A residential service charge is paid by leasehold property owners to the landlord or, as is more common practice, to a management company employed by the landlord. The funds received in payment of a service charge will be used to contribute towards the upkeep and maintenance of any communal areas managed by the landlord/management company.
In accordance with the Landlord and Tenant Act 1985 (“The Act”), all residential service charges must be reasonable to allow them to be recovered. The legislation does not expressly define “reasonable” which, whilst allows for flexibility, also creates grave uncertainty in this area.
The Act states that “relevant costs shall be taken into account in determining the amount of a service charge payable for a period
a) only to the extent that they are reasonably incurred; and b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard; and the amount payable shall be limited accordingly”.
This means that costs which are incurred but which are not necessarily needed (i.e. if works are carried out merely to improve a property, rather than repair it) or are done to an unacceptable standard can be challenged by a leasehold property owner.
A point to note is that service charges can be challenged retrospectively, following payment of the same.
There is no set criteria which a Court or Tribunal will follow when deciding as to the reasonableness of a service charge as they are entitled to use their discretion. Stemming from case law, it can be seen that there is a wide range of factors a Court or Tribunal is likely to consider and a couple examples of such factors are as follows:
- How the landlord or management company determined what works and/or services were required (i.e. whether they were necessary, beneficial and cost effective); and
- What was taken into consideration when determining who is best placed to carry out the work and/or services (i.e. was research carried out and were independent quotes obtained). It is important to note here that the Court or Tribunal will not necessarily insist the cheapest services are obtained, but that price must be taken into account. Essentially, the landlord is not entitled to absolute discretion; however, in the same breath, the leaseholder is not able to demand the cheapest services.
As a quick reference point, and to summarise, the judgment in Plough Investments v Manchester City Council [1989] 1 EGLR 244 suggested the prevalent question to ask is whether the landlord would have chosen to incur the costs requested under the service charge if they were the ones bearing the cost of it themselves.
For more information on how Stephens Scown could help you with this, please do not hesitate to contact us.