Service charges for leasehold properties

Service charges are variable charges payable directly or indirectly for services, repairs, maintenance, improvements or insurance, or the landlord's costs of management in respect of a dwelling.[1] The whole or part of the charge varies or may vary depending on the cost actually incurred.

Improvements were included in the definition only from 30 September 2003.

Variable charges

Fixed charges are not service charges. Where a term of the lease imposes a charge that does not vary according to the relevant cost, it is not a service charge and does not therefore benefit from the 'reasonableness' requirement.

Such a fixed charge is interpreted according to the usual principles of contractual interpretation. In one case, a lease contained a clause by which the leaseholders were to be charged a fixed amount for services in the first year, and this amount was to increase by ten per cent every year thereafter. Within a number of years, according to this formula, leaseholders would be subject to extremely high charges, considerably greater than the actual costs of services provided. The Supreme Court held that the term of the lease was to be given its natural meaning and that the resulting high increase to charges was no reason to depart from this interpretation.[2]

In one case, it was held that where service charges were variable and subject to annual reviews, it allowed the landlord to increase/decrease the amount but not expand the schedule of service charges payable under the agreement to add new services.[3]

In respect of a dwelling

Only charges that relate to a 'dwelling' are within the statutory definition of a service charge.

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.[4] 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, ie the bedsit plus the shared accommodation, was not a separate dwelling as it was shared.[5]

For information on which charges the leaseholder is obliged to pay, see Liability for service charges. See also Challenging service charges.

The Landlord and Tenant Act 1985 limits the amount of service charges payable in that the costs must be reasonably incurred and works must be of a reasonable standard.[6] Charges to cover administration costs such as those in connection with granting an approval under the lease, or in connection with breaches of conditions of the lease must also be reasonable.[7]

See Statutory rules for service charges for more information on how much a landlord may charge for services.

It has been established in the courts that the landlord is still obliged to carry out repairs or provide services even where the tenants have not paid their service charges. This will still be the case when the lease specifies that the landlord's duty does not arise until the tenants have paid.[8]

In certain cases the landlord may be required to act by a court order for specific performance and/or damages, and other remedies may be available.

Where services such as repairs or works of improvement will be over a certain amount, these are referred to as 'major works' service charges and particular consultation requirements apply.

See Consultations with leaseholders for major works for more information.

For information on how the landlord may demand service charges, and the information that the leaseholder is entitled to receive, see Service charge demands and Liability for service charges.

This also applies to short-term tenants who pay service charges, except those of local housing authorities and some other public landlords.[9]

To avoid confusion, the terms 'landlord' to describe the lessor or freeholder and 'tenant' to describe the lessee or leaseholder is used here.