties when court proceedings are issued to collect arrears.

Where a lease does enable the landlord to collect an interim charge, it is important for the landlord to appreciate that they are not entitled to collect a greater amount ‘than is reasonable’.

Beware tenant challenges

Landlords must be increasingly aware of the possibility that tenants may challenge expenditure which has been incurred in providing services. More often than not, the service provided to tenants, in accordance with the service charge provision, will be administered by a third-party managing agent on behalf of the landlord. If the lease allows, an interim service charge may be collected on a monthly basis. Tenants that consider their monthly service charge to be too high may seek an explanation or even challenge how the cost of the service charge is made up.

A tenant may require the landlord to provide them with a written summary of the costs incurred for the last accounting period or the 12-month period ending at the date of the request. The tenant has the right to be given reasonable facilities to inspect, copy or extract information from the accounts, receipts or other documents relevant to the statement of account. It is important to bear in mind that the service charge that the landlord seeks to recover from the tenant is always subject to the criterion of reasonableness.

A landlord (or managing agent if the task has been devolved) must therefore be able to demonstrate that it is contracted to provide the service (the lease will provide the point of reference) and that the costs of providing the service are reasonable. It is prudent for the landlord to be able to demonstrate that the service being provided is done so at the current market rate.

A tenant has the right to withhold payment of service charges where:

(1) the landlord fails to supply the prescribed notice with the service charge demand advising the tenant of their rights and obligations concerning the service charge;

(2) the landlord fails to supply a statement of account (or, where required, an accountant’s certificate in the required timeframe); or

(3) the formal content of the statement or certificate allegedly supplied does not conform to the requirements of the relevant regulations.

If the landlord fails to serve a notice setting out the tenant’s rights and obligations, the amount demanded by the service charge can be withheld until this has been done. In such cases the maximum amount the tenant may withhold from current and future payments of service charges is the total amount they were due to pay in service charges in the accounting period covered by the missing or incorrect statement or certificate and, if relevant, the credit balance at the beginning of that accounting period from their earlier payments of service charges.

If a tenant is unhappy with the landlord’s service charge, they could wait until the landlord issues proceedings (probably in the county court) for recovery of the service charge arrears. The tenant will have the opportunity to raise any issues regarding this. Alternatively, a tenant may take the initiative and document the issues they have with the service charge in an application to the Leasehold Valuation Tribunal (LVT). The LVT has jurisdiction to decide whether a service charge is payable and can be asked to decide:

• who has to pay;

• who is to receive payment;

• how much is payable;

• when it has to be paid; and

• how it is to be paid.

The LVT can also be asked to determine in advance whether a service charge would be payable for the cost of specific proposed services, repairs, maintenance, improvements, insurance or management, and if so:

• who would have to pay;

• who would be entitled to receive payment;

• how much would be payable;

• when it would be payable; and

• how it would be payable.

Impact of the tenant’s failure to pay service charge

As already identified, it is important for the landlord to comply with the lease in providing its services. The tenant always has the ability to challenge the landlord’s expenditure on service charges.

But what happens if the landlord (or management company) has insufficient funds to adequately perform the services which it is contractually bound to provide under the lease due to tenants defaulting on a service charge (which may have nothing to do with the landlord’s provision of services)? As in every other walk of life, a landlord may be faced with the situation where tenants either claim an inability to pay, or simply refuse to pay.

Perhaps one of the reasons why landlords may increasingly be encountering difficulty in collecting service charge payments is the expansion of the buy-to-let market in recent years. The purchaser of a buy-to-let property may not necessarily have agreed with its tenant exactly who is responsible for payment of the service charge. In the absence of an agreement to the contrary, the liability rests with the purchaser (as opposed to the tenant).

Part of the problem for landlords (or management companies) in such instances is that the purchaser is not resident in the property in question. As service charge demands are usually sent to the property, there is the potential that the purchaser’s tenant will ignore these demands. In addition, even if the demand is addressed to the purchaser elsewhere, or a demand is received by the purchaser, they may not necessarily regard the payment of service charges as a priority. This devolution between the service provider (landlord/management company) and recipient of the service (the eventual tenant) creates collection difficulties for the landlord.

Most leases will invariably state that the landlord is entitled to pass on any legal cost it incurs when recovering service charge arrears against a tenant. This may be of little comfort to a landlord faced with a large number of defaulters on a large-scale development. In practical terms, faced with habitual defaulters, a landlord may have no other alternative but to adopt a strategy of dealing with the defaulters in stages. From a commercial perspective, it may be advisable for a landlord to issue proceedings against a number of defaulters and await the outcome of those proceedings and any enforcement action, before issuing against the next tranche of defaulters.

What options are open to landlords against habitual defaulters?

A landlord may threaten forfeiture proceedings, but forfeiture by peaceable re-entry is not lawful in respect of residential premises. If a landlord commences forfeiture proceedings, it is necessary for the service charge to be agreed or admitted by the tenant or to have been determined, at least 14 days’ previously, by a court or arbitral tribunal.

In practical terms, it is extremely unlikely that a landlord would ever proceed to forfeit a long residential lease. The threat of forfeiture proceedings may, however, be a tactical weapon in the landlord’s debt-recovery armoury to collect outstanding service charge arrears. Another tactic which a landlord may employ, especially if the tenant’s property is mortgaged, is to write to its mortgage provider advising it of the arrears in service charges and indicating that it is prepared to take forfeiture proceedings, which will prejudice its security. The mortgage provider will often have the power in its deed of mortgage to enable it to discharge the arrears of service charge and then add this on to its advance to the tenant.  © Property Law Journal