Summary: Service charge recovery is a key issue for all landlords. The legislation governing the administration and recovery of residential service charges is complex and can lead to substantial shortfalls in recovery if strict regulatory procedures are not followed correctly . In this blog we provide some timely reminders for residential landlords carrying out major works following recent decisions from the Upper Tribunal.
There is a heavy burden of statutory and regulatory material designed to protect residential tenants from unscrupulous landlords regarding service charges. Not only can the reasonableness of service charge costs be challenged, but also recovery of some costs may be immediately limited if a landlord fails to carry out the necessary prior consultations with its tenants. Prior consultation applies to:
- qualifying long-term agreements for the provision of services (any agreement for 12 months or more which would result in a tenant paying a service charge contribution of more than £100); and
- qualifying works to the property where the works would cost a tenant more than £250 for the year).
The rules do not apply to fixed service charges which increase annually nor to Rent Act controlled tenancies.
Getting a consultation wrong can mean that a landlord is able to recover a maximum of £250 per tenant in relation to qualifying works and £100 for works carried out under a qualifying long term agreement.
Whilst the consultation process will not always be onerous, the consultation rules are strict and compliance can sometimes be challenging, depending on the stage in the life cycle of a property when the consultation must occur. For example, consultations may be straightforward in a mature building which is occupied by tenants but less so where a qualifying long term agreement needs to be entered into as a property is being developed and there are no tenants with which to consult.
The industry has adapted its practices to fill in some of the gaps, and a landlord always has the right to seek dispensation from the consultation requirements from the Tribunal, where a consultation has either been difficult or impossible to achieve.
2 recent cases from the Upper Tribunal have provided welcome clarity to some of the grey areas.
Which tenants must be consulted?
I am a freeholder of a residential block of flats. The entire building is let to a head tenant, which in turn has granted individual long leases of the residential elements. I am required to undertake works to the buildings and need to undertake a consultation. Do I consult only with my tenant, the head tenant or must I consult with all the sub-tenants as well even if I do not know who they are?
You must serve on all tenants of dwellings in the building, including subtenants. The recent decision in Foundling Court and O’Donnell Court v Camden has confirmed that the landlord with the intention to carry out the works must consult not just its own tenants and any tenants’ association, but also any subtenants even though they have no direct relationship with that landlord.
The Tribunal acknowledged that in some instances, it may be difficult for a freeholder to identify all relevant sub-tenants. The following solutions were suggested:
- deliver consultation notices addressed “to the leaseholder” to each flat;
- There are no specific service provisions in the regulations for the service of consultation notices and no requirement for the tenants to be named. The Tribunal did acknowledge the danger that a landlord may receive a number of responses which will bear no weight on the consultation and will need to sift through;
- request details of the sub-tenants from the intermediate landlord – it will be in the interests of intermediate landlords to assist as if they do not and the consultation fails the maximum amount they will be entitled to claim from their sub-tenants will be £250 per tenant – the same limitation may not apply to its own liability as a superior landlord will have a better claim for dispensation.
- if all else fails, and where possible, seek dispensation from the Consultation Requirements before carrying out the works though dispensation can also be given retrospectively.
Is consultation needed for on account service charge payments?
I am the landlord of a large block which is due for a cosmetic refurbishment within the next 12 months. I have not yet planned the works in detail or obtained any quotes. All the leases make provision for me to request service charge monies on account. Any future works are likely to result in costs which exceed the consultation thresholds – do I need to consult prior to issuing service charge demands for monies on account.
No. The Upper Tribunal in 23 Dollis Avenue (1998) v Vejdani held that there is no need to fulfil the consultation requirements in order to collect sums in excess of £250 for future works.
The reasoning behind the decision is that the statutory limit applies to contributions payable by tenants in respect of costs incurred by the landlord in carrying out proposed works and not for works to be carried out in the future. In this instance you will simply be asking for a sum of money on account of future service charge payments – not in respect of specified works.
Consultation will still be required before the carrying out of any works and the amounts drawn down by a landlord will still be open to challenge if the consultation requirements are not carried out correctly.
How accurate must estimates be?
I have now obtained a number of estimates in relation to a large refurbishment project I am carrying out on my estate. I am shortly going to forward these on to the tenants but I have noticed that the quotes have been couched in slightly different terms plus one of the builders has included an extra item. Will this matter?
It may do. Although there is nothing in the regulations governing the service charge consultation which stipulates that estimates should be highly detailed with unit prices, the estimate must be an estimate for the carrying out of the proposed works. The proposed works should be those set out in your notice and the estimate has to refer expressly to the estimated cost of the proposed works. In the 23 Dollis Avenue (1998) v Vedjani the Tribunal held that none of the estimates satisfied the Regulations as they each included works which went beyond the proposed works.
To be completely safe the estimates should be for the intended works only.
23 Dollis Avenue (1998) Ltd v Vejdani  UKUT 365 (LC)
Leaseholders of Foundling Court and O'Donnell Court v Camden LBC  UKUT 366 (LC)