September 2016: Landlords of residential premises who are obliged to comply with the Consultation Requirements should take note of an important decision in the Upper Tribunal (Lands Chamber). This decision clarifies that superior landlords intending to carry out qualifying works or enter into a qualifying long-term agreement must consult, not just with their immediate tenant, but also with each subtenant of a dwelling (or dwellings) who is liable to contribute towards the relevant costs.

Failure to comply with the Consultation Requirements could be very costly as it will mean that the superior landlord’s ability to pass on its costs to tenants is severely limited (unless the First-tier Tribunal agrees that the superior landlord may dispense with the Consultation Requirements). This is likely to pose a significant practical difficulty for superior landlords who will not know the identity of those subtenants with whom it is required to consult.

January 2016: Residential landlords should take note of an Upper Tribunal (Lands Chamber) decision. The tribunal held that a landlord of a residential estate comprising three blocks of flats was not entitled to recover through the service charge the sums it paid to settle a dispute with a tenant or the legal costs incurred in securing the settlement. The landlord had breached its repairing covenants under the lease and, after admitting liability, had failed to procure completion of the remedial works in a timely manner.

August 2015: An Upper Tribunal (Lands Chamber) case provides a valuable reminder for residential landlords (freeholders) and/or managing agents that they hold service charges on trust for the leaseholders and they need to carefully consider the provisions of the lease.

In this case, which was brought to the Upper Tribunal following appeal from the First Tier Property Tribunal, the lease specifically said that the landlord should set up a reserve fund for service charge money, that the reserve should be held in a specially designated trust fund and that the cost of repairs should come first from that fund.

The landlord did not set up a specially designated trust fund and argued successfully at the First Tier Property Tribunal that, because he had not set up a specially designated trust fund for the reserve, he did not have to take monies from that to pay for repairs. The Upper Tribunal said that this decision was wrong, because the landlord could not benefit from his own wrong doing, and the cost of repairs must come from the reserve fund first.

June 2015: Two decisions in the Upper Tribunal (Lands Chamber) (UT) provide cautionary reminders to landlords about residential service charge requirements.

The first case concerned the consultation requirements under the Landlord and Tenant Act 1985. The UT held that a management company failed to comply with the requisite consultation requirements because the place and hours specified in the notice for inspection of the estimates were not reasonable, and the estimates were not available for inspection, free of charge, at that place and during those hours. This decision highlights that a landlord or management company needs to carefully consider what information must be given to tenants, and how this is to be made available.

In the second case, the UT held that the service charge demanded from a tenant under a residential lease had not become due as the demand did not comply with section 47 of the Landlord and Tenant Act 1987. This decision underlines the strict requirements of section 47. Landlords should check that their practice accords with its provisions, as failure to comply could delay collection and lead to disputes.

April 2015: Service Charge Increase for Improvements: A decision in the Upper Tribunal (Lands Chamber) will increase the administrative burden on landlords to show that they have considered both alternative approaches and the financial impact on tenants of improvements before proceeding. Failure to do so may provide disgruntled tenants with ammunition to challenge high service charge bills.

The tribunal held that, when considering whether service charge costs for improvements (as distinct from repairs) are reasonable, the landlord must show that it has considered the availability of an alternative and less expensive remedy, and the views and the financial means of the tenants who will be required to pay for the works.

March 2015: Landlord and Tenant Service Charges: Landlords with a large portfolio of properties often have an agreement with one contractor to provide services to several properties within the portfolio. A decision from the Upper Tribunal (Lands Chamber) emphasises the need to keep separate accounts for each property and to pay regard to the detail of the lease.

The tribunal held that a landlord was not entitled to apportion communal lighting charges by reference to the rateable value of the estate compared to the rateable value of other properties owned by the landlord and covered by a global maintenance contract. While the landlord may have obtained the benefit of economies of scale, and passed on that benefit, if any apportionment of costs does not comply with the service charge provisions and a tenant feels that the apportionment used is disadvantageous to it, unsurprisingly the tenant may contest the service charge.

This business briefing explains what a service charge is, when consultation is required, the penalties for failing to comply with consultation requirements and the time limits for making service charge demands.

What is a service charge? A service charge is an amount payable by a tenant as part of, or in addition to, rent. Service charges may vary according to the costs or estimated costs incurred in connection with the matters for which the service charge is payable. Legislation protects residential tenants from excessive service charges.

Service charges must be reasonable. Landlords can request that tenants pay a service charge for costs the landlord incurs for:

  • Services
  • Repairs
  • Maintenance
  • Insurance, and
  • Management

The costs must be reasonably incurred and the work or services must be of a reasonable standard. There is no restriction on the factors that can be taken into account when determining if service charge costs have been reasonably incurred. This means that the financial impact on tenants, and whether the works should be phased to spread the costs, can be taken into account alongside other relevant considerations. However, tenants cannot insist that service charges are phased in to spread the cost of major works.

Tenants can challenge service charge costs: A tenant can challenge service charge costs by asking the Property Chamber of the First-tier Tribunal (FTT) to determine whether:

  • The service charge costs were reasonably incurred
  • The services or works are of a reasonable standard, and
  • An estimated service charge, payable before costs are incurred, is reasonable

Tenants cannot avoid liability to pay service charges on the grounds of hardship. If repair work is reasonably required at a particular time and is carried out at a reasonable cost and to a reasonable standard, the tenant must pay the corresponding service charge in accordance with the terms of its lease.

When is a consultation required? Before entering into contracts to provide services or carry out works relating to residential properties, landlords should consider whether they need to consult with their tenants. If a landlord fails to consult when required, they will only be able to recoup the statutory maximum, unless they receive dispensation from the FTT. A landlord must consult with tenants if either:

  • The amount payable by any one tenant for services to be provided under a qualifying long-term agreement (QLTA) will exceed £100 in any one year. A QLTA is an agreement entered into by the landlord or a superior landlord for a term of more than 12 months
  • The total contribution towards qualifying works will exceed £250 for any one tenant

What are the consultation requirements? A landlord must:

  • Give notice to tenants and to any recognised tenants’ association (RTA), explaining why the proposed works are necessary. The landlord must invite written observations on the proposals and take note of any responses
  • Obtain estimates. Tenants and the RTA have a right to nominate alternative contractors and the landlord is obliged to ask for an estimate from the nominated alternative contractors
  • Issue a statement setting out the estimated costs from at least two of the estimates, with a summary of the written observations received and the landlord’s responses to them
  • Provide a notice setting out when and where all the estimates can be inspected; and inviting written observations on the estimates within 30 days of the date of the notice. Landlords must take note of any written observations provided
  • Give reasons for selecting the successful contractor

Dispensing with the consultation requirements: The FTT has the power to dispense with the consultation requirements, if it is satisfied it is reasonable to do so. It will consider whether the tenants suffered any relevant prejudice due to the landlord’s failure to comply with the requirements and can decide to grant a dispensation subject to conditions.

Time limits for making service charge demands: When service charge demands are issued after completion of the works or provision of the service, a landlord must issue the demand within 18 months. If the demand is provided later than this, the landlord will be unable to recover the costs, unless they have served a notice during the 18 months stating that:

  • Costs have been incurred, and
  • the tenant will be required to contribute to them by payment of a service charge

If the landlord does not know the exact amount of the costs incurred, they should specify a figure for costs that they would be happy to accept as the limit on the costs ultimately recoverable (the notification will be valid even if the service charge ultimately claimed is less than that stated in the notice).

What are the penalties for failing to comply with the consultation requirements? If a landlord does not comply with the consultation requirements, and the FTT does not decide to dispense with the requirements, the landlord’s ability to pass on costs to tenants will be limited. The maximum that the landlord will be able to recover is:

  • £100 for each tenant for each year for QLTAs
  • £250 for each tenant for qualifying works

The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at September 2016. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.