Service charges and the law

This article is a brief description of the various pieces of legislation that relate to leasehold service charges. To see the full detail, I would recommend going to www.legislation.gov.uk

Landlord and Tenants Act 1985

Section 18:  this defines what” service charge” and “relevant costs” are.

• Service charge costs: for each development the lease will define what can be collected via the service charge but typically this covers services repair, maintenance, improvements, insurance and landlord costs of management.
• Relevant costs: costs are relevant costs in relation to a service charge whatever they are incurred or to be incurred, in the period for which the service charge is payable or in an earlier or later period.

Section 19: Service charges are only payable to the extent that they are reasonable, and works are to a reasonable standard.

Practical use of this legislation: sometimes directors of resident management company or landlords may ask to spend money on items that may not be necessary or desirable, it is always good to cite this legislation if you find yourselves in this situation. The legislation is also designed to protect leaseholders from landlords, managing agents or resident property management companies spending too much for services or works; by way of example a managing agent might be offered a percentage of a job by a contractor a practice that could lead towards bias as to which contractors are selected for jobs.

Section 20: limitation of service charge: In short, if any leaseholder is required to pay £250 or more (Reduces to £100 for agreements lasting more than one year), then the landlord is required to commence a consultation process with the leaseholders. For those who wish to read more, I would highly recommend reading the extensive article on the Leasehold Advisory Website

Section 20ZA: this covers the ability to dispense with the section 20 consultation process and requires an application to the first-tier property tribunal.

Practical use of this legislation: Where major emergency works are required. e.g roof repairs

Section 20B – 18 Months Rule:  limitation of service charge: time limit on making demand. If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.

If you become aware of costs that might be incurred but can’t be invoiced within 18 months of the cost being incurred then you will need to send out a section 20B notice which advises the tenants of your intent to reclaim these cost through the service charges.

Section 20C: Limitation of service charges: costs of proceedings. A tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before a court or first tier property tribunal or in connection with arbitration proceedings, are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the application.

Practical use of this legislation: many leases allow landlords to recover legal costs through the service charges even if they lose. This legislation affords some protection to leaseholders.

Section 21: summary of the service charge costs. Leaseholders have the right to request a summary of service charge expenditures

Practical use of the legislation: By producing the annual accounts inclusive of a summary of expenditure we are automatically compliant with this legislation.

Section 21A: If section 21 is breached, the tenant might withhold the payment of the service charge.

Section 21B:  Service charge information, summary of the rights and obligation of the tenant. This is a standard notice which must be included with any service charge demand.

Section 22: the right to inspect supporting accounts. If a leaseholder is not satisfied with the summary of financial information pursuant the section 21 of this act then they have the right to request access to the supporting documentation used to create the accounts.

Section 23: Request relating to information held by superior landlord. This is the requirement for a superior landlord to provide information relating to requests under section 21 and 22. If the superior landlord do not held this information then he must apply to the immediate landlord.

Section 27A: An application to the First Tier Property Tribunal to determine if a service charge is payable

Section 28: Defines the meaning of qualified accountant. Service charge accounts should be produced by a “qualified accountant”,  an individual who has the necessary qualification and is not disqualified from acting.

The following are disqualified from acting—

– An officer, employee or partner of the landlord or, where the landlord is a company, of an associated company;
– A person who is a partner or employee of any such officer or employee.
– An agent of the landlord who is a managing agent for any premises to which any of the costs covered by the summary in question relate;
– An employee or partner of any such agent.

Landlord and tenants act 1987:

Part 5 – Management of leasehold properties.

 Section 42: service charge contributions to be held in trust.

Section 42A: Service charges to be held in designated account.

• Leaseholders have the right to assess compliance
• Withhold payments if they believe non-compliance.

Section 42B: Failure to comply with section 42A constitute an offence for which a fine can be implemented. 

The law of property act 1925

Section 146:  A section 146 notice of the Law and Property Act 1925 is served by a landlord who wishes to commence forfeiture proceedings against a leaseholder following a breach of a lease.

Commonhold and Leasehold Reform Act 2002

Section 167: Forfeiture to pay small amount for short period.  Landlord can’t apply for forfeiture unless the debt is more than £350 or if less than £350 must be more than 3 years old applies to service charge, rent and administration charges.

Housing act 1996

Section 81: states that there will be no forfeiture for unpaid service charges unless:

• The amount is admitted or agreed
• Is determined by a court, the First Tier Property Tribunal or arbitration.