Are you being served? You and your service charges

Remember, of course, that your Property Manager is bound by the terms of your lease. The Manager cannot stray outside those terms, it is bound by them, and has to carry out the Manager's duties in accordance with what the lease says and charge the proportions to each leaseholder as set out in the Lease. That really is the starting point.

“A service charge makes sure the daily costs of looking after a home can be divided up between the flat owners in a block.”

What is a service charge? A service charge is a payment made by the leaseholder in addition to the ground rent to cover the cost of specified works and services. It is usually a variable amount according to the costs incurred. However, the Property Manager cannot charge any sum it feels it would like to charge. Service charges payable by leaseholders are subject to strict legal controls contained within the Landlord & Tenant Act 1985, so the charges that we are concerned with relate to services, repairs, maintenance, insurance or the costs of management. Remember, the legislation does not allow the Landlord to charge costs that are not expressly contracted for in the Lease and it is very rare for a Court to allow a Landlord to imply a term which would have that consequence. By the same token legal controls do not cover charges that come outside the statutory definition but which the Lease allows to be charged.

It is easy to forget that essential services (like cleaning, lighting, decorating common areas, maintaining car parks, any security system and/or garden areas) have to be provided on a centralised basis. Heating and hot water are usually supplied from one source. In other words, all that a service charge clause in your Lease usually achieves is making sure that the daily costs of looking after a home can be divided up between the flat owners in the block.

Service charges are also the way in which the property owner passes on to the occupiers the costs of expenses that would otherwise have to be met out of rental income or by some other means such as the costs of repairing the structure and exterior of the block and the common parts, and making sure the building is insured. In certain sorts of situations, such as sheltered housing or high class developments, centralised management is really an advantage even if there is another way of doing things. I am particularly thinking here of sheltered housing for old people or the really high class residential developments where you see such leisure facilities as tennis courts and swimming pools.

The Property Manager comes on the scene either because there is a Management Company as a party to the Lease which appoints specialised Property Managers or, where that is not the case, where the Landlord appoints Property Managers to look after all the management functions.

Leaseholders in blocks usually wish to organise themselves into an Association and where this is legally recognised it has to be supplied with detailed specifications in respect of proposed major works. They can then nominate their own contractors to put in estimates. The Secretary can ask for a summary of costs and they have the right to be consulted over the Managing Agents performance and their appointment. Tenants Associations can now appoint a qualified surveyor to advise on service charges.

Sometimes it is not the charge for the services that is important to leaseholders but the quality and the standard. On the other hand in some blocks lessees are keen to keep costs to the absolute minimum. Some leaseholders are willing to get involved in the management, but most do not want to give up time for this sort of thing and prefer leaving everything to the professional managers.

Whatever the Lease says, the property owner has to achieve some acceptable minimum standard - what is usually called “a reasonable standard”. And, those services have to be supplied with reasonable care and skill. But the same standard is both minimum and a maximum. It makes sure that the property owner cannot recover extravagant charges but that does not mean that the Manager always has to choose the cheapest option if it is not the most appropriate.

It is in everybody's interest that the responsible party should make sure that all parts of the building which are not leased to individuals should be repaired. Obligations to redecorate exteriors and common parts normally take place at set intervals. In order to avoid large fluctuations in annual payments, the costs of items of expenditure that regularly occur (such as redecoration) are normally spread over a number of years and provided for in what is called reserve fund. Instead of asking leaseholders to pay every five years for expenditure, for example, an estimate of the likely cost is made in advance and this amount is collected by five equal instalments over the years preceding the work. From the leaseholder's point of view this is quite attractive because if you transfer your lease during the period each leaseholder will pay a share that bears some relationship to their period of ownership. Whereas a reserve fund evens out expenditure, a sinking fund is more of a replacement fund and is used to build up the money needed to pay for major items of replacement such as lifts and heating or air conditioning systems and it may even extend to cover improvements and replacements of parts of the building. In other words it looks after those major capital expenditure costs. Although contributions to sinking funds often cause a lot of argument, the fact is that it does help to make sure that expensive items are replaced when necessary and the benefit of contributions are more like to be reflected in the price of the appartment.

Reserve and sinking funds have to be kept separate from the Landlord's own money and the Landlord is usually required under a lease to contribute its share in respect of any unlet flats.

Where costs exceeding either £50 multiplied by the number of flats, or a total of £1000, are incurred in respect of works on a building these cannot be recovered unless the Landlord complies with strict requirements covering the provisions of estimates and consultation. The exact obligations depend on whether or not there is a recognised Tenants Association, but in general the Landlord must provide the lessees (or Association) with copy of at least two estimates. One of which must be from somebody wholly unconnected with the Landlord, together with a notice describing the proposed works. Observations on both have to be asked for, and unless the works are really urgent the work must not be started within a period of one month so that the lessees have got a chance to make observations. The Landlord has to pay regard to whatever observations are put forward.

The final settlement of a service charge for any one year cannot take place until the property owner's expenditure has been finally worked out. The final accounting normally involves the issuing of a certificate by a third party, not the property owner. Sometimes it is the Managing Agent, other times it is an accountant. However, in the service charges are relevant costs that are payable by lessees of more than four flats the summary has to be certified by a qualified accountant as being a fair summary and which is also supported by accounts and receipts and other documents which have been provided. Usually this certificate is conclusive but no on whether costs have been reasonably incurred, whether works or services are of a reasonable standard and whether or not payments in advance are a reasonable amount.

We now have the Leasehold Valuation Tribunal which has power to decide whether services, repairs and maintenance have been reasonably charged. No costs incurred by a party in this sort of proceeding are usually recoverable. It is meant to provide a cost effective way of getting these matters independently adjudicated.

In what is of necessity a broad overview of service charges I have really just covered some key areas. The best run buildings are those where both the owner and the occupiers work together in harmony with a broad understanding of what is to be achieved. Consultation is always very important and making sure everyone understands what is happening can often prevent a lot of needless squabbles. In increasingly large buildings with lots of people living together, as you would expect, it is rare to find total unanimity. An effective property manager usually needs the skills of a diplomat to make sure everything runs smoothly.

Erika Laffan can be contacted on editor@newsontheblock.com and she will be pleased to put in any questions you may have on property management matters. She will do her best to cover as many questions raised as possible in future articles.