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Payment and protection of leasehold service charges

This content applies to England

Service charge amounts, methods and frequency of payments, and how service charge money is protected.

Variable or fixed amount

The exact amount of service charge is not normally specified. The lease may state that a demand for 'variable' service charges will be made at certain specified times. The amount is often based on the previous year's costs and a prediction of the costs for the following year. See the page Definition for more on what constitutes a service charge.

If the landlord wants to charge interest on any money borrowed to carry out her/his obligations, this must be specified in the lease in 'clear and unambiguous words'.[1] Any claim for interest on service charge arrears must also be supported by clear wording in the lease.

Payments on account

It is common for a lease to provide that payments on account of service charge are to be made by the leaseholder, either of a sum fixed by the lease or (more commonly) by a sum determined by the landlord, often by reference to the previous year's expenses. This is often called a sinking fund or reserve fund.

The leaseholder has to make those payments on account. Then, after the year end, the landlord draws up a full account of the year's costs, and the leaseholder may then have to pay the balance or may be entitled to a refund of an overpayment. The balance or refund will usually be added to the payments on account for the next year.

Frequency of payments

Service charge is often payable twice yearly, although the lease may allow the landlord to demand payment for extra works at other times of the year. Where the ground rent is variable, the landlord may only charge for services actually provided and can only recover the amounts actually paid.

Help with paying service charges

Welfare benefits

A leaseholder may be able get help with paying certain service charges if s/he is claiming income support, income-based jobseeker's allowance, income-related employment support allowance, pension credit or universal credit.

Some service charges are excluded, for example, those to cover major repairs or improvements (although help in the form of a government loan can be provided to pay the interest on a loan taken out to to pay for major repairs or improvements, for more information see the pages Support for mortgage interest and Payment condition).

Social landlord

Social landlords may offer a range of options to enable leaseholders to pay service charges demanded.

Local authority landlords may:

  • provide a service charge loan where the charge is in respect of repairs[2] (although this may not be at the most competitive rate of interest). A loan must be offered in the first ten years of the lease where the property has bought under the Right to buy, and is at the local authority's discretion otherwise
  • the option to spread payments over a longer period of time and pay by instalments
  • buy back the property at a considerably lower-than-market value, in return for granting a secure tenancy of the property.

A social landlord has the power to waive or reduce service charges for repair, maintenance or improvement works if it considers that the leaseholder will suffer exceptional hardship otherwise. In deciding whether to exercise this discretion a social landlord should also have regard to:[3]

  • any estimate of the costs of works provided before the purchase of the lease
  • whether the purchase price took into account the estimated cost of works
  • the benefits that will accrue to the leaseholder as a result of the works, such as an increase in the value of the lease, improved energy efficiency or an improvement in the security of the property.

For information on how service charges may be limited, see the page Statutory control of service charges.

Provisions for landlords who hold service charge money

Where the landlord holds service charge funds collected on account of future costs, the landlord holds these on trust for the tenant who contributed them.[4] They may only be invested in investments that are suitable for trust funds, with the addition of bank deposit accounts.[5]

Provisions under the Commonhold and Leasehold Reform Act 2002 intended to increase the protection given to service charge money by requiring it to be held in a separate, designated account with a right for leaseholders to inspect the statements relating to the account were not brought into force.[6]

Wales

The information on this page applies only to England. Go to Shelter Cymru for information relating to Wales.

[1] Boldmark Ltd v Cohen [1986] 277 EG 745.

[2] Housing (Service Charge Loans) Regulations 1992 SI 1992/1708.

[3] Social Landlords Discretionary Reduction of Service Charges (England) Directions 2014. Earlier Directions of the same name made in 1997 also allowed social landlords to reduce a service charge bill in certain circumstances.

[4] s.42 Landlord and Tenant Act 1987.

[5] Service Charge Contributions (Authorised Investments) Order 1988 SI 1988/1284.

[6] ss.42A and 42B Landlord and Tenant Act 1987, inserted by s.156 Commonhold and Leasehold Reform Act 2002.

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