1. Law Works Training: Service Charges
Amy Just
Barrister, Arden Chambers
2 November 2016

2. Introduction
Amy Just
Barrister at Arden Chambers, Assistant Editor, Encyclopedia of Housing Law, co-authour of Judicial Review: A Practitioner’s Guide.

3. What are we talking about?
Service charges
The overwhelming majority of leasehold flat owners in England & Wales will be required to pay service charges for certain communal costs (e.g. roof repairs, management fees).
These costs are a frequent sources of dispute.
This session is an introduction to service charges, how to approach cases, and a look at statutory protection afforded to leaseholders.

4. STRUCTURED APPROACH (a) Is there a contractual entitlement to costs?
(b) Insofar as service charges are due, have they been demanded in accordance with statutory requirements?
(c) Insofar as service charges are due, have they been reasonably incurred/reasonable in amount?

5. (a) Contractual Entitlement
Is there a contractual obligation to pay all the service charges demanded?
Read the lease. Read the lease. Read the lease.

6. Contractual construction
There is no rule of law or presumption that a landlord should always recover their whole expenditure; it may well be that the lease puts obligations on the landlord which are not to be reimbursed by the tenants.
In the absence of clear wording to the contrary, a lease will not be read so as to enable the landlord to make a profit. Jollybird v Fairzone [1990] 2 EGLR 55. If the lease did provide for more than 100% of expenditure to be recovered, it is very likely that an application could be made to the Tribunal to vary the lease:.

7. Calculation of amount payable
In blocks of flats, most service charge clauses apportion the total expenditure of the landlord amongst the tenants.
(a) by floor area;
(b) by rateable value;
(c) by fixed proportions; or
(d) by a duty to pay a ‘fair proportion’ or words to that effect.

8. Contractual Pre-Conditions?
The provision of a certificate from a surveyor or accountant is a common feature of modern residential leases. The certificate will usually give a definitive figure of the service charge expenditure and, in many cases, is a condition precedent for payment of those charges. If it is a condition precedent for payment then, until the certificate is provided, the service charges are not payable. It is unlikely, however, that a failure to comply with the condition precedent would mean that the money was never due; rather, the money is likely to become due once the condition is satisfied. If the lease does not specify a time for provision of a valid certificate, then it is likely that a requirement would be implied that it be provided within a reasonable period of time.

9. (b) Statutory Procedure
Has there been strict compliance with statutory requirements?
S.47 Landlord and Tenant Act 1987
S.48 Landlord and Tenant Act 1987
s.21B, Landlord and Tenant Act 1985

10. S.47 Landlord and Tenant Act 1987
S.47 Landlord and Tenant Act any written demand for rent or service charges must contain the name and address of the landlord.
This is not satisfied by giving the details of an agent: Beitov Properties Ltd v Martin [2012] UKUT 133 (LC); [2012] L. & T.R. 23
Failure to comply with the requirements of s.47 means that the service charges demanded are not due until that information is supplied, s.47(2).

11. S.48 Landlord and Tenant Act 1987
S.48 Landlord and Tenant Act the landlord must also provide the tenant with an address in England and Wales at which notices may be served on him by the tenant.
Failure to comply with s.48 entitles the tenant to withhold payment of service charges, rent or administration charges, s.48(2).
Once the information is provided, the money will, however, be due.

12. s.21B, Landlord and Tenant Act 1985
s.21B, Landlord and Tenant Act service charges
A demand for payment of service or administration charges must be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to the charges

13. Summary of rights and obligations
The form of summary is prescribed: (Summary of Rights and Obligations, and Transitional Provision) (England) Regulations 2007; Administration Charges (Summary of Rights and Obligations) (England) Regulations 2007
The summary must be printed or typewritten in a font no smaller than 10 point.
A tenant who has received a demand that does not contain such a summary may withhold payment: LTA 1985 s.21B(3) (service charges), CLRA 2002 sch. 11 para. 4(3) (administration charges).
There is no provision for a landlord to ask the Tribunal to dispense with this requirement, if a tenant is validly withholding service charges the only recourse for the landlord is to serve another demand this time with an accompanying summary.

14. Stale service charges? S.20B, Landlord and Tenant Act 1985
Within 18 months of incurring costs, the landlord must either:
Demand it from the tenant as a service charge
Notify the tenant in writing that the cost had been incurred that the they will subsequently be required under the terms of his lease to contribute to them by the payment of a service charge.

15. … stale service charges
For these purposes, costs are incurred not when the service is provided to the landlord, but when the liability to pay has crystalised, either by presentation of an undisputed invoice or actual payment.
Burr v OM Property Management Ltd [2013] EWCA Civ 479. The demand must be made of the landlord for the time being and not any former landlord: Ground Tents (Regisport Ltd) v Dowlen [2014] UKUT 144 (LC).

16. (c) Reasonableness 19.— Limitation of service charges: reasonableness.
(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—
(a) only to the extent that they are reasonably incurred, and
(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;
and the amount payable shall be limited accordingly.
(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.

17. Reasonableness
There is no general “reasonableness” requirement for service charges.
Rather, where service charges are payable for works which have been done or services which have been performed, then they are only payable to the extent that they are reasonably incurred and to the extent that the services or works are of a reasonable standard.

18. Reasonably incurred?
Whether a cost is reasonably incurred involves consideration of two related questions.
First, was the decision to incur the cost a reasonable one?
Secondly, did the landlord take appropriate steps to test the market? Forcelux v Sweetman [2001] 2 EGLR 173.

19. General principles
There is no requirement that the landlord obtain the lowest price in the market.
There may be a range of reasonable decisions which could be reached as to whether or not a particular cost should be incurred; the decision is for the landlord rather than the tenants (or Tribunal) and, so long as the decision falls within that reasonable range, the cost will be reasonable incurred.
The fact that something is contemplated in the lease does not automatically make it reasonable to incur costs for that item.
Costs incurred pursuant to professional advice are more likely to be reasonable; conversely, failing to take relevant advice is evidence of unreasonableness.
When examining the method of repair (or provision of services) chosen by the landlord, the level to be reimbursed by the tenant will be assessed with reference to whether the landlord would have chosen this method of repair (or provision of services), if they were to bear the costs themselves.

20. General principles
There is no requirement that the landlord obtain the lowest price in the market.
There may be a range of reasonable decisions which could be reached as to whether or not a particular cost should be incurred; the decision is for the landlord rather than the tenants (or Tribunal) and, so long as the decision falls within that reasonable range, the cost will be reasonable incurred.
The fact that something is contemplated in the lease does not automatically make it reasonable to incur costs for that item.
Costs incurred pursuant to professional advice are more likely to be reasonable; conversely, failing to take relevant advice is evidence of unreasonableness.
When examining the method of repair (or provision of services) chosen by the landlord, the level to be reimbursed by the tenant will be assessed with reference to whether the landlord would have chosen this method of repair (or provision of services), if they were to bear the costs themselves.

21. …
The nature and location of the property is a relevant consideration as to what level of services is reasonable, with a luxury block in Mayfair having different demands to a converted house on the Old Kent Road.
Costs in respect of works carried out by or on behalf of public authorities after a public procurement exercise are likely to be reasonably incurred.
The fact that tenants may suggest that they could, acting individually, provide services cheaper than those provided by the landlord, is irrelevant. Landlords are entitled to use qualified personnel and any comparisons by the tenant must be on a “like for like” basis.
Where it is possible for works to be done at no charge to the tenant (e.g., under a guarantee) to carry out works at a cost to the tenant will render the whole of those costs unreasonable unless there is some good reason to do so.
It is irrelevant whether or not the tenant will benefit from the works, so long as he is obliged to pay for them under his lease.
The fact that it is ‘reasonable’ to have a service provided does not automatically mean that the costs associated will be ‘reasonably incurred’.

22. …
The fact that tenants have a time limited interest in the property may be a material factor when considering ‘reasonableness’.
The financial impact of major work on lessees, and whether the work should therefore be phased, is something which should be considered by the landlord.
How the need for the work arose is not a relevant factor, even if the repair works are only required because of the landlord’s breach of a repairing covenant.
There is nothing objectionable to a landlord managing a property through a connected company (or providing other services through such a company) and recovering the costs as such, so long as the arrangement is not a sham.

23. Reasonable Standard
This is, in effect, a value for money test. If the standard of works or services is too low when compared with the sums charged, the service charge should be reduced by an appropriate proportion. It is unlikely that this could ever result in a reduction to “zero” however.
Yorkbrook Investments Ltd v Batten [1985] 1 EGLR 100; Country Trade Limited v Noakes [2011] UKUT 407 (LC)

24. Role of the Tribunal
Both a court and the Tribunal have jurisdiction to deal with service charge disputes: S.27A(7), 1985 Act.
but, in most cases, it will be preferable for the case to be dealt with in the Tribunal, given its expert knowledge and common practice of conducting a site visit.
Phillips v Francis (No.1) [2010] L. & T.R. 28;

25. Application to the Tribunal
An application may be made to the Tribunal to determine whether a service charge is payable. Anyone may make the application, although most applications are made by a landlord or a tenant. A managing agent that is not a party to the lease should not normally, however, be the respondent in a service charge case; rather it would normally be appropriate for the landlord (their client) to be named as respondent should be their client.

26. s.27A The Tribunal may also determine:
(a) the person by whom it is payable;
(b) the person to whom it is payable;
(c) the amount which is payable;
(d) the date at or by which it is payable;
(e) the manner in which it is payable.
LTA 1985, ss.27A(1)(a)-(e)

27. Burden of proof/Evidence
A particular difficulty with service charge proceedings in the Tribunal is the question of burden of proof. It is unhelpful to approach the question by considering any burden of proof; the correct approach is to consider the matter in the round and only resort to any burden of proof in the event that there is not a clear answer.
In the event that it is necessary to resort to the burden of proof, the position appears to be that it is for the tenant to adduce some evidence to suggest that there might be a question mark over any service charges demanded. If this is done, then the landlord must provide sufficient evidence to establish that the service charges are properly due. If the landlord produces no evidence, then its case should fail.
The nature of the evidence will vary from case to case. In some circumstances, the quantum of the bills can be enough to suggest that something is amiss (e.g. leaking water pipe; electricity being abstracted).
In others, like-for-like quotes will be needed. The absence of a proper invoice for works is not necessarily a reason to disallow the recovery of costs if there is other evidence to show that some work has been done.

28. Law Works Training