Service charge

What is service charge?

A sum of money payable by a tenant to a landlord for providing the services set out in a residential lease. The amount is variable depending on the costs incurred. The total cost is usually split between the tenants occupying the building in accordance with the terms of the lease.

You usually expect to find service charges in leases of part where the landlord is providing services to the building. The landlord usually pays for the services upfront and is then reimbursed via the tenant by way of a service charge.

What are the types of services that can be provided?

This will vary depending on the lease; however, examples include:

Providing lighting and heating to the common parts
Providing security and cleaning staff for the building
Cleaning and maintaining the retained parts of the building which remain in the ownership of the landlord
Maintaining the gardens/landscape that are common parts
Maintaining and repairing any lifts in the common parts
Replacing bins on the common parts
Any other services required to the building and/or the estate in line with good estate management- this tends to be a ‘”sweeping up” clause that landlords sometimes include so that they are not restricted to providing only the services set out in the lease

What else can tenants be expected to pay for under service charge?

Again, this depend on what is set out in the lease however, examples include:

Managing agent fees
Satisfying insurers recommendations for the building
Supplying and removing utilities from the retained parts
Satisfying legal requirements relating to the retained parts
Landlord’s proper and reasonable accountant fees
Landlord’s proper and reasonable legal fees
Redecoration of the building

How is service charge calculated?

This will be governed by what is in the lease. The figure payable may be fixed each year or may be the estimated cost or the actual cost of providing the services.

The lease should set out how the service charge is to be calculated. For example, it may be calculated based on a fair and reasonable proportion as the landlord decides, floor space divided by the number of flats, or even a fixed percentage of the costs.

The Landlord and Tenant Act 1985 (as amended) (“the Act”) states that a landlord can only recover service charge in relation to costs which have been reasonably incurred and work which has been carried out to a reasonable standard. A tenant can dispute any unreasonable service charges by applying to the Leasehold Valuation Tribunal (“LVT”).

When is service charge payable?

The lease should set out when payment of service charge is due. This can vary from payments in advance on certain dates or a demand after costs have been incurred. Sometimes at the end of the service charge year, where service charge is payable based on estimated costs, there is a shortfall i.e. the actual service charge is higher than the monies received by tenants and so tenants will usually be expected to settle the outstanding balance of their proportion. If the actual service charge is lower than the service charge received, the money tends to either be returned to the tenants, placed into a reserve fund or used against the service charge for the following year. Usually, a lease will require a landlord to produce an end of year statement of account of what has been spent and provide this to the tenant. The lease can provide for this to be audited or certified by an accountant.

It is important to note that demands for service charge must be in writing and include the name and address of the landlord instead of the managing agent (except where they are also the landlord, or it states in the lease that payment must be made to the managing agent).

A summary of tenants’ rights and obligations must be issued with the demand for payment of service charge. There is a specific title and content that must be used, see prescribed content for summary of tenant’s rights and obligations- service charges. It must be “legible in a typewritten or printed form of at least 10 point” (Regulation 3, The Service Charges (Summary of Rights and Obligations, and Transitional Provisions) (Wales) Regulations 2007). Where the landlord is a local authority or National Park Authority, these regulations do not apply. This includes details of a tenants right to apply to the LVT. If a service charge demand does not comply with the statutory requirements, a tenant is not obliged to pay until a compliant demand is issued.

Right to information relating to service charge

Tenants have the following statutory rights:

To seek a summary of the service charge account from the landlord (s21 of the Act)
To inspect accounts, receipts and other documents relating to the service charge summary and take copies of these (s22 of the Act)
To request a summary of insurance cover and to inspect insurance policy documents (s30A and Schedule 1 of the Act)

The ability to request information is useful for tenants who plan to sell their property or for those who are formally challenging the costs.

Limitation Period on recovery of service charge

S20B of the Act states that service charges costs cannot be recovered by a landlord if they were incurred more than eighteen months before being formally demanded. If a landlord notifies a tenant in writing of the amount of costs due to be demanded within eighteen months of incurring them, this does not apply.

Major Works and Consultation

S20 of the Act states that if a landlord either intends to carry out work which will cost any one tenant more than £250 in any accounting period or a landlord intends to enter into a qualifying long-term agreement, for over twelve months, which will cost any one tenant more than £100 in any accounting period, they must consult the tenants. For further information see: s20 Consultation).

What is a reserve or sinking fund?

A reserve or sinking fund is a pot of money obtained by the landlord in advance, from all tenants, as permitted under the lease. The purpose of these funds is to ensure that the cost of expensive works, such as redecoration of the building, are spread over a long period of time to make payment more manageable for tenants. It also creates an element of fairness between tenants as money received from tenants who no longer hold a leasehold interest but have contributed previously to the fund can be used. However, if there is a shortfall, tenants will be expected to pay the balancing charge in accordance with their service charge liability as stated in the lease.

The contribution to the fund from tenants must be reasonable and will either be determined in the lease itself or determined by the landlord. A tenant can dispute any amount they feel to be unreasonable.

How should service charges funds be held?

S42 of the Landlord and Tenant Act 1987 (“the 1987 Act”) requires service charge funds to be held by the landlord on trust for the tenants. This ensures that the money remains protected, and held for the tenants’ benefit, in the event of the landlord’s insolvency. The requirement does not apply to local authorities, registered housing association and other exempt landlords, as defined in s58(1) of the 1987 Act.
Service charges for Assured Shorthold Tenancies in the private rented sector are largely prohibited under the Renting Homes (Fees etc.) (Wales) Act 2019.