Service charges are essential to effectively manage any block of flats.
However management companies and landlords who are contractually required to provide these services can only do if leaseholders stick to their contractual obligation and pay the charges as laid out in the lease.
Recovering your service charges requires having the right legal processes and procedures in place and following the steps below.
Restrictions on recovery are either contractual (based on the lease) or statutory. Sometimes mistakes made when those restrictions are not adhered to can be corrected and service charges become payable. But that’s not always the case, and there are occasions on which service charges may become “stale” and unrecoverable. Following the steps below will help with effective recovery.
1. Understand (and implement) the lease
Service charge recovery is always about the lease - and every lease is different. When demanding service charges, ensure you read, review and implement the mechanisms set down by the lease relating to recovery.
If your apportionments don’t add up to 100% (and mean that you’re under-recovering), then consider varying the leases so that you can recover 100% of your service charge costs.
Also, overlook pre-conditions for payment at your peril!
Leases often set out certain things that require doing to “trigger” the leaseholder’s obligation to pay service charges. Again, read, understand and implement any mechanisms set down by your eases.
The Court of Appeal in Skelton v DBS Homes (Kingshill) Limited determined that the 18 month rule applies to on account demands for service charges. Here the landlord served demands, but neglected to serve a summary of the estimated costs - a mechanism set down by the lease - with them. This rendered the demands invalid, and by the time the landlord served valid demands, more than 18 months had passed.
Although a windfall decision for leaseholders, it also serves as a cautionary tale to ensure contractually valid demands are served.
2. Identify your landlord
Sections 47 and 48 of the Landlord and Tenant Act 1987 require any demand to contain the landlord’s name and address and an address in England and Wales where notices may be served.
If a demand does not contain that information, service charges aren’t payable.
However there is some leeway if you get this wrong. The Upper Tribunal recently confirmed the effect of section 47(2) is suspensory – meaning the service charges become due when the leaseholder is given written notice of the landlord’s name and address. This can be done at any time.
As is commonly known, in situations where you intend to undertake a project of major works and recover costs of over £250 via the service charge that:
Consultation is required; or
Dispensation from consultation obtained from the Tribunal.
Often forgotten is the limitation placed by section 20 on leaseholders’ contributions for costs incurred under a qualifying long-term agreement (QLTA) - an agreement for a term of more than 12 months with a cost per leaseholder per financial year of more than £100.00. Management agreements have been under the spotlight recently following the Upper Tribunal’s decision in Corvan (Properties) Limited v Abdel-Mahmoud, and with the appeal scheduled for late April, it’s one to watch…
4. Be reasonable
Perhaps the thorniest of the statutory restrictions is reasonableness. Service charges are payable only to the extent that they are reasonably incurred, and when incurred in relation to works or services only to the extent that those works or services are of a reasonable standard.
Recent cautionary tales on recovering service charges relate to when there are alternative means of recovering those costs. Most recently, the Upper Tribunal in Avon Groundworks Limited v Cawley examined the interplay between recovery of costs under an NHBC warranty and on account payments for service charge. Factors requiring taking into account to determine the reasonableness of that kind of advance payment include:
The time when the landlord would (or would be likely) to become liable for the costs
How certain the amount of those costs is;
Whether there is any certainty that the works will be carried out and paid for during the period covered by the advance payment.
As with many cases, it’s not an application of rigid rules, but an assessment in light of the specific facts of the particular case. Ultimately, a thorough understanding of the mechanisms set down by the Lease is a key priority.
Cassandra Zanelli, Partner at PM Legal Services