New Ruling on Service Charges: Common Sense Prevails
Tenants of residential properties (particularly those with long leases of flats) will typically be required to pay a service charge on top of their rent as a contribution to the landlord’s costs of managing the property, including the cost of structural repairs and maintenance.
However, regardless of what is in the lease, landlords are only entitled to recover those costs if they are reasonably incurred.
A new ruling on service charge costs has held that this reasonableness test should take into account the financial impact on tenants and whether that should be eased by phasing the works (and therefore the expense) over a longer period.
The ruling came after flat owners on an estate questioned the necessity of increased service charge costs introduced by a new property manager. The increases - £100,000 in 2009 and £538,012 in 2010 - had come about as the result of works carried out to the properties following years of little maintenance and neglect.
Concerned about their ability to pay, two of the flat owners argued that although the works were necessary, it was not necessary to have carried them all out at the same time and that the work should have been phased to spread costs. The flat owners claimed that some flat owners would have had to sell their flats in order to meet service charge payments.
The manager applied to the Leasehold Valuation Tribunal to determine whether or not the costs had been reasonably incurred. The Tribunal held that they had, and that it was not necessary, for the determination of “reasonableness”, to take into consideration the ability of individual leaseholders to pay.
The flat owners appealed that issue to the Upper Chamber (Land Chamber), which allowed the appeal.
While this is undoubtedly good news for tenants and leaseholders, it does not mean that they can always insist that service charges are phased in order to spread the costs of major works. It does, however, mean that landlords must consider the likely financial impact on tenants (alongside other factors such as the urgency of the works and any effect phasing might have on the overall cost) when they come to decide whether works should be carried out in one go or over a phased period of time.
This decision has once again established that, in this context, “reasonable” should be given a broad, common sense meaning. As a consequence both landlords and tenants/leaseholders should be careful to ensure that they have taken all relevant factors into account before taking any action. From a landlord’s perspective, failure to do so could be particularly costly.
For more information, please contact Peter Bridgwater and the Commercial Property team at Stones Solicitors LLP on 01392 666777, peterbridgwater@stones-solicitors.co.uk.
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