Our Top 10 Mistakes Landlords make with Service Charges
Whilst no two properties are exactly the same, nor landlords, there certain things which we see landlords getting wrong time and time again. If you are concerned about your Service Charge bill, whether it’s your annual bill or a Major Works bill, and you aren’t sure exactly what has gone wrong a good starting point is to check the ‘usual suspects’. If you are a landlord reading this, then preparing a check list based on this list might help you to ensure that you are correctly invoicing your leaseholders.
1. Incorrect Apportionment
Leases will normally state how the landlord’s costs in managing a building or estate should be divided between residents. This is known as the ‘apportionment method’. Landlords don’t always take account of what a lease says in this respect. Some landlords, particularly large housing associations, have so many different types of leases that they don’t actually know what every lease says and they use an apportionment method different to the one stated in the lease.
For more information see our article about the Apportionment of Service Charges.
2. Invalid Invoices
Leases will generally say something about how service charge invoice should be calculated, what it should include and when it should be issued. Some leases require bills to be sent every 3 or 6 months, many say annually. Some leases give a specific time of the year when this should happen, others give a Landlord the option to select the dates upon which the service charge accounting period starts and ends. Some leases say service charge invoices should be signed off by an independent auditor. If landlords don’t follow all the rules stated in the lease then may have the legal right to withhold payment. The law also states that all service charge invoices are only payable if they are accompanied by a ‘Statement of Rights’. You can read more about this click on this link.
3. Failure to Consult
The law says that if a leaseholder is going to be charged either £250 or more for a single set of works, or more than £100 a year for something provided by a company under the terms of contract lasting more than 1 year, they must be consulted before any costs are incurred. The consultation must be done by a letter known as a Section 20 notice. The rules on how and when to serve section 20 notices are complicated. Many landlords get it wrong. The consequence of getting the service of section 20 notices seriously wrong may be that the amount a landlord can charge is limited to either £100 where it relates to a contract lasting more than a year, or £250 for a single set of work.
For more information see our guide to Section 20 of the Landlord and Tenant Act 1985.
4. Lease does not allow a Landlord to Charge
Leases generally set out in detail the types of things a landlord can charge for. If they do not refer to a type a charge then the Landlord may not have the legal authority to make that charge. A good approach for a leaseholder would be to look closely at their lease and check that for all the things they are being charged they are specifically referred in their lease as being things they are required to contribute towards through their service charge. A common issue that comes up is where landlords try to charge for improvement costs when the lease only states that landlords may charge for things such as ‘repair’ or ‘maintenance’. Leaseholders have successfully challenged their liability to pay for improvement works because their lease did not specifically use the word ‘improvement’.
5. 18 Month Rule
Section 20B of the Landlord and Tenant Act 1985 says that a landlord must either bill a leaseholder for, or notify them of, a cost within 18 months of it being incurred. In most instances the cost is taken to been ‘incurred’ on the date that the invoice is sent to the landlord. It is surprisingly common for landlords to issue invoices, or inform leaseholders, of a cost more than 18 months after the date of the invoices. Leaseholders who receive delayed invoices would be wise to check whether they have previously received notice of the costs (a ‘Section 20B Notice’) and if not they should be asking their landlord to provide copies of the invoices for the costs to check whether the date on the invoice is more than 18 months older than the date of the service charge bill.
For more information see our guide to Section 20B of the Landlord and Tenant Act 1985.
6. Quality of the Service or Works
Section 19 of the Landlord and Tenant Act 1985 states that a service charge is only payable in so far as the services or works have been carried out to a ‘reasonable standard’. The implication of this is that leaseholders can ask that their service charge be reduced if the service or work hasn’t been done very well. Landlords who don’t manage their service providers to ensure a reasonable standard of service or work can be penalised when it comes to recharging the cost to leaseholders. A common issue for leaseholders is cleaners not attending as regularly, or for as long, as stated in the contract for the cleaning service. A cleaner, it could be argued, cannot do 2 hours cleaning twice a week to a reasonable standard if they only clean for 1 hour once a week.
For more information see our guide to Section 19 (1) (b) of the Landlord and Tenant Act 1985.
7. Necessity of the Work
Section 19 of the Landlord and Tenant Act 1985 also states that a service charge is only payable in so far as it is ‘reasonably incurred.’ The law gives no definition of what ‘reasonably incurred’ means. When Courts and Tribunals assess whether a cost has been reasonably incurred they tend to look at a range of factors. One of the key things they are likely to consider is whether the provision of a service, or particularly the carrying out of work, was really necessary. There have been some recent cases where major works bills have been reduced from tens of thousands of pounds to £0 because the landlord did work which they deemed unnecessary. One such case involved a London local authority which the First Tier Tribunal decided had replaced the flat roofs on several blocks of flats when the existing roofs were in a good condition.
For more information see our guide to Section 19 (1) (a) of the Landlord and Tenant Act 1985.
8. Value for Money
Another factor which is relevant to whether a service charge has been ‘reasonably incurred’ is whether the cost of the work or service represents value for money. The most common concern for leaseholders in this respect is whether the major works are let to companies which landlords know already, rather than properly tendered to achieve the best price.
9. Supporting Documentation
Concerned leaseholders would be well advised to ask whether their landlord is able to produce all the invoices which account for the provision of services and works for which they intend to raise a service charge. In the event of a dispute about whether services or works were provided, a landlord may experience real difficulty in proving they spent the money they are seeking to recharge leaseholders if they can’t supply the supporting documentation. In practice this happens frequently.
10. Failure to Carry Out Timely Repairs
If a building has not been maintained properly, a leaseholder may wish to argue that the landlord has caused damage to the building by neglect. A Tribunal can consider this in relation to the issue of whether a cost has been ‘reasonably incurred’. It may be that something mechanical, like a lift, has not had regular maintenance carried out on it and develops a problem which regular maintenance would have prevented. It may be that a roof was left to leak and that whatever is underneath it has been damaged by this, with a pitched roof this may be wooden roof joists rotting, with flat roofs this may be damage to the concrete base underneath.