Challenging service charges for leasehold properties

The lease determines what services and works are to be paid for through a service charge, and how the charge is calculated. The cost of an item cannot be recovered from a leaseholder unless the lease allows it, so the first consideration if seeking to challenge a service charge demand is the lease itself.

Service charges are not payable until properly demanded. In addition, leaseholders are entitled to information about service charges, including the opportunity to inspect the landlord's accounts.

Service charges are subject to a number of statutory controls, in particular the requirement that they:[1]

• are reasonably incurred and for works carried out to a reasonable standard, or

• where the charge is payable before the relevant costs are incurred, no greater than is reasonably payable

Where works or services fall short of this reasonableness test, the landlord will only be able to recover charges to the extent that they are reasonable.

Certain works or agreements would cost the individual leaseholder over a certain amount of money ('major works' and 'qualifying long term agreements'). In this case, there is a statutory consultation process that must be followed, unless the First-tier Tribunal (Property Chamber) grants the landlord dispensation from those requirements. Where the process is not followed, unless dispensation is granted, the landlord will be limited in the amount reclaimable in service charges.

Charges relating to a dwelling?

Only service charges that relate to a 'dwelling' benefit from the statutory controls on their reasonableness. A dwelling is defined in the Landlord and Tenant Act 1985 as a 'building or part of building occupied or intended to be occupied as a separate dwelling', along with ancillary premises such as yards and gardens. Certain types of accommodation may fall outside the definition of dwelling - this may arguably include a bungalow in a holiday park.[2]

In one case it was held that the leaseholders of certain units of student accommodation (bedsits referred to as 'pods') did not occupy them as separate dwellings because they each had the right to use shared kitchens, living rooms and bathroom facilities. The bedsits were only occupied as part of the leaseholder's dwelling, and the totality of the dwelling (the bedsit plus the shared accommodation) was not a separate dwelling as it was shared.[3] Therefore the First-tier Tribunal could not determine the service charge.

It may be possible to dispute the demand for services charges.

Does the lease allow recovery?

A landlord will not be able to recover costs incurred for work and items not specified as recoverable from the leaseholder in the lease. For example:

• repairs to the roof and parapets of a building were not recoverable as the service charge provision in the lease was limited to certain parts of the building and common parts, and the roof was not a common part[4]

• the lease provided that the landlord could charge for cleaning, lighting, caretaking and 'any other beneficial services which may properly be provided by the lessors' and it was held that this did not allow the landlord to charge for major external repairs and redecoration[5]

• a provision for repair will extend to replacement of something broken or worn out, but not one that is obsolete or nearing the end of its expected life[6]

• words such as 'amend', 'renew' or 'keep in good and tenantable condition' may be sufficient to allow the landlord to charge the cost of an improved system of cladding,[7] but not to dig new foundations or to install a damp-proof course[8]

• costs incurred by a right to manage (RTM) company that are not recoverable under the terms of the leases from which it derives its management functions must be met by the members of the RTM company; the costs of establishing and running an RTM company cannot be passed on as service charges to leaseholders unless specifically allowed by the lease[9]

• where the occupier's responsibility for service charges in a block of flats was contractually limited to covering the cost of garden maintenance and lighting, the landlord was unable to add the cost of removing rubbish from the car park to the rear of the property to the list of service charges after the tenancy started[10]

• where the lease specified that the landlord (local authority) could charge leaseholders (former local authority's tenants who have exercised their right to buy) a reasonable part of the cost of carrying out works to keep in repair the structure and exterior of the building, with exception of making good of structural defects, the landlord was not allowed to charge for repair works aimed at making good a structural defect[11]

• If there is a dispute, the outcome may depend on the specific wording of the agreement. For example, where the agreement allowed the landlord to add new extra services to the list of service charges, it was permissible for the landlord to include new charges for existing services.[12]

Does the charge relate to the correct period of time?

Costs incurred outside the accounting period allowed by the lease for recovery cannot be recovered until after the end of the next accounting period. In addition, where a fixed sum towards service charges is payable on account, the balance is not due until after the year end's accounts have been completed:

• in one case, where the service charge related to works carried out before the leaseholders acquired the leasehold of a flat, the landlord could only charge for those costs if the lease specifically allowed it[13]

• in another case, the landlord could not obtain payment to cover future costs, as the lease only allowed for recovery of amounts actually expended[14]

Have the procedural requirements of the lease been met?

Where a landlord has not complied with conditions precedent imposed by the lease, the service charge is not recoverable. For example, where the lease:

• required the landlord to give the leaseholders of a block of flats a copy of the specifications of the works that it proposed to carry out and cost estimates before starting the works, but the landlord failed to do so and the court decided the leaseholders did not have to pay those costs[15]

• provided that the amount of service charges payable by the leaseholders was to be certified by a surveyor, the production of such a certificate was a precondition to the recovery of such charges and the landlord's service charge demands were held to be invalid because the charges had not been certified[16]

Have the charges been correctly apportioned?

A landlord may only recover from each leaseholder in a block or estate the share of the total cost as determined by the lease (or as determined by a third party such as the landlord's surveyor if this is what the lease provides). A requirement to pay a due proportion means a fair and reasonable proportion.[17]

Has there been a history of neglecting the property?

The cost of a landlord's historical neglect of a property cannot be passed on to a leaseholder through a service charge. In one case, where the costs of repair work were increased because of the landlord's earlier delay in acting to repair damage, those costs were not reasonably incurred and the leaseholder had a defence to their recovery.[18]

Third party contributions?

A service charge provision in the lease should be interpreted so as to prevent double recovery, therefore the landlord may be required to give credit for third-party funding received in respect of the works and reduce the service charge payable by the leaseholder. This could include insurance payouts, as well as warranties and public sector funding. [19] The landlord may also have to take into account likely future contributions from a third party, for example under a warranty payment - this will depend on the facts of each case.[20]

Double recovery is specifically prohibited in relation to certain types of public funding which have contributed to the works.[21]

Where the freeholder is a social landlord in receipt of funding from a Government or Homes and Communities Agency source, the leaseholder may be entitled to have the total cost of works capped. This is sometimes referred to as 'Florrie's law'.

Have the charges been agreed or admitted?

A leaseholder cannot challenge the reasonableness of a service charge that they have agreed or admitted. The fact that the leaseholder has paid a service charge does not in itself amount to agreement or admission. An Upper Tribunal held that where a leaseholder had paid service charges for a five-year period without qualification or protest his agreement could be inferred.[22]

Is the charge for the costs of legal proceedings?

Where the lease specifies that the costs of court or tribunal proceedings incurred by the landlord are to be paid by the leaseholder, the leaseholder can apply (under section 20C of the Landlord and Tenant Act 1985) to the First-tier Tribunal (Property Chamber) to exclude some or all of such costs from a service charge demand.[23]

The wording of a lease may also allow for the recovery of costs incurred as a result of threatened legal proceedings. Where such proceedings are not commenced the reasonableness of such costs can only be challenged under section 19 of the 1985 Act.[24]

Consider the timing of a challenge

It is common for a lease to include a clause that allows a landlord to recover costs in connection with the enforcement of the terms of the lease. To avoid liability for such costs it could be advisable for a leaseholder to pay a disputed service charge and then to challenge the validity of the amount charged in the First-tier Tribunal (Property Chamber).[25]

Anyone can apply to the First-tier Tribunal (Property Chamber) for a determination as to whether or not a service charge is payable.[26] This is the case whether or not the charge has been paid, as long as the leaseholder has not admitted that they must pay it (paying the charge is not necessarily an admission that it is payable).

An application for a determination of liability to pay and reasonableness of service charges may also be made in advance of costs being incurred - this allows landlords to check whether their proposed works are reasonable.

The Tribunal may also determine:

• by whom and to whom the charge is payable

• the amount payable

• the date and manner by which the charge is to be paid

Under this provision, the Tribunal's jurisdiction is restricted to determining the reasonableness and payability of service charges.[27] In one case, the Upper Tribunal held that where the county court had transferred to the First-tier Tribunal proceedings that included, but were not limited to, reasonableness of service charges, the First-tier Tribunal had had no jurisdiction to determine unrelated issues, such as the fairness of the use of a reserve fund, the landlord's claim for legal costs and whether to dismiss the leaseholder's counterclaim submitted in the course of the county court proceedings.[28]

The applicant must complete an application form and send it to the tribunal with the relevant fee where applicable. A copy of the lease must be enclosed with the application. Details of all the parties to the application must be included on the form, as well as the details of the person against whom the declaration is sought. The applicant may indicate if the matter can be dealt with without a hearing, but the Tribunal will decide whether or not it deems a hearing to be necessary. The Tribunal may transfer the case to the court if involves complex matters of law.

The Tribunal may delegate the task of sending copies of the application notice to the other parties in the proceedings, but it must deliver its decision itself. In a case where the Tribunal determined that service charges were payable and requested the landlord to forward a copy of that decision to the leaseholders, the Upper Tribunal held this was unlawful, and the decision was set aside.[29]

The Tribunal's decision only binds the parties to the case.

For more information about solving service charge and residential property disputes, including how to apply to the Tribunal, see Gov.uk.

A service charge dispute can also be transferred to the Tribunal from another court when it arises in any separate proceedings between the landlord and tenant, for instance in a landlord's claim for the recovery of unpaid service charges where the tenant disputes their liability to pay the full amounts demanded.[30] In such cases, the Tribunal has jurisdiction to determine only the specific issue transferred to it, not the entire claim or issues not raised by the landlord or tenant.[31]

Forfeiture for non-payment of service charges

A landlord is not able to forfeit the lease for non-payment of a disputed service charge unless the amount is agreed or admitted by the leaseholder, or has been determined by a court or tribunal.[32]

The power of forfeiture for non-payment of a service charge is not available at all for debts of less than the prescribed amount, unless outstanding for more than the prescribed period.[33]

Leaseholders disputing the service charges can also apply for:

• the appointment of a manager by the First-tier Tribunal (Property Chamber), where the

• landlord is making or intends to make unreasonable service charge demands (or fails to carry out their obligations under the lease)[34]

• the management audit of the landlord's accounts[35]

• the appointment of a surveyor to advise a recognised tenants' association on service charges[36]

• a discretionary reduction in the bill where there is a social landlord and where the leaseholder would otherwise suffer exceptional hardship[37]

• leasehold enfranchisement