Service charge disputes: a main area of dispute for leaseholders and landlords

You’re looking to buy an apartment and the sales agent takes you to view an exquisitely appointed duplex apartment situated in an ultra-modern block overlooking the river -- the last word in luxurious, modern, urban living. Or, perhaps your tastes run to something more traditional with those much-sought after high ceilings and cavernous rooms, typical of the Georgian era up to the early 20th Century. Or maybe something more modest? Whatever type of flat you’re in the market for, what questions do you ask about it? The price, obviously. Close to transport links and shops? Good school district? All important, of course, but all too often this one, critical question is often overlooked: how much are the property service charges?

What are service charges?

In England and Wales, it is not really possible to have a freehold flat. This is due to quite arcane legal reasons. So, every flat in England and Wales is leasehold. The lessee (or “tenant”) owns his or her own apartment but not any other parts of the building. The lessor (or “landlord”) owns or retains the structure of the block and all the common parts, gardens and other amenities. This includes the exterior fabric of the building too, such as the roof, the façade, the main conduits and foundations.

The tenant is responsible for the maintenance and upkeep of his or her apartment but the landlord is responsible for the maintenance and upkeep of all those common parts and amenities. This includes such things as lighting, heating, cleaning, repairs, replacement (where necessary) and, of course, insurance.

Naturally, all this costs the landlord money and the landlord recoups that money by means of landlord service charges which are levied on the various tenants in the building, usually in proportion to the size of their apartments. So, in other words, service charges are the means by which tenants reimburse their landlords for the cost of maintaining their communal blocks.

It’s not just residential tenants that have to pay service charges. There are commercial property service charges too, calculated in the same way. Even owning a house may not entirely exempt you, as freehold property service charges may be levied on the owner of a house on an estate where the common parts and amenities have to be maintained.

How much are service charges?

There is no fixed or set amount. A tenant’s service charge bill may vary considerably depending on how much maintenance or repair the building requires. Older blocks tend to be more expensive to maintain but many modern blocks have amenities such as 24 hour security, gyms and swimming pools, all of which have to be paid for. In addition to the regular sums for upkeep, most landlords require a contribution from each tenant towards a reserve fund, usually called a “sinking fund”, the purpose of which is to cover heavy expenditure items such as a new roof or communal heating system.

Furthermore, many, if not most, landlords engage a property management company to actually run and look after the building and their fees are also added to the service charges.

In 2016, the average service charge for a newbuild apartment block was £2,777 per annum. However, they can soar to much higher levels, such as in the case of these unfortunate tenants in 2020 who found themselves saddled with a service charge bill of over £23,000.

Service charges can prove to be a major financial headache for many tenants, particularly those on fixed or limited incomes. Retirement property service charges are often a serious issue for retired or older tenants.

It’s all in the lease

Most leases grant the landlord the right to levy charges and impose an obligation upon the tenant to pay them. The lease will also set out the landlord’s obligation in regard to upkeep, repair and maintenance and often expressly provide that the landlord or management company may charge a reasonable management fee.

If the tenant cannot or will not pay the service charge demand, the lease will usually provide that the landlord has a right to charge interest on late payments. If the service charge remains unpaid, then the lease usually grants the landlord a right to apply to the court to forfeit the lease. If such application is successful then the tenant actually loses his or her flat which then goes back to the landlord who can re-sell it. So, the consequences of not paying service charges can be ruinous.

Statutory provisions and service charge reasonableness

That said, the lease is required by law to follow the rules laid down in the Landlord and Tenant Act 1985 and subsequent legislation. The thrust of the law is to require service charges to be fair and reasonable. In other words, the law requires that service charges must be reasonably incurred and reasonably levied and tenants are only required to pay a fair and reasonable proportion of those service charges.

Any tenant who believes that their landlord is not complying with these provisions can apply to the Lands Tribunal by way of recourse. Sadly, the Tribunal is not a magic bullet though. If they decide in favour of the landlord, then the hapless tenant may find themselves even deeper into the financial hole.

As well intended as it may be, the law does little to soften the impact of hefty service charges upon tenants and the term “reasonable” leaves a lot of room for interpretation. Hence, disputes over service charges do, and will continue, to form the lion’s share of all landlord and tenant disputes.

For further information and trusted legal advice regarding property litigation and service charge disputes, get in touch with us at Carlsons Solicitors.