We have dealt with several instructions to assess the reasonableness of service charges presented by both local authority and private freeholders to private leaseholders – the service charge demand can be very high and with the current cladding issues can be crippling.
Since August 2014 social landlords / freeholders are limited in the amounts that they can claim – £15,000 within London and £10,000 outside London (as at 2015). Social landlords also have the power to vary, waive or reduce service charges subject to varying criteria. Nonetheless if the charges are still excessive, they can often be challenged. There are no restrictions on private freeholders however.
This article presents a quick and general guide. If you have any concerns or questions about your own situation, please give us a call.
What is a leaseholder?
A leaseholder (or a tenant) owns a property on a lease, usually a flat or apartment within a block owned by a ‘freeholder’. In some cases, owners of houses within a larger estate may be leaseholders. This lease might be for 99, 125 or 999 years. It decreases year by year until it eventually runs out.
What is a service charge?
Service charges are fees to cover costs of management, maintenance and repairs on the common areas of the building or land that your property is within. Examples include roof repairs, drains, guttering, rendering or pointing, etc. Full details of service charges will be within the lease and you should always check this.
The lease will also set out the manner in which they are accounted for and collected. Commonly, they are paid around once or twice a year and may even accrue over time as a sinking fund so that when major works is required there is enough money available within the fund. They have no limit and can go up or down each time.
This means leaseholders could potentially have large one-off payments to make when larger works must be undertaken.
In any event, if the cost of any work is greater than £1,000 or £250 per leaseholder the freeholder MUST undertake a consultation (known as the Section 20 process) with their lessees and must consult about the work, invite contractors to be nominated and provide the estimates for costs of work.
What happens if I don’t pay my service charge?
The freeholder will enforce the terms of the lease. That means they will sue you for the service charge and if you still don’t pay they might apply for your lease to be forfeited. If your lease is forfeited, you will lose your home. If you really cannot pay, then you must discuss the situation with them and also talk to your mortgage provider as you may need to borrow more money to pay the service charge. Whether you like it or not, the obligation to pay the service charge is an absolute undertaking by the leaseholder within the lease.
How do I challenge service charges?
What you must not do is simply not pay them! You are usually in a stronger position if you have paid and challenged.
Challenging service charges can be difficult and costly. Challenges are made to the First Tier Property Tribunal (FTPT) and if the tribunal considers that the charges are wrong or disproportionate then they can assess them at a lower level. The FTPT may also consider whether the correct process was followed, the bills correctly drafted and served and whether the works was, in fact, necessary at all.
This can be a fraught legal process involving solicitors and barristers and can take some time. Remember the freeholder will be fighting hard to demonstrate the costs are reasonable and that you must pay them.
If you are thinking of contesting a service charge very often the first calls are to a chartered surveyor and a lawyer – make sure you use an experienced property litigation lawyer. When we are asked to consider a service charge the very first thing we do is to check that all of the required Section 20 consultation notices have been issued. This formal process is very rarely flawed in local authority property but can often be irregular for private freeholders where we do find that costs and work descriptions can change between notices. Any error in this process can limit a freeholder’s ability to claim service charges.
Can tenants request an independent inspection of the property?
Ideally, we will have been invited to inspect a property by a tenant before the works start. This enables us to confirm the condition of a property and to determine whether the repair is necessary or otherwise.
We acted as expert witness in one case where the whole cost of re-roofing was rejected (it was a lot of money) because our early inspection and report proved that the roof was in sound condition and the work was unnecessary. These inspections can be costly, but if you split the cost with other lessees in the block, the fee per flat can be reasonable.
We will then review the lease documents in detail. This is important because it sets out what the freeholder can and cannot claim as a service charge item and a leaseholder’s liability to pay it. Sometimes we find that the lease precludes ‘improvements’ being a service charge recoverable item and if these have been included, then they need to be removed from the final bill. Only then will we carry out a site inspection.
What types of issues are found during an inspection?
Occasionally, we will find that the works have all been completed and carried out to a good standard – in those cases we will advise that the charges are ‘reasonable’ if all other criteria have been met.
More often than not though we find problems. Here’s a typical selection:
- Gutter replacement being partially completed, rather than full replacement claimed and only a down pipe replaced.
- Works simply not done, but costs claimed – most recently brick bin stores left dilapidated.
- Poor quality workmanship, especially decoration.
- Works started but not finished.
- Poor finishing and making good.
- Non-compliance with building regulations and planning regulations.
- Specified materials not used and cheaper material substituted
- Works of improvement claimed as repair – this could include things like communal satellite TV installation and security installations.
Part of the problem with local authority and large property companies is that very often costs are assessed on an estate-wide basis, then simply divided without regard for the actual work done on individual blocks – some will need more and some will need less.
We commonly find that the administration costs are excessive. Our experience says that a full design and project management team will usually be around 18% of a project value, but we regularly see 25% or more. We occasionally see accounts where the contingency has not been omitted as it should have been.
What happens when surveyors find irregularities and problems?
In most cases you will need legal advice (always use a specialist housing/leasehold lawyer). You will need an expert witness report from a surveyor and you may take the case to the FTPT for review. They will hear evidence from both sides and make a decision that may uphold, vary or reduce service charges. This can be expensive, and costs are not always recoverable.
You can read more about service charges and other issues here (This is a really useful article – Service charges and other issues. If you think you need service charge advice, we can help. Contact us via the form below.