Date 21 July 2011
Service charge recovery accounts for a good proportion of the regular residential property litigation work that I undertake on behalf of landlords and managing agents. Unlike the commercial equivalent, there is plenty of legislation governing the residential service charge regime which can create a minefield for landlords who are not up to speed with the detailed requirements.
Unfortunately for landlords, this means that it is not as simple as “I have incurred the expenditure so the tenant must pay up” and getting it wrong can have very expensive consequences (a failure to recover £270,000 in the case of Daejan Investments Ltd v Benson!).
There are 5 key arrears to pay attention to:
1. Terms of the lease
The starting point for a landlord must be the terms of the lease. This governs the expenditure a landlord is entitled to recover from a tenant and when it is entitled to recover it.
All too often landlords presume that the lease effectively gives them a complete indemnity from the tenants for any expenditure it undertakes. This is rarely the case, for example improvements to the building or the method of service provision often fall outside what is strictly recoverable under the terms of the lease.
Then there is the question of when must the tenant pay. Notwithstanding the issues below, for convenience many managing agents have their own billing practices which mean that they raise all of their service charge invoices on a quarterly or half yearly basis irrespective of what each individual lease says. This can mean that an agents system shows substantial arrears early in the year but much of that sum has yet to lawfully become due.
Landlords should also take care to check whether the demands are required to be “served” and if so make sure that they use the correct method of “service” as prescribed by the lease (this can often mean that demands need to be sent by recorded delivery or by hand!).
2. Summary of Rights and Obligations
Each demand for service charges must be accompanied by a summary of the tenants rights and obligations in a prescribed form, otherwise the charges demanded are not lawfully due from the tenant (a sample of the prescribed form can be found here).
This is a surprisingly easy requirement to fulfil but one often overlooked by managing agents or difficult to conclusively prove that it was carried out for the demand in question.
3. Reasonableness
The concept of reasonableness acts as a cap on what the landlord is entitled to recover from the tenant. This is always a fruitful ground for a dispute and I could write several articles on the case law that has developed in this area.
By way of illustration, many tenants will allege that major works ended up costing more than they should have because they were exacerbated by historic disrepair or mismanagement by the landlord. Consequently the tenants argue that they should only be liable for what it should have cost but for those problems. This is especially risky for ground rent investors who acquire a freehold subject to existing disrepair and then plan to undertake renovations at the tenants expense.
In the case of “reasonableness,” payment of service charges on account by the tenants will not mean that they are unable to later bring a challenge on the grounds of reasonableness.
4. Consultation
A further constraint upon the landlord is the requirement to undertake a statutory consultation procedure before incurring expenditure on works or certain long term agreements (in excess of 12 months) where any leaseholder would have an individual liability in excess of £250 (works) or £100 (long term agreements). Failure to follow this process properly (or at all) will limit the tenants liability to £250/£100 each and can leave the landlord with a hefty bill.
In some instances this can be avoided (ie emergencies or where all of the leaseholders have formally consented). It is then possible to prospectively or retrospectively apply to the Leasehold Valuation Tribunal to dispense with statutory consultation.
5. Time limit
Expenditure incurred by a landlord more than 18 months before a demand for payment of the service charge is served on the tenant will not be recoverable from the tenant, even if it is reasonable.
This is most relevant for the collection of deficit charges as it used to be fairly commonplace for annual service charge account audits to be delayed well into the next service charge year. Now, the penalty for a landlord who is slow to reconcile the accounts is that it may not be able to recovery all of the historic expenditure.
Get one of the above wrong and a landlord may find itself barred from recovering the costs of some or all of the legal proceedings being used to pursue the tenant as well. This is particularly important if a landlord has incurred substantial expenditure pursuing matters through the Leasehold Valuation Tribunal (which has a limited costs jurisdiction) and is looking to recover the costs through the service charge account (if not direct from the leaseholder).
If the landlord/agent gets these issues right then the scope for the tenant to resist legal proceedings is considerably diminished and the only issue is then enforcement, which is a topic for another day!
If you would like more information or advice relating to a specific matter, please do not hesitate to contact Chris Alexander on 01727 798042 or by email at chris.alexander@salaw.com.
© SA LAW 2011
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual case