Can a Freeholder charge 10% of the final building works invoice as admin for dealing with the S.20 procedure?
Reply from Service Charge Dispute Guide
1. The first point to consider in this situation is exactly what type of charge your landlord is claiming.
2. In law a ‘service charge’ is something distinct and different to an ‘administration charge’.
3. The definition of an ‘administration charge’ is given in schedule 11 of the Commonhold and Leasehold Reform Act 2002:
“an amount payable by a tenant of a dwelling as part of or in addition to the rent which is payable, directly or indirectly—
(a) for or in connection with the grant of approvals under his lease, or applications for such approvals,
(b) for or in connection with the provision of information or documents by or on behalf of the landlord or a person who is party to his lease otherwise than as landlord or tenant,
(c) in respect of a failure by the tenant to make a payment by the due date to the landlord or a person who is party to his lease otherwise than as landlord or tenant, or
(d) in connection with a breach (or alleged breach) of a covenant or condition in his lease.”
4. The preparation of section 20 notices does not fit into any of these four categories and it cannot therefore be considered an administration charge.
5. The definition of a service charge is given in section 18 of the Landlord and Tenant Act 1985:
“In the following provisions of this Act “service charge” means an amount payable by a tenant of a [F1dwelling] as part of or in addition to the rent—
(a)which is payable, directly or indirectly, for services, repairs, maintenance [F2, improvements] or insurance or the landlord’s costs of management,”
6. The 10% which your landlord is asking you to pay is therefore a service charge, and more precisely the “landlord’s cost of management”.
7. Furthermore, it is therefore subject to section 19(1)(a) of the Landlord and Tenant Act 1985, which states that a service charge is only payable to the extent that it is ‘reasonably incurred’. This term ‘reasonably incurred’ is not defined in the legislation but has been defined (to an extent) by the decisions of the upper courts and tribunals.
8. If you read through the decisions in the reasonableness of a service chargesection of the Case Law Library on our website you will note that the upper courts and tribunals have found that a wide range of considerations have been found to be important in determining whether a service charge is reasonably incurred.
9. In relation to your particular issue (whether a landlord is entitled to charge an extra 10% specifically for issuing section 20 notices) the factors that have been focussed on are a) whether the function of issuing section 20 notices is already included in the management fee which most landlords and managing agents already charge and b) whether the amount charged for preparing the notices is reasonable in relation to the work involved. For example:
i. The First Tier Tribunal case of Seamoat Ltd v Mr S A Clark (A) Talmor Property Developments Ltd (B) Ms C P Baker (E) CAM/OOKF/LSC/2014/ 0102, 5 & 9 in which separate charges of £345 and £540 for the issuing of a total of 10 notices were found to be unreasonable and disallowed.
ii. The Upper Tribunal case of Isaac Sadeh, Deborah Kol, Caroline Ebborn v Mirhan and Azzniv (Charitable Trust), Mary-Ann Bowring  UKUT 0428 (LC) where a separate charge of £300 for issuing section 20 notices was disallowed.
10. In these cases you will note that the issue was not decided by a general rule of law, but by looking at the specific circumstances of each case and deciding the reasonableness of the charge in relation to those circumstances.
11. It is of course perfectly normal and reasonable for a landlord to charge a management fee for undertaking major works. Contractors need to be managed, tenders sought and assessed, and other necessary tasks carried out. The key question is the reasonableness of the amount charged in relation to what is done.
12. In some situations a fixed amount is stated in a lease or other contract. In such a situation that fixed amount is all that is chargeable, although that still leaves the important question of whether that fixed amount is meant to cover the task of issuing section 20 notices.
13. We suggest you consider whether the 10% is the only management fee being charged by your landlord in respect of the proposed works. 10% as a total fee for all the management functions of a landlord in respect of carrying out works is not an unusually high amount.
14. If the 10% is solely being charged for issuing section 20 notices then you should consider carefully whether the work involved in issuing the notices is commensurate with whatever sum 10% of the contract amount comes to.
15. On the basis of the case law referred to above, it appears doubtful that a First Tier Tribunal would consider it reasonable for a landlord to charge hundreds of pounds solely for the task of preparing a small number of section 20 notices, particularly if a management fee is already being charged.
Click on the link to read more Reader’s Questions and Answers on Consultation (Section 20)
Click on the link to read more Reader’s Questions and Answers on Major Works