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Service charges in the cost of living crisis

Doug Rhodes looks at the issues landlords face when seeking to increase service charges.

With the current rise in inflation, tenants and leaseholders of registered providers are facing the largest service charge increases in a generation. With recently issued service charge demands facing almost unprecedented levels of scrutiny, here's what landlords can do to protect themselves against a significant reputational and financial risk.

The law and regulation of residential service charges is highly prescriptive and fraught with pitfalls for the unwary. With the current consultation by the Royal Institution of Chartered Surveyors on extending the Service Charge Residential Management Code to Registered Providers, the level of scrutiny is only likely to increase. However, with the right procedures in place, landlords can take confidence in knowing that service charges demanded will ultimately withstand challenge.

Practice and procedures

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In order to ensure that service charges are legally recoverable, landlords should put in place procedures to ensure the following:

  • Leases should be checked to ensure that the terms of the lease allow for recovery of the service charges demanded.
  • Section 19 of the Landlord and Tenant Act 1985 Act (LTA 1985) provides that a service charge is only payable to the extent that the cost is reasonably incurred and only where the works are carried out to a reasonable standard. In the event of a dispute, leaseholders can apply to the First-Tier Tribunal (Property Chamber) for a determination as to reasonableness. In order to support the reasonableness of the service or works undertaken, landlords should ensure they have a paper trail to demonstrate both that the decision to incur the costs and the amount charged was reasonable (including evidence of market testing).
  • Section 20 of the LTA 1985 requires a landlord to undertake a prescribed consultation process for works on a building if those works will cost more than £250 per leaseholder, or for works or services if the contract is for a term of more than 12 months and the works or services will cost more than £100 per annum per leaseholder (called a qualifying long term agreement). Landlords should ensure they have strict processes in place to ensure compliance, which means a joint and co-ordinated effort involving the development, procurement, repairs and maintenance, leasehold and finance team functions.
  • Where Government funding is obtained for the purposes of undertaking works of repair, maintenance or improvement, the Social Landlords Mandatory Reduction of Service Charge (England) Directions 2014 (also known as Florrie's Law) caps service charge recovery at £15,000 for a dwelling within a London authority, or £10,000 for a dwelling not situated within a London authority.
  • The Social Landlords Discretionary Reduction of Service Charge (England) Directions 2014 permit (but do not require) social landlords to waive or reduce the service charge payable in respect of works of repair, maintenance and improvement. The amount of reduction is such as the landlord considers reasonable, having regard to any benefit which the landlord considers the lessee has received or will receive as a result of the works and whether, upon receipt of an application by a lessee, the lessee would suffer exceptional hardship in paying the service charge. If Registered Providers wish to have the ability to waive or reduce service charges in exceptional circumstances, a procedure could be put in place to give effect to the 2014 Directions. However, this would need to be dealt with on a case-by-case basis and if the landlord is a charity then it would need to consider the charity law position when setting any policy and making individual decisions.
  • When the relevant provisions of the Building Safety Act 2022 come into force, service charge demands for remediation works (including but not limited to defective cladding) will be much more heavily regulated, requiring landlords to positively take reasonable steps to pursue claims against third parties before issuing service charge demands.
  • Landlords should consider offering repayment plans or instalment arrangements to leaseholders. Financial Conduct Authority authorisation may need to be obtained in certain circumstances where credit is being offered but there is an exemption enabling landlords to offer payment arrangements payable over a period of not more than 12 months and involving 12 payments or less. However, landlords cannot impose interest or any other charges in order to take advantage of the exemption. Information could also be provided to leaseholders as to alternative lenders.

Confidence and trust is key

With the above best practice and procedures in place, Registered Providers and their boards can take decisions with confidence. Whilst landlords face little option but to increase service charges in order to cover their operating costs, there are positive steps that can be taken to minimise both cost increases and the reputational and financial risk of successful challenges being made in the First-tier Tribunal, which should help steer the ship through the current choppy waters.

Doug Rhodes is a partner at Trowers & Hamlins.

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