by Delyth Williams
Unlike the question of service charges in commercial premises, dealt with by the author in an article entitled “Service Charges in Commercial Premises” [9] 45 EG 24, the service charges in residential premises are subject to the provisions of the Landlord and Tenant Act 1985 as amended by the Landlord and Tenant Act 1987. This article considers the question of service charges from the viewpoint of the operation of the statutory provisions.
Definitions and the 1985 Act
The Landlord and Tenant Act 1985 section 18 defines a service charge as:
an amount payable by a tenant of a dwelling as part of or in addition to the rent —
(a) which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and
(b) the whole or part of which varies or may vary according to the relevant costs.
The definition was extended to dwelling-houses other than flats by the Landlord and Tenant Act 1987 and it is to be noted that “costs” and “relevant costs” are further delineated in section 18(2) and (3) of the 1985 Act. “Costs” include overheads and “relevant costs” are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with matters for which the service charge is payable. It is clear that the obligation to pay the service charge must derive from the lease or tenancy agreement. In Embassy Court Residents’ Association Ltd v Lipman [4] EGD 447; (1984) 271 EG 545, L was granted a 99-year lease under which he covenanted to pay a due proportion of the costs and expenses incurred by the landlord in carrying out works of maintenance, repair and renewal to the main structure, painting to exterior parts of the building and so forth. In 1972, the landlord’s interest was transferred to the residents’ association but all rents were directed on to the headlandlord. L’s lease contained obligations, inter alia, (i) to pay all maintenance contributions as a due proportion of the expenses incurred by the landlord; (ii) to apply for, and accept, membership of the management company and to observe and perform its regulations. It is to be noted that the management company, whose members were the residents of Embassy Court, was limited by guarantee. L contended that he was not under any obligation to pay a management fee to the professional managing agents appointed by the residents’ association, neither was he liable to pay for the cleaning of windows other than those of the common parts. The Court of Appeal was of the opinion that the common interest of the tenants was enhanced by the transfer of the landlord’s obligations to the residents’ association. In order to give business efficacy to this arrangement, it was correct to imply into the lease that the residents’ association could incur necessary administrative expenses and the reasonableness of the appointment of the managing agents could be challenged under the Housing Act 1980 (now Landlord and Tenant Act 1985 (as amended)). Finally, the obligation as to the cleaning of windows encompassed all the windows.
The definitions of “service charge” in section 18(1), of “costs” and “relevant costs” do not cover payments for improvements to the premises unless they are expressly included in the service charge provisions. In Sutton (Hastoe) Housing Association v Williams [8] 1 EGLR 56; [1988] 16 EG 75, the appellants were tenants of a flat who had acquired a long lease of 125 years’ duration under the “right to buy” provisions in Part I of the Housing Act 1980. The window frames in the flats in question had been constructed of wood and, over the years, there had been trouble with wet rot in the woodwork, and the housing association landlords had decided to replace the windows by double-glazed UPVC windows. The lease provided for a service charge to be payable by the tenants covering contributions to the costs of the landlords in carrying out repairs under their covenants and for “… carrying out such additional works and providing such additional services as may be considered necessary by the Lessor in its absolute discretion from time to time”. The lease conformed with Schedule 2 to the Housing Act 1980 in that it excluded payments by the tenants for making good structural defects unless their existence had been notified to the tenants before the grant of the lease. The appellant-tenants objected to the replacement of the windows and refused to pay the consequent increases in the service charge. The Court of Appeal held that there was no need for a sharp distinction between repairs and improvements in this case and, in any event, some of the works involved both repair and improvement. Further, the lease complied with Schedules 2 and 19 to the Housing Act 1980 and that, in so far as the service charge related to the making good of structural defects, the lease had given express warning of the need to replace the old wooden windows. Schedule 19 to the 1980 Act did not prohibit a service charge from covering improvements if the parties agreed to it and the lease gave the landlords discretion to carry out additional works and provide additional services.
Reasonableness, estimates and consultation
The 1985 Act imposes a reasonableness limit on the amount of the service charge to the extent 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.
In the event that a service charge is payable before the relevant costs are incurred, only a reasonable amount is payable and any necessary adjustment is to be made thereafter: section 19(2) of the 1985 Act.
The requirements for consultation and the obtaining of estimates are contained in section 20, the general effect of which is that, wherever the relevant costs incurred in carrying out qualifying works exceed the limit specified in section 20(3), the excess cannot be taken into account in determining the amount of the service charge unless the requirements specified in section 20(4) have either been complied with or have been dispensed with by the county court. The trigger mechanism emanates from the definition of “qualifying works”, which means works to the costs of which the tenant by whom the service charge is payable may be required under the terms of his lease to contribute. Where the relevant costs exceed £1,000 or £50 multiplied by the number of dwellings let to the tenants concerned, whichever is the greater, the excess cannot be taken into account in determining the amount of the service charge. The relevant requirements for the operation of the provisions where the tenants are not represented by a recognised tenants’ association are found in section 20(4) of the 1985 Act:
(a) At least two estimates for the works shall be obtained, one of them from a person wholly unconnected with the landlord.
(b) A notice accompanied by a copy of the estimate shall be given to each of those tenants or shall be displayed in one or more places where it is likely to come to the notice of all those tenants.
(c) The notice shall describe the works to be carried out and invite observations on them and on the estimates and shall state the name and the address in the United Kingdom of the person to whom the observations may be sent and the date by which they are to be received.
(d) The date stated in the notice shall not be earlier than one month after the date on which the notice is given or displayed as required by paragraph (b).
(e) The landlord shall have regard to any observations received in pursuance of the notice; and unless the works are urgently required they shall not be begun earlier than the date specified in the notice.
Where the tenants in question are represented by a recognised tenants’ association, as defined in section 29 of the 1985 Act, the relevant requirements are as follows, section 20(5):
(a) The landlord shall give to the secretary of the association a notice containing a detailed specification of the works in question and specifying a reasonable period within which the association may propose to the landlord the names of one or more persons from whom estimates for the works should in its view be obtained by the landlord.
(b) At least two estimates for the works shall be obtained, one of them from a person wholly unconnected with the landlord.
(c) A copy of each of the estimates shall be given to the secretary of the association.
(d) A notice shall be given to each of the tenants concerned represented by the association, which shall
(i) describe briefly the works to be carried out,
(ii) summarise the estimates,
(iii) inform the tenant that he has a right to inspect and take copies of a detailed specification of the works to be carried out and of the estimates,
(iv) invite observations on those works and on the estimates, and
(v) specify the name and the address in the United Kingdom of the person to whom the observations may be sent and the date by which they are to be received.
(e) The date stated in the notice shall not be earlier than one month after the date on which the notice is given as required by paragraph (d).
(f) If any tenant to whom the notice is given so requests, the landlord shall afford him reasonable facilities for inspecting a detailed specification of the works to be carried out and the estimates, free of charge, and for taking copies of them on payment of such reasonable charge as the landlord may determine.
(g) The landlord shall have regard to any observations received in pursuance of the notice and, unless the works are urgently required, they shall not be begun earlier than the date specified in the notice.
In any proceedings relating to the service charge, the court may dispense with any or all of the relevant requirements if it is satisfied that the landlord acted reasonably: section 20(9) of the 1985 Act.
Limitations on service charges
Under section 20A of the 1985 Act, where relevant costs are incurred or are to be incurred on the carrying out of works in respect of which a grant has been or is to be paid under the Housing Act 1985, the amount of grant is to be deducted from the costs, thereby reducing the amount of service charge payable. In addition, under section 20B of the 1985 Act, where relevant costs were incurred more than 18 months before the demand for payment of the service charge is served on the tenant, the tenant is not liable to pay that part of the service charge unless he was notified in writing in the intervening 18-month period (section 20B(1), (2)).
Finally, the court can order that all or any of the costs incurred (or to be incurred) by the landlord in connection with any proceedings are not to be regarded as relevant costs for the purposes of the service charge, where it is just and equitable in the circumstances.
Tenants’ rights: summary of relevant costs
Any tenant or recognised tenants’ association may require the landlord in writing to supply a written summary of the costs incurred and which are relevant costs in relation to the service charges payable or demanded as payable, section 21(1):
(a) if the relevant accounts are made up for periods of twelve months in the last such period ending not later than the date of the request, or
(b) if the accounts are not so made up, in the period of twelve months ending with the date of the request.
The landlord must comply with this request within one month of the request or within six months of the end of the period referred to in (a) or (b) above.
If the service charges are payable by the tenants of more than four dwellings, the summary must be certified by a qualified accountant as, in his opinion, a fair summary complying with the requirements of section 21(5) of the 1985 Act and as being sufficiently supported by accounts, receipts and other documents which have been produced to him: section 21(6)(a), (b).
Sections 22 to 25 of the 1985 Act deal with the right of the tenant (or the secretary of a recognised tenants’ association) within six months of obtaining the written summary of the costs incurred under section 21 to require the landlord to afford him reasonable facilities for inspecting the accounts, receipts and other documents supporting the summary and for taking extracts or copies thereof: section 22(1), (2). There are provisions in section 23 for dealing with the position where the request, in whole or in part, relates to information held by the superior landlord. The assignment of a tenancy does not affect the validity of a request made under section 21, 22 or 23 before the assignment. It is to be noted that it is a summary offence for a person to fail, without reasonable excuse, to perform any duty imposed on him by section 21, 22 or 23 of the 1985 Act.
Exceptions to the 1985 Act provisions
Sections 18 to 25 of the 1985 Act do not apply where the service charge is payable by a tenant of one of the following unless the lease is a lease for 21 years or more:
(a) a local authority;
(b) a new town corporation; or
(c) the Development Board for Rural Wales.
In addition, the service charge provisions do not apply to a service charge payable by a tenant where a fair rent is registered unless it is variable: section 27 of the 1985 Act.
Service charge contributions and trusts
Section 42 of the Landlord and Tenant Act 1987 provides that sums paid by way of service charges (whether to the landlord or to some other person, such as a management company) are to be held by the payee on trust, together with any investments representing those sums and any interest accruing. This trust fund is to be held primarily to defray the relevant costs and, subject to that, on trust for the contributing tenants for the time being. This trust prevails over any express or implied trust created by a lease so far as it is inconsistent with those provisions, other than an express trust created before the commencement of the section: section 42.
The operation of the provisions means that the payee may hold moneys in two or more separate funds if he thinks fit (section 42(2)) and contributing tenants are entitled to shares in the residue of the trust in proportion to their respective liabilities to pay relevant service charges. In the circumstances, the entitlement is determined according to the liability to pay rather than actual payment.
Where a lease is terminated (by forfeiture, effluxion of time or otherwise) the tenant is not entitled to any part of the fund though the lease may make provision for repayment of a proportion of the fund in the circumstances: section 46(6), (8). If, at the termination of the lease(s), there are no longer any contributing tenants, the trust fund is dissolved and the landlord is entitled to the remaining assets unless the lease(s) provide otherwise: section 42(7).
