Definition of Service Charges
Service charges are essentially a payment made by Tenants to the Landlord. This payment covers the expenses incurred by the Landlord in providing services to the Tenants of the building or estate and can be made as part of, or in addition to rent. The extent and type of services provided by the Landlord will depend on the size and nature of the estate in question.
Services may include, but are not limited to, the provision of insurance, maintenance, repair and management of the estate. Also included within the service charge may be a contribution toward a reserve or sinking fund.
A reserve or sinking fund is a sum retained by the Landlord to contribute toward the cost of large items of individual expenditure the Landlord anticipates having to pay in the future. For example, contribution toward the replacement of a lift or repair of a roof.
The services a Landlord is obliged to provide, or may at their discretion provide to their tenants, will, or at least should, be clearly defined and outlined in the Lease.
What Can be Recovered?
Under statute, service charges are subject to the following criteria:
• Costs can only be included to the extent they are reasonable; and
• The amount of any advance payment demanded must also be reasonable.
In relation to the first point above, the costs must have been reasonably incurred and services to which they relate must have been completed to a reasonable standard.
The word reasonable here is given its ordinary meaning and will largely depend on the circumstances. What is ‘reasonably incurred’ and a ‘reasonable standard’ in one situation may not be so in another.
In addition, a Landlord can only recover their actual costs incurred. In other words, service charges cannot be used as an additional means of making profit. Similarly, a Landlord cannot charge for services that it does not actually provide.
Tenants have the right to challenge the service charges demanded and/or the reasonableness of them by making an application to the Court.
Service Charge Demands – Formalities
By law, service charge demands must be made in a prescribed format. In addition to these statutory requirements, most likely, there will be further, more detailed, conditions set out in the Lease of the property itself.
At the very least, service charge demands must contain the name(s) and address(es) for the Landlord and a summary of the rights and obligations of the tenants in regard to the service charges.
Service charges must be served by the Landlord to their Tenants within 18 months of the date the costs were incurred. If a Landlord cannot adhere to this requirement, they must at least serve a notice during this 18-month period that costs have been incurred and a Tenant will be required to contribute to them by way of service charge.
If a Landlord does not conform to these requirements, they will be unable to recover their costs incurred during the period in question.
Tenants are entitled to a summary and breakdown of the costs incurred by the Landlord in providing the services. Tenants also have a right to inspect accounts, insurance and other documents relating to costs incurred by the Landlord that have subsequently been charged to the Tenants by way of a Service Charge.
If you require more specific advice in relation to a service charge query, or have another property related enquiry, please do get in touch with Hanne & Co’s Property team who will be more than willing to assist.
Simon Cozier is a Partner at Hanne & Co. and heads up the Property Team.