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Splitting the Bill? Service Charges for the Residential Landlord

Most landlords will already be aware of the protection afforded to residential tenants by the Landlord and Tenant Act 1985. In order to be claimable, the components of a service charge must be:

  • Reasonably incurred; and
  • If they relate to works or services, of a reasonable standard.

If you are a landlord and your property requires work, the first step is to check the terms of the lease. If your lease does not contain any provision for payment of service charge by the tenant then there is a real chance you will be stuck shouldering the costs yourself.

A sensible step would also be to consider your insurance policy to investigate whether the necessary works are not already covered by insurance. Whilst insured damage generally is not recoverable through service charges, you may be able to charge for any premium increases as a result of making a claim. The source of the damage, however, will need to be properly investigated.

If there is a prospect of recovery through the service charge, you need to pay close attention to the procedure set out in your lease for raising that charge. Inevitably you will have to consider whether the costs are reasonable.

The Court of Appeal recently considered whether the costs of works to a block of residential flats were reasonably incurred and could be passed onto the tenants as a service charge (Waaler v Hounslow LBC [2017] EWCA Civ 45). Although the Court of Appeal declined to give precise guidance as to what will be considered reasonable, there are some key points to keep in mind: -

  1. You need to consider how much longer the tenant will be residing in the property under their lease. For example, should a tenant with a one year lease pay for the full costs of works that will last for much longer?
  2. You must consult with tenants before undertaking any work and should have regard to their views. The weight to be attached to the tenant’s opinion will be affected by the nature of the work, the tenant’s interest in the property and the expense. For example, if a tenant has a 125 year lease then you will need to assess whether it is appropriate to impose works that they do not want.
  3. There is a distinction between repair works and optional improvements. When a tenant signs a lease, they know what type of building they are getting and will have an idea of the scale of the potential repairs that it may need. By contrast, the tenant cannot predict how a landlord will exercise discretion with regard to improvements. The Court of Appeal has advised that landlords may wish to have particular regard to the views of their tenants when the works are optional.
  4.  You need to take stock of the overall outcome before making your final decision as to whether or not the costs will be reasonably incurred. It is wise to take a step back and reflect on the likely bill and whether it would actually be reasonable for your tenants. You don’t have to undertake a detailed investigation into their financial means, but you can reflect upon the nature and location of the property as well as the amount of service charge that has previously been paid.

If the expense is reasonably incurred and there really is no way to avoid a large bill then you could consider reaching an agreement as to the method of payment. Could your tenant pay in monthly or annual instalments to make the costs more affordable for them?

If there is a range of reasonable options then it is a matter for you which course of action you choose. The Courts generally won’t interfere simply because a cheaper alternative was available. Expense is only one factor in the balancing exercise.

If you need advice with regards to service charge disputes, please contact our Dispute Resolution department.

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