Residential service charges can be something of a minefield for investor landlords. The statutory provisions designed to protect tenants from excessive service charges brought into force by the Landlord and Tenant Act 1985 (LTA1985), were supplemented by regulations introduced through the Commonhold and Leasehold Reform Act 2002 (CLRA2002). The result is a complex web of rules and regulations which can sometimes be difficult to interpret.

Recent cases have centred on two aspects of the service charge regulation; the concept of reasonableness and the requirement to consult before incurring expenditure in relation to large-scale works or entering into long term agreements. Whilst these provisions were put in place to protect tenants from unscrupulous landlords, both these concepts illustrate the inherent conflict of interest between the parties; landlords will generally have a long-term interest in maintaining the building, whereas the flat tenants often have a shorter term view.

What is reasonable?

Section 18 of LTA1985 requires all costs within the service charge to have been "reasonably" incurred and any works/services provided to be of a "reasonable" standard. There is no statutory definition of reasonableness and tenants have the right to challenge service charge costs by application to the First Tier Tribunal, whether or not the relevant cost has actually been paid.

The case of Wallace-Jarvis v Optima (Cambridge) Ltd & others [2013] UKUT 328 (LC) demonstrates that landlords cannot fulfil the duty to be reasonable simply by taking third party charges (such as water bills) at face value. The tenants in that case successfully argued that the meter readings were incorrect, resulting in excessive charges and, as the landlord failed to address this issue, it held that the landlord was only entitled to recover the cost of a reasonable consumption. However, landlords will welcome the Upper Tribunal's decision in Blackpool Borough Council & Anor v Cargill [2013] UKUT 377 (LC) which, perhaps surprisingly, held that a landlord who divided a global management charge equally between each of its tenants without attempting to estimate the actual expenditure for each building had not acted unreasonably.

The requirement to consult - how far does it go?

Landlords are required to consult with their tenants in relation to qualifying works which would result in a cost per tenant of more than £250 and in relation to long term agreements which would result in a cost of more than £100 per tenant. The consultation procedure involves a number of prescribed stages and may last several months. If a landlord fails to consult in accordance with these requirements its recovery will be limited to £250 per tenant (in case of works) or £100 (in the case of long-term agreements), unless it has successfully sought dispensation from the First Tier Tribunal.

Several recent cases have sought to clarify various aspects of the consultation requirements. The case of Phillips v Francis [2012] EWHC 3650 decided that it was the aggregate cost of qualifying works in any accounting period that should be looked at for the purposes of consultation (not the cost of each individual item of works), meaning that landlords will have to bring together all projects for a year and consult in relation to them altogether. BDW Trading Limited & Ors v South Anglia Housing Limited [2013] EWHC 2169 (LC) concerned a seven year agreement entered into with a management company prior to the grant of any flat leases, and indeed before the building was even constructed. Fortunately, the County Court reached the common sense decision that there can be no requirement to consult where there are no tenants with whom to do so, even though the relevant exception in the statutory regulations is limited to agreements of five years or less.

Where the works are urgent or the landlord has other good reason for proceeding quickly, it is possible for the landlord to apply to the First Tier Tribunal for permission to dispense with the consultation requirements. The case of Daejan Investments Ltd v Benson and others [2013] UKSC 14 clarified how the tribunal should exercise its jurisdiction in dispensation claims, deciding that the correct question was whether the tenants would suffer any prejudice as a result. This pragmatic less formulaic approach will be welcomed by landlords; rather than focussing on the non-compliance, the Supreme Court sought to return to the spirit of the legislation by focusing on whether the tenants suffered any adverse effect as a consequence.

Daejan was a good example of the court seeking to achieve a fair balance between the interests of the parties. Of course sanctions must be in place sufficient to prevent landlords from becoming too cavalier about their responsibilities, but it is also important not to allow the tenants to recoup a windfall as a result of an insignificant procedural breach. As we have seen, the majority of the other recent cases demonstrate a similarly pragmatic approach, with the courts seeking to arrive at the common sense solution, taking into account the circumstances as a whole. 

This article by Olivia Tassell originally appeared in Property Investor News in February 2014.