Payment and protection of service charges

The exact amount of service charge is not usually 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.

If the landlord wants to charge interest on any money borrowed to carry out their 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.

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.

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.

Welfare benefits

A leaseholder may be able get help with paying certain service charges if they claim 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.

However, help can be provided in the form of a government loan, to pay the interest on a loan taken out to to pay for major repairs or improvements.

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

Right to buy leaseholders

In the event that a right to buy leaseholder has difficulty paying the service charges in respect of repairs and improvement contributions, the landlord can purchase an equitable interest in the flat (ie a share of the value) in order to enable the leaseholder to meet some or all of the payments owed.[4]

A right to buy leaseholder may be entitled to a loan from the landlord for service charges, in respect of repairs and improvements, between £1500 and £20,000 that are payable over the ten-year period from the start of the lease.[5]

With effect from 12 August 2014, 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:[6]

• 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 tenant 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

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. [7] They may only be invested in investments that are suitable for trust funds, with the addition of bank deposit accounts.[8]

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.[9]