Service charges: what do you need to know?

Over the past two decades the rules dealing with service charges have changed completely and there now exists a fairly comprehensive set of rules which as can be seen in cases reported from the Leasehold Valuation Tribunal (LVT) can catch out the unwary.

The starting point for all Property Managers and Leaseholders must be the actual Lease itself. It is no good to say “Well good practice is this…” if the lease does not allow or includes a particular mechanism this must be followed. One of the things which many leases contain is some sort of Certification mechanism. If this is included In the lease unless and until this process is followed in full the service charge will not be payable and unless done in a reasonable period of time may not be payable at all! As to what is reasonable this will always depend upon the actual circumstances but usually a common sense interpretation will be given.

Next are the various statutory rules governing service charges and the collection of these. Some of the main items can be summarized as:

1. All demands must contain a Summary of the Leaseholders rights. Without this no valid claim has been made.
2. Leaseholders are entitled to inspect accounts and all receipts and invoices.
3. Leaseholders are entitled annually to a copy of the insurance policy.
4. Any works which will cost any one leaseholder more than £250 must be subject to a detailed consultation following a set formula
5. If there are any costs associated with works and if for any reason the sum cannot be demanded within 18 months details of the amount etc and the fact it will be claimed must be notified to the leaseholder.

The above gives a brief synopsis of some of the major pitfalls that lie in service charges and the recovery.

Today most disputes about residential service charges even if begun via the Court will normally be actually adjudicated on by the LVT. This is a specialist property Tribunal. The LVT has jurisdiction to deal with most disputes as to the reasonableness of service charges and can make set offs although it does not have jurisdiction to deal with breach of covenant claims. Generally the process before the LVT is similar to the County Court although not always as formulaic. The LVT will issue Directions and then list a matter for hearing. At the hearing there will usually be a panel of a Chairman (usually a lawyer), a Surveyor and sometimes a third lay member. The panel will often inspect the property before the hearing and then go on to hear evidence before usually retiring to then give a written decision within about 6 weeks of the hearing.

Parties should be aware that on occasion even if issues are not raised by a party the Tribunal may raise them such as the service of appropriate consultation notices and Summary of Rights and Obligations. Property Managers should always have available these documents when they attend an LVT and be able to show that they have complied. Without it the consequences can be significant as the LVT seems to be taking a tough line on compliance. What is often said to be the real benefit of the LVT is that generally it has no powers to award costs. In certain circumstances it can award a party its costs up to a maximum of £500. It is also able to order that a particular party should pay to the other side any fees paid to the LVT and also to adjudicate on whether the costs may be included as a future service charge expense. It is worth noting that many commentators believe it is likely that the jurisdiction of the LVT will be increased and the rules on costs will be changed probably giving the LVT powers to award up to £5000 per party.

It is vital that all Leaseholders and Property Managers give careful consideration as to the lease and the rules. In particular Owner Managed blocks (e.g. where the Leaseholders have purchased their own freehold) do need to be aware that these rules apply equally to them and there is no opt out simply because in effect the freeholders and leaseholders are one in the same. If in doubt you should look to take advice at an early stage to prevent problems later!

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