Service Charge Disputes and how to avoid them

Service Charge Disputes – and how to avoid them

Here are some points to consider if you are involved in (or are trying to avoid) a service charge dispute.

How often do I hear the words, “I think we have a service charge dispute…. what should we do about this?” A dispute about service charge, if not handled correctly can be the route to quite a lot of misery.

The first thing to realise about service charges is that they are not an inequity but rather, something of a necessity!

Any property with a shared ownership structure needs to be maintained and what flat owners often do not realise is that taking proactive steps to either buy the freehold or to take over the management of the building under the Right to Manage (RTM) legislation does not necessarily lead to lower service charges in the short term. In fact, sometimes quite the reverse is true. Often their service charges will increase because of the quality of the materials or frequency of services being provided.

Avoiding a dispute

The first piece of guidance is of course, to avoid any kind of dispute at all costs. How can this be done?

Well, in a small block where everyone is a shareholder in a company owning the freehold having the service charge budget approved by the company in a general meeting might help.

Whilst the consultation requirements under the service charge legislation are myriad (see the various requirements for s.20 notices etc,) the tribunal does have a power to dispense with consultation requirements in certain circumstances. In particular, this applies in the case of an emergency, but there is also nothing to say that a ‘one off’ error in the consultation process (although this would depend on the exact circumstances) made by a well-intentioned, self-managed group of residents might not also be excused.

Additionally, if the company has approved the budget and the member in question was present and ratified it (or indeed was perhaps even a director of the company a the time) it is going to be very hard for them to argue (whatever a strict interpretation of the service charge legislation might say) that they did not know what was going on. There might even be a legal argument that they would be prevented from bringing a later challenge as to do so would be unfair.

Preparation is key

The best piece of guidance is to take all possible steps to ensure that any budget is properly prepared. This may well involve a fairly detailed consideration of what work is proposed and how it will be done (in case this is also subject to challenge).

The next sensible thing to do is probably to get professional advice. A good managing agent makes all the difference to the relationship between flat owners and also to the relationship between the freeholder and the flat owners when it comes to the ‘day to day’ aspects of running a building. Additionally, a good managing agent will also be able to provide effective advice on the service charge consultation procedures. Whilst some people resent the suggestion of the imposition of an additional layer of cost in a small building, experience tends to show that if there is likely to be any friction at all, then having a managing agent in place provides a significant advantage and longer term cost saving.

So, why are service charge disputes often the route to a lot of misery?

If you are thinking of either of these options then you may want to consider some of the pros and cons of an incorporated versus an incorporated structure. A brief outline of each appears below:

One of the main reasons is that the First Tier Tribunal ('FTT'), formerly known as the Leasehold Valuation Tribunal or 'LVT,' has a very limited costs jurisdiction. There is a right to claim costs where another party has behaved unreasonably, or caused costs to be wasted because of their behaviour, but these are rarely used.

A key issue therefore, in taking a case to the FTT on the question of service charges is not only ‘what is it going to cost?’ but also ‘where are these costs going to end up?’

If no-one is going to be awarded costs (win, lose or draw) then who is going to pay? the answer is, sadly that unless the lease is strongly in the landlord’s favour that the most likely outcome is that ‘everyone’ is going to pay, via the service charge budget.

A clear cost/benefit analysis therefore needs to be done at each step in the process. With a trip to the FTT with legal representation likely to cost a good few thousand pounds, a dispute about relatively minor sums may be might be ripe for mediation, or may have to be left until the sums are more substantial to make the economics of pursuing it stack up.

Sadly, from the landlord’s point of view – particularly with a freehold company owned by the residents, if one person will not pay, the company has little option but to pursue the arrears and if necessary take the budget to the FTT as it can hardly be fair to the other members that one person is not paying when everyone else is.

The second issue affecting the question of costs is what the lease itself says about the right to recover costs. Some modern leases may permit the recovery of costs outside the court process (e.g. FTT costs) from the individual non-paying flat owner. However, a lot of leases do not. This means (that provided that there is an appropriate clause in place) that the costs of any service charge action taken or defended by the landlord will probably end up on the general service charge budget, in other words, paid for by everyone and not just the defaulting party.

There is also another hurdle. Any flat owner who is party to FTT proceedings brought about the service charge also has a right to make an application requesting that the landlord’s costs are not to be added to the service charge budget. This is only likely to be granted where, for instance the lease itself does not permit the costs to be collected via the service charge, or where there is inappropriate behaviour on the part of the landlord.

The third and final element of risk for the landlord is that the costs themselves will of course also be subject to the general test of ‘reasonableness’ applicable to any sum forming part of a residential service charge.

In other words, whilst the lease might permit the costs to be recovered and any application to prevent them being recharged to the budget may have failed the FTT can still decide that the actual amount of costs incurred is ‘unreasonable’ and then seek to reduce the amount added to the budget.

Whilst these principles were designed to ensure a degree of protection for the individual flat owner against an unscrupulous landlord, where the landlord is in fact a collective of flat owners and the behaviour of the non- paying party is clearly unreasonable, these provisions to put RMC companies to significant expense and a degree of risk.

So, having considered all of this, what is the answer?

Of course, there is no simple solution, but the first conclusion must be to reduce the risk of disputes by careful consultation and preparation and, if a dispute has arisen to take particular care in the analysis, preparation and presentation of the case. As with all these things, having the access to the right professional advice early on in the process certainly does help.

Mark Chick is a head of Landlord and Tenant at Bishop & Sewell LLP and a director of ALEP (the Association of Leasehold Enfranchisement Practitioners).