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Service charges

This article is for general information onlyand does not constitute legal advice; you should only act or refrain from acting after receiving full professional advice on the facts of your particular case.

Collecting service charges is extremely important in the running of a property. Service charges need to be collected to pay for repairs, insurance and running expenses etc. However, this is not a straight-forward area. Below are some key points for landlords to consider:-

1 – Terms of the lease

The service charges that a landlord can recover are governed by the lease. The landlord cannot legally obtain other costs from the tenants. Therefore, it is important for the terms of the lease to be carefully considered before costs are incurred.

The provisions regarding payment and the landlord’s information obligations will be set out in the lease. It may be the case for instance that the landlord must provide an estimate/budget before any charges can be demanded. If that is the case it will be necessary for the landlord to allow sufficient time and arrange for the preparation of the necessary budget.

2 – Reserve fund

This is linked to the above. However, we often get asked specifically whether a landlord can build up a reserve/sinking fund. The lease will govern whether a reserve fund can be collected; the landlord can only collect charges to pay into such a fund if expressly authorised by the lease. If the lease permits a sinking fund, it is highly advisable to collect an additional sum as part of the service charge demand to avoid having to levy large charges on tenants at any one time.

3 – Summary of right and obligations

For a demand for service charges to be valid it must, by law, be accompanied by a notice in a prescribed form setting out the tenant’s rights.

Tenants are able to inspect documents and accounts relating to service charge demands or final accounts if they make a request in writing within 6 months of receiving a demand.

4 – Acting promptly

It is important to promptly demand service charges. Failure to do so can prejudice the landlord. As well as the lease potentially containing provisions about the timeframe for collection of charges, there is legislation which means that a landlord can only recover monies from the tenant if they send a demand for payment within 18 months of a cost being incurred or notify the tenant in writing within the same 18 month period that a cost has been incurred, the amount of that cost, and that they will be required to pay that cost as a service charge at a later date.

Following the end of a service charge year the lease may also require that the accounts are audited to ascertain the totals spent over that year and check if the amounts collected from the tenants is sufficient to cover the total expenditure.

5 – Consultation procedures

Where charges are over £250 or there is a long-term agreement (over 12 months) it is necessary for landlords to follow a multi-stage consultation process. Failure to do so may well mean that the landlord is unable to recover monies from the tenants. It is advisable to seek advice before starting the procedure to ensure you comply with each stage correctly and prevent tenants from challenging future demands.

6 – Reasonableness

Service charges must be reasonable and it is open to tenants to challenge their reasonableness at tribunal. The landlord should keep an eye on the reasonableness of the charges; it is prudent for landlords to sporadically review and compare charges against the market. Landlords should be especially careful to consider the level of any management fees and commissions.

Michelle Goodrum
Senior Associate
June 2019