Service charge payments will be a familiar term to most residential and commercial lessees. The amount you have to pay in service charge in any given year is dependent on a number of factors, and the starting point is always to check the terms of your lease. However, in certain periods tenants may see fluctuations in the service charge demands received, which can often be attributed to the landlord having carried out a significant set of works to a property which they want to reclaim (some) of the cost for.
Section 20 of the Landlord and Tenant Act 1985 (“1985 Act“) sets out the landlord’s requirement to consultant a residential tenant in relation to certain service charge contributions due from the tenant.
Who does it effect?
Section 30 of the 1985 Act indicates that consultation will apply to all landlords who have a right to enforce payment of service charge. The consultation requirements extends beyond just freeholders and will apply to any management company or head tenant who has the right to enforce service charge payments. In terms of who and what falls under the service charge costs category will largely depend on the terms and definitions contained in the lease.
What works trigger consultation requirements
Given the associated time implications in following the section 20 procedure the requirement to consult a tenant will only be triggered if they fall into the category of either “qualifying works” or “qualifying long-term agreements”.
- Qualifying works – defined as a single set of works that will cost any one contributing residential tenant over £250. In a building made up of several residential tenants who contribute differing amounts of service charge the need for consultation will be triggered if just one of those tenants has to pay over £250.
- Qualifying long-term agreements – an agreement entered into by the landlord with a third party provider for a period of more than 12 months, where the amount payable by a residential tenant in any one accounting period is over £100.
The consultation process and failure to consult
The consultation process is as set out in The Service Charges (Consultation Requirements) (England) Regulations 2003, in brief the consultation involves a four stage process:
- Notice of intention;
- Inspection of proposed works;
- Duty to have regard to observations; and
- Landlord’s response to observations.
The consultation period under the regulations is designed to be formulaic. However, there is a risk that where the residential tenants push back on a landlord’s intended works the landlord may face significant delays in proceeding with the works.
One option for a landlord is to apply to the First-tier Tribunal for a dispensation from the need to consult. The application can be retrospective to carrying out the work, for example where the work needed was urgent. In deciding whether to award dispensation the tribunal will consider a number of factors including whether the residential tenants suffered any prejudice as a result of the landlord’s failure to consult.
Otherwise, where the landlord has failed to consult they are risked of being capped for the amount of service charge they may recover from their tenants. For example for Qualifying Works that cap will be set at £250 which can be a significant drawback depending on the cost of the work proposed.
The section 20 procedure should not be something that either a landlord or a tenant fears. It provides clear guidelines a landlord should follow when looking to recover service charge for any qualifying works. Landlords will need to consider questions such as commerciality, i.e. is the time taken for consultation proportionate to the level of costs they are seeking to recover. It similarly gives a tenant an important level of protection against would could be otherwise excessive service charge costs.
- Section 20 procedure offers an important level of protection to residential tenants who pay a service charge.
- A landlord’s failure to consult may result in the costs they are able to recover from the tenant being capped.
- Both the landlord and the tenant need to pay close attention to their lease terms and how those terms cater for service charge payments.