Service Charges: Overview

A service charge is an amount payable by a leaseholder in addition to, or as part of, rent, which is wholly or partly attributable to the costs of services, repairs, maintenance, improvements, insurance, or management of the building or estate. The statutory definition is in section 18 of the Landlord and Tenant Act 1985. A service charge is variable — the amount varies or may vary according to the relevant costs incurred. This distinguishes it from a fixed annual sum and is why demands differ from year to year.

A service charge may cover maintenance and cleaning of common parts, repair of the building structure and fabric, buildings insurance, management fees, lighting and heating of common areas, lift maintenance, concierge or porterage costs, and any other service the landlord is required or permitted to provide under the terms of the lease. The lease itself defines the scope of recoverable costs. Costs that do not fall within the service charge provisions of the lease, or that are not properly attributable to the building or estate, are not recoverable.

Ground rent is a separate obligation. It is not a service charge and is not governed by the Landlord and Tenant Act 1985 in the same way. See LHF/07 — Ground Rent.

The Reasonableness Test: Section 19

A service charge is only payable to the extent that the costs incurred have been reasonably incurred, and that the works or services were carried out to a reasonable standard. This is the statutory test under section 19 of the Landlord and Tenant Act 1985. The test applies to all variable service charges. It cannot be excluded by the terms of the lease.

Two limbs apply. First, the costs must have been reasonably incurred — this includes whether the expenditure was necessary at all, whether competitive procurement was carried out, and whether the amount paid was reasonable for the work done. The fact that a landlord has contracted with a particular supplier or paid a particular amount does not automatically satisfy the test. Second, where the charge relates to works or services, they must have been carried out to a reasonable standard — not an unnecessarily high standard, and not an inadequate one.

A leaseholder may apply to the First-tier Tribunal (Property Chamber) for a determination that a service charge, or a proposed service charge, is not payable on the grounds that costs have not been, or would not be, reasonably incurred. The tribunal may also determine that costs attributable to works carried out to an unreasonable standard are not payable. See LHF/02 — Challenging a Service Charge and LHF/06 — First-tier Tribunal.

Where the charge relates to qualifying works or a qualifying long-term agreement, a separate statutory consultation procedure applies under section 20 of the Landlord and Tenant Act 1985. Failure to follow that procedure limits the amount recoverable per leaseholder. See LHF/03 — Major Works and Section 20.

Valid Demands

A service charge is not payable until it has been formally demanded in writing. Under section 21B of the Landlord and Tenant Act 1985 (inserted by section 153 of the Commonhold and Leasehold Reform Act 2002), a demand must be accompanied by a summary of the leaseholder's rights and obligations in the prescribed form. The current prescribed form is set out in the Service Charges (Summary of Rights and Obligations, and Transitional Provisions) (England) Regulations 2007 (SI 2007/1257).

If the demand does not comply — because it is not in writing, or because it does not include the required summary — it is not a valid demand and the charge is not yet due. A leaseholder may withhold payment until a valid demand is served. The landlord cannot pursue the charge, or treat it as arrears, until a compliant demand has been made.

Under section 20B of the Landlord and Tenant Act 1985, a landlord cannot recover costs through a service charge if more than 18 months have elapsed between the costs being incurred and the demand being served — unless the leaseholder was notified in writing of the liability within that 18-month period. Costs notified in time may be recovered even if the demand is served later.

A charge that has been agreed or admitted in writing, or determined by a court or tribunal, is not subsequently variable under the Landlord and Tenant Act 1985. It cannot be re-opened on reasonableness grounds once it has been settled by agreement or adjudication.

Requesting a Summary of Costs: Section 21

Under section 21 of the Landlord and Tenant Act 1985, a leaseholder may request from the landlord a written summary of the costs incurred, or proposed to be incurred, during the preceding 12-month period or the relevant accounting period if different. The request must be in writing.

The landlord must comply within one month of receiving the request, or within six months of the end of the accounting period to which the summary relates, whichever is later. The summary must identify the works and services, the costs incurred, and any amounts outstanding. Where the building contains more than four dwellings, the summary must be certified by a qualified accountant as a fair summary of the accounts, receipts, and supporting documents.

Failure by the landlord to comply with a valid section 21 request, without reasonable excuse, is a criminal offence under section 25 of the Landlord and Tenant Act 1985. The right to request a summary exists independently of any dispute — it does not require the leaseholder to be contesting a charge.

Inspecting Documents: Section 22

Following a section 21 summary request, a leaseholder may also require the landlord to make available the accounts, receipts, and other documents supporting the summary. This right is under section 22 of the Landlord and Tenant Act 1985. It is conditional on a valid section 21 request having been made first — the right to inspect under section 22 does not stand alone.

The landlord must make the documents available for inspection at a reasonable time within 21 days of the section 22 request. The leaseholder is entitled to take copies; the landlord may charge a reasonable amount for the cost of copying.

Failure by the landlord to comply with a valid section 22 request, without reasonable excuse, is a criminal offence under section 25 of the Landlord and Tenant Act 1985. If documents are withheld or not made available within the required period, this is a ground for a complaint to the relevant local authority.