Most tenants of residential premises benefit from protection against excessive service charges under the Landlord and Tenant Act 1985 (the 'Act').
For this purpose the Act defines service charge as an amount which:
- is payable by a tenant of the dwelling as part of or in addition to the rent, and
- is payable directly or indirectly for services, repairs, maintenance, improvements, insurance or the landlord's management costs.
The statutory regime provides a number of key rights for residential tenants including:
- The landlord may only include costs in the service charge to the extent that they are reasonable;
- The amount of any advance payment of service charge must be reasonable;
- Where the lease entitles the landlord to demand a variable administration charge, the amount of that charge must be reasonable;
- The landlord must consult with the tenant before entering into an agreement for more than 12 months, or for carrying out works above a certain cost threshold (unless the landlord obtains a dispensation from consultation requirements);
- The tenants do not have to pay service charge or administration charges unless the landlord includes key information in any demand for those charges;
- The tenants do not have to pay service charge in respect of costs which were not demanded within the statutory deadline for issuing service charge demands (within 18 months of the landlord incurring the cost); and
- The tenants have a right to obtain information about costs forming part of the service charge (seeking a summary of account (Section 21) and inspection of accounts, receipts and other documents (Section 22)).
Certain exceptions to the service charge regime under the Act apply to public sector tenancies or rent control tenancies.
Once the contractual scope for the service charge has been determined, the landlord may only include costs in any service charge to the extent that they are reasonable.
There are two elements to the reasonableness test being;
- The cost must have been reasonably incurred and
- Any works or services to which they relate must be of a
- reasonable standard.
Reasonableness
The first test is that the costs are reasonably incurred, not reasonable in amount. It is important, therefore, to consider the actions taken to incur costs and whether these were appropriate and properly effected in accordance with the terms of the lease, the provisions of the Act, and appropriate advice.
Reasonableness does not, however, require the relevant expenditure to be the cheapest available.
The second test does not mean that if the services are not carried out to a reasonable standard, no part of the cost can be charged; it simply means that the Court will allow the landlord to charge a fair and reasonable amount for the work undertaken.
Qualifying works
'Qualifying works' are defined and cover a range of items that are often included in service charge expenditure. What comprises a single set of qualifying works is a question of fact and they can range from day-to-day repairs and planned maintenance to major improvements. Services such as window cleaning, gardening or cleaning are not qualifying works.
The leading Court of Appeal authority confirms a "sets" approach. Separate sets of work should be identified to establish whether the relevant costs exceed the recoverable limit and, therefore, trigger the consultation process. Aggregating all works in a given year without dividing them into sets of qualifying works is wrong.
Qualifying Long Term Agreement ('OLTA')
A QLTA is defined as an agreement entered into by or on behalf of the landlord for a term of more than 12 months. It is important to consider here if any agreement entered into is to take the form of a rolling contract and, therefore, if the consultation requirement applies. For example, a management agreement for an initial term of 12 months, to continue, subject to 3-month notice (to terminate) of either side, was not found to entail a commitment for more than 12 months and did not, therefore qualify as a QLTA.
Consultation (s20 of the Act)
It is important that landlords do serve any notice correctly and that the landlord complies strictly with any notice requirements contained within the lease. There is, however, no strict prescribed form for Section 20 notices. However, such a notice must meet the detailed requirements of the Regulations.
There is no deadline in the consultation regulations or the Act by when the landlord has to implement proposals and appoint a contractor. However, the landlord should consider the following;
- In practical terms, it is likely that any contractor estimate will only be valid for a certain period, after which they may wish to revise the figures;
- If the landlord has identified work that needs to be carried out, a delay in progressing the work could result in the landlord being in breach.
The procedure for consulting before entering into a QLTA has two stages, broadly speaking. In summary, the landlord should first give each tenant written notice of the landlord's intention to enter the QLTA, including a general description of the matters covered or details of a place and time when information can be inspected. The tenants have 30 days to make observations upon the proposed QLTA.
After the initial consultation, the landlord starts the process of obtaining estimates. If the tenants have put forward a nominated person, the landlord must get estimates from that person. Having obtained estimates, the landlord must then draw up at least two alternative proposals based upon the estimates, so that the second stage of the consultation can take place. At least one proposal must be with a contractor wholly unconnected to the landlord.
The landlord must then give each tenant written notice of the proposals and should provide an estimate of how much each tenant will have to contribute under each proposal. The tenants have a further period of 30 days to make observations. Within 21 days of entering the QLTA, the landlord must give each tenant a written notice confirming the landlord's reasons for entering into the agreement, summarising any observations made.
There is a separate procedure for qualifying works, and this procedure differs if public notice is required. The first stage of the consultation consists of the landlord providing each tenant with written notice of the landlord's intention to carry out qualifying works.
The tenants have a 30-day period to make observations and if they wish to supply the name of another person from whom the landlord should obtain an estimate.
After that initial consultation, the landlord should obtain estimates, where appropriate from any nominated person put forward by the tenants. The landlord must obtain at least one estimate from someone who is wholly unconnected to the landlord and must give each tenant a statement including
- For at least two of the estimates, the amount specified in the estimate as the estimated cost of the proposed works.
- A summary of the observations on the landlord's initial notice of intention to carry out qualifying works and the landlord responses to them.
The tenants have 30 days to make observations, and within 21 days of entering into a contract for qualifying works, the landlord must give each tenant written notice explaining the landlord's reasons for awarding the contract. In that respect, the landlord must only have "due regard" to any written observations or comments made by the leaseholders upon the estimates.
This note is accurate at the time of publication. Statutory amendment may be coming in the form of the Leasehold and Freehold Reform Bill (2024).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.