There are significant costs involved with the administration of any multi-occupational development, and these are usually the responsibility of a landlord and payable by a tenant, as determined by the lease. Leases will usually have their own definition of “Service Charge”, however in reality a service charge is a charge levied by a landlord to a tenant for maintaining and administering the development.

The Service Charge Provision

The purpose of the service charge provision is to enable a landlord to recover the costs associated with maintaining and administering the development for its tenants.  A service charge provision will usually provide:

  • A description of the items the tenant is to contribute.
  • The service charge proportion payable by the tenant.
  • The way the service charge proportion is calculated.
  • Whether the service charge is variable or fixed in amount.
  • Whether the service charge is payable in advance or in arrears.
  • The days on which the service charge is to be demanded.
  • The days on which the service charge is to be paid.
  • To whom the service charge is payable.
  • Whether any short fall in service charge is recoverable.
  • Whether any overpaid service charge is to be paid by to the tenant.

Service charge reserved as rent

Some leases include a provision reserving service charge as rent or as an additional rent. The implication of service charge being reserved as rent is that the service charge is likely to be treated as “rent in arrears” which makes it payable in order for a tenant to obtain relief from forfeiture.

“no set-off” or “without deduction”

Some leases include a “no-set off” or “without deduction” clause which seeks to prevent a tenant from setting of his or her liability to pay service charge against any sums they may wish to claim from the landlord. These provisions are, however, rarely enforceable as they are subject to any statutory rights in respect to contracts and withholding service charges.

Contractual pre-conditions

Many leases require certain actions to have been performed by a landlord before service charge becomes payable by a tenant. The landlord must ensure it discharges its obligations before demanding payment of the service charge.

The Statutory Definition

s.18 of the Landlord and Tenant Act 1985 defines “service charge” and what counts as a “relevant cost” for the calculation of a service charge:

“(1)   In the following provisions of this Act “service charge” means an amount payable by a tenant of 

         a dwelling as part of or in addition to the rent—

  • which is payable, directly or indirectly, for services, repairs, maintenance improvements or       insurance or the landlord’s costs of management, and
  • the whole or part of which varies or may vary according to the relevant costs.

 (2)   The 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.

(3)   For this purpose—

  • “costs” includes overheads, and
  • costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period.”

2.3.1 Understanding the statutory definition

“Tenant”A person to whom a landlord grants temporary and exclusive use of land or a part of a building, usually in exchange for rent.  This includes a mesne landlord; where a tenant sub-lets it property to another individual.  
“Dwelling”A building or part of a building occupied or intended to be occupied as a separate dwelling together with any yard, garden outhouse and appurtenances belonging to it or usually enjoyed with it.  
“Payable”The payablity of service charge may not simply arise as a result of the obligations in an individual lease but also by any agreement between a landlord and tenant.  
“Indirectly”This includes payment to a superior landlord.  
“Improvements”Repairs, maintenance and service are generally contractual obligations on a landlord, however improvements tend to be discretionary.     
“Varies”Service charges may be fixed or variable.  This definition does not apply to fixed service charges.  
“Relevant Costs”These are costs or estimates costs incurred or to be incurred by or on behalf of a landlord or superior landlord in connection with matters for which the service charge is payable.  

Service Charges Must Be Reasonable

For service charges that fall within the Landlord and Tenant Act 1985 regime, a landlord may only include costs falling within the s.18 definition to the extent that the costs are reasonable. S.19 of the Landlord and Tenant Act 1985 provides three separate tests for determining the reasonableness of service charges and states that service charges are only payable to the extent that:

  • they are reasonably incurred.
  • the works or services are of a reasonable standard.
  • where service charge is payable in advance of the costs being incurred by the landlord “no greater amount than is reasonable” is payable.

“Reasonably Incurred”

The Landlord and Tenant Act 1985 provides no guidance for what is meant by “reasonably incurred”, however in the case of Waaler v LB of Hounslow [2017] EWCA Civ 45, the Court of Appeal held that the question of whether costs have been reasonably incurred is a two staged process that requires an evaluation of the landlord’s decision-making process and the outcome of the works undertaken.

It is important to consider whether the landlord’s actions in incurring the costs were appropriate and properly executed in accordance with the lease, the provisions of Landlord and Tenant Act 1985 and proper practice. It is also vital to distinguish the difference between “reasonably incurred” and reasonable in amount. Reasonableness does not require the landlord to contract for the cheapest service or works so long as the amount incurred was reasonable. 

“Reasonable Standard”

The Landlord and Tenant Act 1985 provides no guidance for what is meant by “reasonable standard” and it is at the discretion of the courts and tribunals to determine on a case-by-case basis.  In practice, the courts and tribunals tend to assess whether the works or service provided was worth the costs incurred by the landlord. In respect of services, courts and tribunals will often consider the level of service a person or company was contracted to provide, and decide whether the service was provided to a reasonable standard on the basis of whether the person or company has met their contractual obligations.

Service charge paid in advance

Where the lease provides for the service charge to be paid in advance of any costs being incurred by the landlord the amount of any advance payment must be reasonable. In the Upper Tribunal case of Avon Ground Rents Ltd v Cowley and others [2018] UKUT 92 (LC), it was determined that it was not reasonable for tenants to pay in advance for the entire cost of corrective works where a payment of a similar amount was anticipated, without delay, from a home construction warranty and insurance provider.