Service Charges: A Summary Of Tenants Rights And Obligations
Service charges can be a contentious subject, especially if leaseholders aren’t aware of their legal rights. So, understanding what they must do, and what protection they have, in the face of paying service charges, is important for all tenants.
Under Section 153 of the Commonhold and Leasehold Reform Act 2002, a requirement states that “A demand for the payment of a service charge must be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to service charges”.
Many people do not actually read or fully understand the summary or rights and obligations.
Below we list the official summary document and break down some of its accompanying jargon to help leaseholders understand the key points of the document and what they mean in relation to the payment of their service charge.
1. The introductory sector
“This summary, which briefly sets out your rights and obligations in relation to variable service charges, must by law accompany a demand for service charges. Unless a summary is sent to you with a demand, you may withhold the service charge. The summary does not give a full interpretation of the law and if you are in any doubt about your rights and obligations you should seek independent advice.”
This section immediately informs tenants of one very important piece of protection: if a demand for a service charge is sent without the accompanying summary, the leaseholder can refuse to pay the service charge.
Where a leaseholder is also unsure of a right or obligation, they are entitled and encouraged to seek independent legal advice before proceeding with payment.
Though small, this opening section is critical because it informs leaseholders of two immediate grounds on which they can withhold their service charge payment.
2. The explanation of the lease terms
“Your lease sets out your obligations to pay service charges to your landlord in addition to your rent. Service charges are amounts payable for services, repairs, maintenance, improvements, insurance or the landlord’s costs of management, to the extent that the costs have been reasonably incurred.”
This accompanying section points a leaseholder toward the terms of their lease and explains what the service charge covers. This is also an important point to make because service charges commonly cover the below:
- A service (like plumbing)
- A repair (like a roof or guttering)
- Maintenance (like scheduled fire alarm checks)
- Improvements (like an agreed communal area upgrade issued with a section 20 notice)
- Insurance (like fire or terrorism)
- Costs of management (which refer to management fees, typically for managing agents)
If a demand for a service charge does not relate to one of the above, the tenant has every right to withhold payment and question the terms of the charge.
In addition, the wording “if the costs have been reasonably incurred” relates to the leaseholder being made aware beforehand of the service charge fees.
For example, if an improvement was to take place, leaseholders would have needed to agree to incurring the additional cost by way of their service charge obligations. A landlord should not have agreed a price for a contract and then immediately gone ahead with the work without first consulting paying leaseholders over whether the works themselves and the cost of those works were fair and affordable. If this has happened, the addition to the charge can be disputed.
3. The option for a first-tier tribunal
“You have the right to ask the First-tier tribunal to determine whether you are liable to pay service charges for services, repairs, maintenance, improvements, insurance or management. You may make a request before or after you have paid the service charge. If the tribunal determines that the service charge is payable, the tribunal may also determine:
◦ who should pay the service charge and who it should be paid to;
◦ the amount;
◦ the date it should be paid by; and
◦ how it should be paid.
However, you do not have these rights where:
◦ a matter has been agreed or admitted by you;
◦ a matter has already been, or is to be, referred to arbitration or has been determined by arbitration and you agreed to go to arbitration after the disagreement about the service charge or costs arose; or
◦ a matter has been decided by a court.”
Tribunal is often an intimidating word that many people shy away from. Not only can tribunals be complex, legal journeys, they can also be incredibly expensive. In this section, the summary document assures leaseholders that they are entitled to pursue one if they wish in the face of what they feel is an unfair, or incorrect service charge.
However, before undertaking a tribunal it is best to seek legal advice. As outlined in the section above, if the tribunal rules that it is fair for the leaseholder to pay, the leaseholder may place themselves in financial hardship as tribunal costs add up. Tribunals sometimes award costs to a ‘winner’ but even if a leaseholder is certain they will win and recover their costs, they may not be awarded all their costs and they may find themselves paying a portion of their landlord’s costs via the service charge.
4. The option to protect incurring additional costs from tribunal fees
“If your lease allows your landlord to recover costs incurred or that may be incurred in legal proceedings as service charges, you may ask the court or tribunal, before which those proceedings were brought, to rule that your landlord may not do so.”
Each side pays their own legal costs but the Tribunal has the discretion to award costs to one side or the other in full or in part.
Continuing from Section 3, this is a very important discernation to make. Should a contestment go to tribunal, landlords have every right to recover costs they may have incurred in legal proceedings and add those costs to the service charges.
However, leaseholders can ask the court or tribunal to prevent a landlord from doing this, saving themselves from incurring potential additional fees – especially if the matter originally went to a tribunal because the landlord was acting unreasonably or in breach of the lease.
5. The breakdown of first-tier tribunal fees
“Where you seek a determination from a First-tier tribunal, you will have to pay an application fee and, where the matter proceeds to a hearing, a hearing fee, unless you qualify for a waiver or reduction. The total fees payable will not exceed £500, but making an application may incur additional costs, such as professional fees, which you may also have to pay.”
The cost breakdown of first-tier tribunal fees is fairly straightforward, and is important to identify because it gives leaseholders a guide as to the amounts that they should be paying.
6. The explanation of how costs will be awarded by a first-tier tribunal
The First-tier Tribunal has the power to award costs, not exceeding £500, against a party to any proceedings where:
◦ it dismisses a matter because it is frivolous, vexatious or an abuse of process; or
◦ it considers a party has acted frivolously, vexatiously, abusively, disruptively or unreasonably.
The Upper Tribunal (Lands Chamber) has similar powers when hearing an appeal against a decision of a First-tier Tribunal.
This section explains how and where a first-tier tribunal will award a cost against a side that wastes their time. If a leaseholder has sought independent legal advice as recommended beforehand, they will be advised as to whether they are in breach of any of these guidelines – which should prevent such costs from being incurred.
7. The circumstances in which a first-tier tribunal can be applied to
“ If your landlord-
◦ proposes works on a building or any other premises that will cost you or any other tenant more than £250, or
◦ proposes to enter into an agreement for works or services which will last for more than 12 months and will cost you or any other tenant more than £100 in any 12 month accounting period, then your contribution will be limited to these amounts unless your landlord has properly consulted on the proposed works or agreement or the First-tier tribunal has agreed that consultation is not required.”
These are the terms and conditions in which a leaseholder can apply to a first-tier tribunal because they breach Section 20 notice agreements.
The following section, Section 8 explains this.
8. The right to challenge the terms of the lease agreement
“You have the right to apply to a First-tier tribunal to ask it to determine whether your lease should be varied on the grounds that it does not make satisfactory provision in respect of the calculation of a service charge payable under the lease.”
If your landlord has breached either of the terms outlined in Section 7, leaseholders can ask a court if their lease should be adjusted in relation to the landlord having broken the terms of the lease agreement. If a court rules that the lease is now unsatisfactory, it is unlikely leaseholders will need to pay the service charge.
9. The right to request a written summary
“You have the right to write to your landlord to request a written summary of the costs which make up the service charges. The summary must:
◦ cover the last 12 month period used for making up the accounts relating to the service charge ending no later than the date of your request, where the accounts are made up for 12 month periods; or
◦ cover the 12 month period ending with the date of your request, where the accounts are not made up for 12 month periods.
The summary must be given to you within 1 month of your request or 6 months of the end of the period to which the summary relates – whichever is the later.”
If a leaseholder feels unsure about how the costs of a service charge have been calculated, they may request a written summary from their landlord that should entirely outline where the costs have come from.
This should cover an annual accounting period, or the next accounting period, if a new financial year has just begun. Though if it is the latter, a leaseholder could expect to receive the summary six months later.
If a summary does not appear, the leaseholder then has the right to once again pursue legal action.
10. The right to inspect the accounts
“You have the right, within 6 months of receiving a written summary of costs, to require the landlord to provide you with reasonable facilities to inspect the accounts, receipts and other documents supporting the summary and for taking copies or extracts from them.”
This section gives leaseholders another powerful tool: the opportunity to investigate the accounts within six months of receiving a breakdown of their service charge. If a leaseholder feels there is a discrepancy between the service charge payment and the breakdown, or they are unsatisfied in any way with the breakdown, the landlord is obliged to present a copy of the accounts to support the summary document. A leaseholder is also granted access to receipts and invoices so that copies can be made, and their own independent valuation can begin.
11. The right to receive an accountant’s audit
“You have the right to ask an accountant or surveyor to carry out an audit of the financial management of the premises containing your dwelling, to establish the obligations of your landlord and the extent to which the service charges you pay are being used efficiently. It will depend on your circumstances whether you can exercise this right alone or only with the support of others living in the premises. You are strongly advised to seek independent advice before exercising this right.”
The final sentence of this section is perhaps the most important. Though a leaseholder can request a written breakdown of costs, and can even be granted access to receipts and invoices, calling in an accountant to perform an audit is seen as a rather large indicator of distrust. Thus, in some circumstances (and lease agreements), a leaseholder will need to garner the support of others to avoid being accused of spearheading an unfair, or unjust, campaign against the landlord.
Before proceeding with actioning any type of external accountancy checks, it is worth seeking legal advice to ensure the leaseholder does have a legitimate cause to do so, and so that they are protected in the event of an audit backfiring.
12. The right of forfeiture
“Your lease may give your landlord a right of re-entry or forfeiture where you have failed to pay charges which are properly due under the lease. However, to exercise this right, the landlord must meet all the legal requirements and obtain a court order. A court order will only be granted if you have admitted you are liable to pay the amount or it is finally determined by a court, tribunal or by arbitration that the amount is due. The court has a wide discretion in granting such an order and it will take into account all the circumstances of the case.”
The right of forfeiture is the worst case scenario for a leaseholder. If it is discovered that an entire legal campaign has been undertaken in unjust circumstances, and to simply avoid paying a charge that either cannot be paid or that the leaseholder simply refused to pay, a lease may give the landlord the right to terminate the lease and evict the tenant.
But to do this, the landlord must have met all the legal requirements needed, and have obtained a court order that agrees that the payment is due, and suggests that the campaign against the landlord was unfair or unnecessary. However, courts will take into account an array of circumstances, and so eviction is not necessarily a given.
The summary document is a vital accompaniment to a service charge. If a landlord issues a service charge without one, leaseholders can automatically withhold their payment charge. Likewise, if they feel that there is anything unjust or incorrect about the payment, the summary guides leaseholders on how to go about refuting the charge through the use of legal services.
At the Freehold Collective, we help leaseholders buy their freeholds. Buying the freehold can help tenants avoid lengthy, legal disputes with their landlords such as service charge irregularities because those same tenants become the owners of their building.