Service charges are sums payable by leaseholders for services, repairs, maintenance and management costs which are arranged by a landlord (freeholder) in accordance with obligations under the terms of a lease. Service charges typically vary each year and can increase or decrease without limitation.
Increasingly, many leaseholders are experiencing substantial increases in the service charges demanded by their landlord. Some are left unable to pay, and large numbers are struggling to sell properties with such high service charges attached to them.
Rising Service Charges
According to the Association of Residential Managing Agents (ARMA), the average service charge for a London property is approximately £1,800 – £2,000 per year. This is an increase of around 52% from 2018 when the average was around £943 per year.
A number of factors may be contributing to higher service charges. Inflation has led to an increase in the cost of materials and labour for repairs and maintenance. There is also an increased need for more advanced management of buildings as well as enhanced fire safety measures in some buildings following the Grenfell Tower disaster and subsequent Building Safety Act 2022. Managing agents have seen an increase in buildings insurance premiums and soaring energy costs, the costs of which are met by leaseholders.
Although there may be an explanation for these higher charges, such increases must still be ‘reasonable’. Leaseholders are entitled to ask their landlord for summaries of their service charge account and invoices for the services which relate to the previous accounting year. This may provide further clarity as to how the charges have been calculated and what they relate to.
Major Works
A particular issue arises when leaseholders are notified that major works need to be carried out to the exterior, structure and/or common parts of the building, and that they are required to cover these costs in accordance with the terms of their lease. Major works will not include works required to the interior of a leaseholder’s own flat, and the lease should be reviewed to check what is included within a leaseholder’s responsibilities. If works are estimated to cost each flat more than £250, then a consultation process governed by Section 20 of the Landlord & Tenant Act 1985 will need to be followed by the landlord so that leaseholders are properly advised and consulted on the proposed major works. An open line of communication should be kept with leaseholders throughout the process, and they should be given the opportunity to comment on the planned works.
Leaseholders may be able to discuss payment options with their landlord to assist with charges for major works. If a ‘sinking’ or ‘reserve’ fund has been paid into by leaseholders, this may cover part or all of the works.
Challenging the Reasonableness of Service Charges
Leaseholders have the right to challenge the reasonableness of their service charges at the First-tier Tribunal (Property Chamber) to determine whether the charges are payable. Tribunal proceedings can be complicated and it is recommended that expert legal advice is sought.
It should be noted that service charges cannot be challenged if a leaseholder has already agreed to pay the charge.
Recent Changes in the Law
The Leasehold and Freehold Reform Act 2024 (the “Act”) became law on 24 May 2024 and has addressed some of the issues faced by leaseholders in relation to increasing service charges. Amongst many other provisions, the Act seeks to provide leaseholders with more transparency regarding their service charges by placing an obligation on landlords and managing agents to issue bills in a standard format, allowing for scrutiny by leaseholders. Landlords will also be required to publish a schedule of administration fees, which will not be recoverable from leaseholders if not published.
Previously, the right to challenge service charges only related to variable service charges. However, the Act will afford leaseholders who pay a fixed charge some protection from seemingly excessive charges.
Further, the Act removes the preconception that a leaseholder is obliged to pay their landlord’s legal costs when challenging poor management.
Many provisions of the Act will require the new government to pass detailed secondary legislation before it comes into full effect. We will be keeping a close eye on any further changes made in upcoming months.
Overall, rising service charges may lead to an increase in challenges by leaseholders. It is therefore important for management companies and managing agents to deliver a high standard of service and to ensure the service charge accounts are accurate and properly managed.
