At common law, service charges must be fair and reasonable both in regard to their quantum and their nature (Finchbourne Ltd v Rodrigues  3 All E.R. 581, C.A). However, the common law has been regarded as inadequate protection and so there is a detailed and sophisticated control of residential service charges. This page deals with that system of control.
What are “service charges”?
The answer is in the statutory definition (s18 of the Landlord and Tenant Act 1985), not any definition in the lease otherwise the landlord could circumvent the tenant’s statutory protection.
“Service charge” is:
- “an amount payable ... as part of or in addition to the rent ... payable ... for services, repairs, maintenance, improvements or insurance or the landlord's costs of management ... the whole or part of which varies or may vary according to the relevant costs”.
“Relevant costs” are:
- “the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable”.
The service charge must be variable. Fixed service charges are not recoverable: Re 184 Stockwell Park Road P/SC/CR/008/027/00. A fixed management charge forming part of a variable service charge can still form part of a service charge within s18 (Longmint v Marcus (2004) Lands Tribunal LRX/25/2003, unreported).
In Anchor Trust v Waby  UKUT 370 (LC) it was held that an allowance for the lessor's management costs did not fall within the definition of “service charge” within the s 18(1) after the first year, since the basis of charge varied from the second year so as to be increased by reference to an external index and not by reference to the costs actually incurred or estimated. The tribunal therefore lacked jurisdiction to determine applications relating to the amount of the management allowance.
Above all, service charges must be reasonable (s19 Landlord and Tenant Act 1985) Both the courts and the Tribunal have jurisdiction to determine reasonableness issues. By the CLRA 2002, Sch 12 para 3 the court “may” transfer to the Tribunal. Venue is often an important issue early in county court proceedings as the landlord will not be able to recover costs at the Tribunal (unless the lease allows it). The parties cannot contract out of the Tribunal's jurisdiction ( LTA s27A(6) of the 1985 Act).
Limits of Tribunal's powers to determine reasonableness
 UKUT 322 (LC)
The Upper Tribunal reversed the decision of the First-tier Tribunal that the decision of the landlord to repair the windows rather than replace them was unreasonable on the basis that the surveyors’ reports of both parties suggested that replacement was the preferable option. As both options were reasonable, it was not open to the FTT to find that charges incurred in repairing the windows were unreasonable.
The FTT was asked to determine the reasonableness of a number of service charge items, including the repair of the windows. The parties were in agreement that the windows in the building were defective. However, there was a considerable dispute as to the consequences of the disrepair. It was the landlord's (L’s) view that the windows could be repaired and that was the solution it proposed. It was the tenants’ view that all of the windows in the building should be replaced.
Replacing the windows was a significantly more expensive option, but there was expert evidence before the FTT that the windows were near to the end of their natural life and, even after repair, would need to be replaced in around 15 years.
In respect of the windows, the FTT held that the costs incurred in respect of repairing the windows were not reasonable. The Tribunal went on to say that it considered that the replacement of the windows was “the most reasonable option.” The Tribunal recorded in its decision that both experts had said that replacement or repair was reasonable. L appealed principally on the basis that the FTT had applied the wrong test.
Decision on appeal
The Upper Tribunal granted the appeal and dismissed a cross appeal. The Upper Tribunal found that the FTT had not determined that it was unreasonable for L to repair the windows. On the contrary, it had determined that both repair and replacement were reasonable but that in its view replacement was the better option. Such an approach was wrong in law and contrary to authority.
The Upper Tribunal relied upon the recent summary of the FTT’s powers in relation to the reasonableness of charges given by the Court of Appeal in Waaler v Hounslow LBC  EWCA Civ 45. Particular reference was made to the comments of Lewison LJ at paragraph 37 of that judgment:
- ”In my judgment, therefore, whether costs have been reasonably incurred is not simply a question of process: it is also a question of outcome. That said it must always be borne in mind that where the landlord is faced with a choice between different methods of dealing with a problem in the physical fabric of a building (whether the problem arises out of a design defect or not) there may be many outcomes each of which is reasonable. I agree with Mr Began that the tribunal should not simply impose its own decision. If the landlord has chosen a course of action which leads to a reasonable outcome the costs of pursuing that course of action will have been reasonably incurred, even if there was another cheaper outcome which was also reasonable.”
In considering whether the FTT had erred in deciding whether repair was a reasonable option at all, The Upper Tribunal found that such a decision had been open to the FTT on the evidence presented to it. H.H. Judge Behrens said the main matters that had influenced him included:
- “1. Neither expert suggested that a decision to repair was an unreasonable option even though both regarded replacement as the better option… Neither expert gave oral evidence at the hearing. Thus there was no cross-examination.
- 2. There is no doubt that replacement of the windows is a significantly more expensive option than repair. It is true… that individual tenants would have in addition to fund the glazing and this would reduce the differential from the figures suggested in the reports. Even so there is still a significant difference in cost and this is a matter the Directors were entitled to take into account. This is a case where DHS is a company where all the shareholders and directors are owners of flats within the building. Its assets are limited and comprise moneys in the reserve funds.
- 3. Whilst it is true that there was clear evidence that the windows were near the end of their life they were not at the end and there was a suggestion that repair would extend their life by up to 15 years.
- 4. It is true that repair of the windows would not give as good a result as replacement. However, it was common ground that it would substantially improve the position…”
This case serves as an important reminder of the limited role of the First-tier Tribunal in determining whether service charges incurred by landlords are reasonable. The FTT should not go as far as to substitute its own opinion for that of the landlord when choosing between two ostensibly reasonable options. Here, while both experts had preferred replacement of the windows, there also were certain merits to the option of repair, not least the fact that it would keep costs down in the short-term and satisfy the landlord’s repairing covenant. Therefore, it was open to the FTT to find that repair was a reasonable option. Further, having found that repair was a reasonable option, it was not open to the Tribunal to decide that the landlord should have eschewed repair in favour of another option.
It seems that the Tribunal will generally allow the landlord a wide discretion as to how best to perform its covenants under the Lease, as long as the option selected falls within the bounds of reasonableness. However, as the Court of Appeal held in Waaler v Hounslow LBC  EWCA Civ 45, the test is not one of perversity, but rather, whether the landlord, objectively-speaking, acted reasonably, taking into account the interests of the tenants as well as the other circumstances of the case: (see Wandsworth LBC v Griffin  2 E.G.L.R. 105).
Liability to pay for communal heating not being received?
Estoppel by convention - reasonableness
 UKUT 182 (LC)
The Upper Tribunal considered the extent of a tenant’s liability to pay for communal heating when that obligation arose only by an estoppel by convention and, in fact, the tenant’s flat was no longer connected to the communal system. Facts The tenant occupied a flat within a 1930s block containing 36 flats. Until 2014, when the tenant installed his own boiler, the flat was connected to the communal heating and hot water system. The tenant contended that the provision of heating to his flat had been very poor since around 2008.
The Tribunal was asked to decide whether the tenant was obliged to pay for his share of the costs of the communal heating and hot water after March 2014, when his flat was disconnected from the central system.
The FTT held that the tenant was so liable. Even though the leases did not provide for the tenants to contribute towards such services, the tenant had made payment for communal heating and hot water, without protest, since he acquired the lease in 1994. Accordingly, the tenant was estopped from asserting that he was not liable to pay these sums.
The FTT further held that the tenant remained so liable after the installation of the boiler in 2014. The tenant had covenanted to pay a fixed percentage of the service charge costs, rather than a reasonable proportion. Accordingly, the FTT held that it did not have jurisdiction to vary the amount payable by the tenant.
Decision on appeal
The decision was reversed on appeal. If, as the FTT found, the tenant was only obliged to pay for the communal heating costs by virtue of an estoppel by convention, then the conventional liability was conditional on heating in fact being provided. It was no longer unjust or unconscionable for the tenant to rely on the express provisions of the lease given that the landlord had been unable to adequately heat the property since 2008. An estoppel by convention can be terminated by a party.
Secondly, the FTT ought to have considered the effect of section 19 of the Landlord and Tenant Act 1985. No heating was supplied to the flat after it was disconnected from the system.
Accordingly, the heating could not be said to be of a reasonable standard and the tenant derived no benefit from the same. Accordingly, the tenant was not liable to contribute to the costs of communal heating and hot water after his flat was disconnected from the communal supply and the decision of the FTT was reversed.
Paying up without challenge
Series of payments over years - admission that amounts reasonable?
 UKUT 542 (LC)
A tribunal could infer from a series of payments made without protest that the tenant had agreed that the amount claimed was the amount properly payable. The longer the period over which payments had been made, the more readily a tribunal would find that the tenant agreed that which had been demanded. The tenant was barred from proceeding with the application.
Relevant statutory provisions
The material sub-sections of s27A of the Landlord and Tenant Act 1985 are as follows:
- “(4) No application under section (1) or (3) may be made in respect of a matter which – (a) Has been agreed or admitted by the tenant… …
- (5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.”
T acquired the lease of his flat in 2002. In 2014, he issued his application challenging the reasonableness of the service charge under s27A of the Landlord and Tenant Act 1985 for a period of 12 years from the service charge year 2002/2003 up until 2012/2013. In respect of each year, the lessee paid most if not all of the total service charge claimed without any specific provision or retention or qualification in respect of any sums and continued to make sometimes quite large service charge payments, the last one being for more than £890 paid in respect of the 2012/13 service charge year.
The First-tier Tribunal (FTT) determined, as a preliminary issue, that T should be prevented from challenging the reasonableness of any service charges for periods more than six years ago. It found that T was to be treated as having agreed or admitted each of the elements of the service charge by virtue of s27A(4) and notwithstanding sub-section (5) (above). T appealed to the Upper Tribunal.
Decision on appeal
The Upper Tribunal dismissed the appeal. T had submitted that there was insufficient evidence to found any agreement or admission, in particular, no specific date or act or failure to act was identified by the FTT so that, on analysis, all that was left was payment which, by virtue of s.27A(5), cannot found an admission or agreement. Further, as a matter of law, an admission or agreement cannot be inferred from a lessee's conduct under s.27A(5).
The Tribunal held that an agreement or admission for the purposes of s.27A(4) may be express, or implied or inferred from the facts and circumstances. An agreement or admission may be inferred by mere inaction on the part of the tenant over a long period of time. The effect of s.27A(5) is that the making of a single payment on its own, or without more, will never be sufficient; there must always be other circumstances from which agreement or admission can be implied or inferred. Those circumstances may be a series of unqualified payments over a period of time which, depending upon the circumstances, could be quite short. It is a question of fact and degree in every case. Accordingly, in the instant case, the FTT was entitled to conclude that the lessee had agreed or admitted the service charge.
It should be noted that the Tribunal did not take the opportunity to determine whether or not any limitation periods apply to applications made under s27A (note Parissis v Blair Court (St John's Wood) Management Ltd  UKUT 503 (LC)). It is, however, a very useful case for landlords in circumstances where the tenant seeks, for the first time, to challenge service charges that were paid in full many years ago.
On account charges
Sums not incurred
 UKUT 3 (LC)
When determining whether a service charge payable on account is ‘reasonable’ under s19(2) of the Landlord and Tenant Act 1985, the FTT should disregard matters not known to the landlord at the time when the tenant’s contractual liability to pay service charges arose.
Relevant statutory provisions
s19(2) of the Landlord and Tenant Act 1985 provides:
- (2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.
This case concerned a number of long-leaseholders of chalets who applied to the FTT for determination of their liability to pay an on-account service charge. Their leases required them to make payment of service charges on account, to be a fair proportion of the sum “actually expended” by the landlord to maintain and manage the holiday park in which the chalets are based.
Two key costs anticipated by the landlord of the chalets at the time of the service charge demand did not in fact arise: a site manager was not hired and a children’s play area was not refurbished. The tenants argued that the sums demanded were therefore not reasonable pursuant to s19(2)) as there had been no actual expenditure on these items.
The FTT reduced the anticipated salary of the site manager to a sum it found reasonable and allowed the full estimated cost of refurbishment, even though these items had ultimately not been paid for by the landlord at all. The Tribunal concluded that it was obliged to disregard that fact as it had not been known to the landlord at the time it issued its service charge demand. The tenants could expect to be ultimately refunded in any event, as the landlord’s end of year account should reconcile the difference between anticipated and actual expenditure. The leaseholders appealed to the Upper Tribunal.
Decision on appeal
The Upper Tribunal dismissed the appeal. The UT identified a two-stage process in determining the amount of service charge payable under a s27A application.
Stage 1 is to consider the contractual position. In this case, the lease required the tenants to pay such sum as might reasonably be required on account of the service charge. It was not contested that at the time of the demand, the landlord did believe that it would be employing a site manager and refurbishing the play park.
Stage 2 is to consider whether the on-account payment exceeded the statutory limit imposed by s19(2) LTA 1985, which modifies the contractual obligation so that no greater payment than that which is reasonable must be made before the costs are incurred.
The UT borrowed a phrase from Harman LJ in Curwen v James  1 WLR 748: “a court should not speculate when it knows”. The Tribunal distinguished cases of damages which look at actual loss known to have been suffered at the date of assessment. The context of a breach of duty was said to be different to a determination of the reasonableness of a sum due under a contract.
As to the first issue, the UT therefore upheld the FTT ruling that “the reasonable sum required as a payment on-account did not retrospectively become an unreasonable sum once it became clear that the expenditure had been avoided.”
As to the second issue, the UT found that the “necessary adjustment” to be ‘made’ according to s19(2) did not imply that the FTT should make that adjustment. The appellants had submitted that those words permitted the FTT to order the repayment of any sum collected in advance by a landlord but not actually spent. The UT did not conclude on the exact meaning of that word, noting that its purpose was ‘unclear’, but did not see how the provision expanded the jurisdiction of the FTT conferred by s27A LTA 1985.
Likelihood of a third party paying the sums covered by the service charge
Avon Ground Rents v Cowley
 UKUT 92 (LC)
The Upper Tribunal determined the reasonableness of advance service charge demands under section 19(2) of the Landlord and Tenant Act 1985 in circumstances where the landlord’s relevant costs were likely to be repaid by an NHBC warranty.
The claim concerned the building covered by an NHBC warranty. A leak was discovered in the central courtyard of the building, caused by a failure in the waterproof membrane. The landlord commenced the statutory consultation procedure in respect of the costs of repair of the membrane, however one of the tenants suggested that the landlord seek payment under the building’s NHBC warranty. NHBC appeared to accept liability under the policy and proposed to cover the service charge liability of the residential tenants in full, although no final agreement was reached. Nevertheless, the freeholder proceeded to demand the full amount to the tenants and sought a determination from the FTT that the relevant costs of repairing the membrane were reasonable and recoverable from the tenants.
How likely must it be that payment will be made from another source before the service charge payable in respect of work could be reduced to reflect the anticipated receipt?
The FTT held that the works proposed were reasonable and recoverable through the service charge. However, it found that the contributions by the residential tenants were nil, as the costs would be recouped via the NHBC.
Decision on Appeal
The FTT’s decision was upheld on appeal – whilst the sums for the works were recoverable from the tenants as a matter of contract, section 19(2) of the 1985 Act meant that the Tribunal was entitled to consider other matters, such as the fact that it was likely that the landlord would be reimbursed for the costs incurred by other means.
In this case, there was no real dispute about NHBC’s liability and the FTT was entitled to conclude that the sums would be paid by NHBC within a reasonable period of time.
Remission of case to Tribunal
 UKUT 096 (LC)
The Tribunal had erred in failing to consider the tenants’ ability to afford works when determining that certain works were reasonably incurred.
Delay in carrying out repairs affects service charge recovery
One of the big issues that has arisen over the years has been the effect of delay on the cost of repairs. The landlord fails to obey that basic rule of common sense when dealing with property - a stitch in time can save nine. He delays in carrying out the repairs. As a result when they are done the cost is much greater than it would otherwise have been. The tenant in the past has argued that the sums claimed by the landlord were not reasonably incurred (within the meaning of s19 of the Landlord and Tenant Act 1985). Some LVT's have been prepared to accept this argument but it has now been held to be wrong. Whether or not the sums on repair have been reasonably incurred turns simply upon the need for the repairs and the cost of them. The cause of the current defect is irrelevant to that issue. However, and it is a big however, since the introduction of s27A of the 1985 Act (by the Commonhold and Leasehold Reform Act 2002) the LVT has been able to determine whether or not "a service charge is payable"; and it is not payable if the tenant has a right to set-off some other claim against the service charge demand. Where the landlord has failed to carry out repairs in the past that may lead to a claim in damages, which can be set-off against the service charges.
In this case the landlord delayed carrying out repairs resulting in the eventual cost of the repairs being significantly more than they would have been had the work been carried out expeditiously. The Lands Tribunal held that the costs of the repairs had been reasonably incurred but that the landlord's neglect gave rise to a claim in damages against it. The tenants were therefore entitled to a defence of equitable set-off against the landlord's claim for the full cost of the repairs. HH Jg Michael Rich QC:
"It was submitted that the determination of such claims for damages was outside the jurisdiction of the LVT. I accept that the LVT has jurisdiction to determine claims for damages for breach of covenant only in so far as they constitute a defence to a service charge in respect of which the LVT's jurisdiction under s.27A has been invoked. I see no reason of principle why such jurisdiction should not extend to determining even a claim for loss of amenity or loss of health arising from breach of a repairing covenant, but would draw attention to what I said in Canary Riverside Pte v Schilling as to the desirability of the LVT's exercising restraint in the exercise of the extended jurisdiction given to it by the Commonhold and Leasehold Reform Act 2002. (para 15). As I pointed out in the Canary Riverside case the LVT may, as a matter of its discretion, think it inappropriate to exercise its jurisdiction, which it holds concurrently with the County Court, at least where one party asks it not to do so, in a matter where the LVT accepts that the nature of the issues makes a court procedure more appropriate (para 16)".
When is service charge payable?
Tribunal has no discretion
Southend-on-Sea Borough Council v Skiggs
 21 EG 132
Section 27A of the Landlord and Tenant Act 1985 allows tribunals to determine whether a service charge is payable and if so, by whom, to whom, the amount, the date it is payable and the manner in which it is payable. However, the section only allows the Tribunal to state what the position is under the terms of the lease in those respects. It does not give the Tribunal a discretion to allow the tenant to delay payment where it is so payable. In this case the Tribunal determined that the service charges were payable but then went on to give the tenants time to pay. It was wrong to do so. Judge Huskinson at para at para 18:
- "section 27A was introduced to confer jurisdiction on LVT's to decide the legal rights of parties on points that previously could have been dealt with only by the county court. This is quite different from conferring a discretion on the LVT to adjust these legal rights in such manner as the LVT may think just and equitable."
Some specific cases
 UKUT 247 (LC)
A local authority landlord had made arrangements with a management company to manage its housing stock. As a result of the way the contract was structured it was difficult precisely to calculate the specific cost of managing individual buildings. The landlord devised a way to apportion the costs of management and to charge the tenants accordingly. The Upper Tribunal held that it was open to the landlord to manage its properties in this way. The management costs that the landlord had sought to recover from the tenant had properly represented the expenses of the tenant’s building. The management charges were reasonable and recoverable.
Caretaker - Insistence of head-landlord
 UKUT 0134 (LC)
The freeholder had threatened to forfeit the intermediate landlord’s headlease if, in breach of covenant, no full time resident caretaker was employed. It was therefore reasonable for the intermediate landlord to include the cost of a full time resident caretaker in the estimated service charge payable on account, notwithstanding the fact that both the intermediate landlord and the tenant agreed that a cleaner would suffice.
The freehold of premises was owned by F and a headlease was vested in H. This headlease contained a covenant on the part of H to employ a full-time caretaker to reside in the basement flat throughout the term.
The underleases were vested in the Ts. These contained a covenant by the Ts to contribute towards the costs of the services provided by the landlord. The services included “employing such staff as the landlord may in its absolute discretion deem necessary to provide caretaking services for the Building … including … where accommodation is provided for the use of occupation of such person a sum equivalent to the market rent of such accommodation”.
Despite these covenants, the basement flat was let to obtain a commercial rent. F threatened to apply for a declaration that H was in breach of covenant. As a result, H decided to employ a full time resident caretaker. The caretaker’s contract of employment required her to live in the basement flat. H then sought to recover the cost of doing so and also a sum equivalent to the market rent of the basement flat from the Ts. This greatly increased the total estimated service charge from around £8,000 to £56,000 per year.
The Ts contended that they were not liable to pay through the service charge for the costs of the caretaker or for the market rent of the basement flat. H accepted that, given a free hand, it would not have thought it appropriate to employ a full time resident caretaker.
On the issue of the reasonableness of the estimated service charges, the LVT accepted that H had grounds for concern that F might try to forfeit the headlease. It concluded that it was prudent (viewed from H’s perspective) to employ a resident caretaker. It was not, however, necessarily reasonable, within s19(2) of the Landlord and Tenant Act 1985, to impose upon the Ts the full costs of taking the commercial decision to employ a resident caretaker. The LVT concluded it was reasonable to employ – and therefore to budget for – a cleaner rather than a resident caretaker and that the reasonable estimated costs of employing a cleaner were properly to be included within the estimated on account service charges. Having reached these conclusions, the LVT decided that as the costs of employing a resident caretaker were not properly recoverable there could be no recovery of the notional amount of the market rent of the basement, such that it was not necessary to consider the question of whether this notional rent was capable of being challenged under s19 of the Landlord and Tenant Act 1985.
Decision on Appeal
The Tribunal allowed the appeal and found for H.
The Tribunal held that it was reasonable for H to employ a full time resident caretaker in order to remedy a breach of covenant in the headlease and to avoid the risk of forfeiture proceedings. Accordingly, despite the fact that a full time resident caretaker was not needed for the proper day-to-day enjoyment of the building, those costs would be costs which were reasonably incurred within section 19(1)(a). Therefore an estimated amount for the on account service charges which included an amount for the costs of employing a full time resident caretaker would be, in principle, a reasonable amount.
The Ts accepted that if the LVT's decision was wrong, such that the costs of employing a full time resident caretaker could reasonably be included in an estimated on account service charge, then so also can there be included a sum in respect of the notional loss of the market rent of the basement flat.
Right to buy houses - limit on service charges
Extent of liability
 UKUT 295 (LC)
Liability to a service charge in respect of a flat, that had previously been bought under the right to buy scheme, was limited to the amount set out in the landlord’s s125 notice as a result of an estoppel in the case. However, as a matter of principle it is possible to “straddle” costs over a period that falls within and outside the five year period referred to in s125(C) of the Housing Act 1985 – which limits the amount of service charges.
The original tenant had purchased premises from the local authority in 2001 pursuant to the “Right to Buy” legislation in the Housing Act 1985. At that time a notice was served on the original tenant pursuant to s125 of the Housing Act 1985, concerning the value of the property. This stated, inter alia, that liability to contribute to repair costs during the initial period (normally the first five years of the lease) was limited by the Act. It also set out the estimated service charge in respect of repair works to be a certain figure.
The current owner of the flat (T) bought it in 2004. T had made enquiries about the service charges and proposed works before the purchase of the lease and had been assured by a local authority employee that she would be protected by the s125 notice, and had bought relying on that assurance. Certain works were subsequently done by the local authority landlord (L) and a bill was sent for the service charge costs of approximately three times the figure given in the s125 notice.
The reason for the substantial difference between the estimate and the final account was that the works had been carried out, in the main, outside the 5-year reference period during which the statutory limitation on the amount to be paid applied. L had adopted a system of apportionment known as “straddling” so that T was charged fully for the weeks of the works contract that fell outside the reference period.
The amount recoverable was limited to that specified in the s125 notice: L was estopped from denying that the cost of the works was limited to that set out in the s125 notice due to the assurances it had given to T prior to her purchase.
However, as to the principle in relation to apportioning costs to a service charge the Tribunal held that “straddling” the costs over the period that falls within and outside the reference period is an acceptable method of dealing with costs for works which fall both within and outside the reference period.
Such a method of calculating the service charge does not fall foul of the statutory provisions contained in ss125 and 125A of and para16B of Sch 6 to the Housing Act 1985.
Further, a landlord is not prohibited from charging for any previously unplanned work. Para 16B(3) of Sch 6 to the Housing Act 1985 expressly provides for the limitations for charging for such works. The s125 notice does not guarantee that works will be carried out within a particular period or that the costs estimated will in fact be incurred during that period.