1. Section 19 (1) (a) states that service charges are payable “only to the extent that they are reasonably incurred”.
2. This means that a leaseholder should pay no more for a service charge than the costs which were ‘reasonably incurred’.
Definition of ‘Reasonably Incurred’
1. The Landlord and Tenant Act 1985 provides no guidance as to what it means for a service charge to be ‘reasonably incurred‘ and this can makes it difficult for a leaseholder to use Section 19 (1) (a) as a basis for successfully challenging a Service Charge.
2. Guidance on what it means for a service charge to be reasonably incurred is, however, given in a very large body of case law from the upper courts and tribunals.
What is a Court or Tribunal likely to consider when deciding whether a cost has been ‘Reasonably Incurred’?
1. It is not possible to give a definitive list of these because of discretion given to courts and tribunals in deciding which factors are important.
2. Courts and tribunals have decided that a very wide range of factors are relevant in determining whether costs have been reasonably incurred.
3. Amongst the key things Tribunals tend to consider in deciding whether costs have been ‘reasonably incurred’ are:
i. The process a landlord followed in choosing what works or services to provide.
ii. How a landlord went about choosing the company or person to provide services or works
iii. Whether the costs themselves are reasonable, in terms of being typical for the type of work or service involved at time they were procured.
How a landlord went about choosing what work to do or services to provide
1. In many important cases courts and tribunals have assessed the reasonableness of a service charge on the basis of how a landlord selected which services or works to provide.
2. In practice the way they have undertake this task has been to consider the following:
i. Whether the services or works were necessary in order to fulfil a landlord’s obligations under the terms of the relevant leases.
ii. Whether the works or services are demonstrable benefit to the leaseholders concerned.
iii. Whether the services or works were a reasonably cost effective way of fulfilling a landlord’s contractual obligation.
How a landlord went about choosing the company or person to provide services or works
1. Courts and tribunals have found that achieving value for money is an important aspect in determining whether a cost has been reasonably incurred.
2. One part of this is choosing a cost effective option in terms of which services or works to provide to fulfil their legal obligations, the other aspect of this is choosing a person or company that will provide services or works at a reasonable price.
3. With this in mind, courts and tribunals often choose to consider the ‘tendering process’ a landlord used to procure the service or works for which a leaseholder is being charged. A ‘tendering process’ is a system of getting quotes from different people companies, with the aim of achieving ‘value for money’
4. There are better and worse ways of running a tendering process.
5. Better tendering processes involve:
i. An open invitation to all interested companies, not just the landlord’s choice of companies.
ii. A consideration of any quotes on in relation to a range of relevant criteria: not just price, but also on quality, experience, and the financial viability of the company. There is no benefit to residents if a landlord chooses the cheapest company and that company ends up doing a poor quality job or they go bust before they finish.
Relevant Case Law
See the section of our case law library on the Reasonableness of a Service Charge.
Click on the link to read more about the Landlord and Tenant Act 1985