Workshop: Property: Reviewing service charge clauses

Quite often leasehold properties will require the tenant to pay a service charge. More often than not, the lease will stipulate that the service charge is an additional rent meaning the landlord can distrain the lease for non-payment. This charge reflects a proportionate cost to each tenant of the fees payable by the landlord in carrying out the services stipulated in the lease.

For example, a tenant in a block of ten flats may be asked to pay 10 per cent of the total cost of repairing and maintaining the main structure of the flats, the upkeep of the landscaped areas or decorating the exterior of the building, to name just a few services which may be offered. The list of services can be quite long or be limited to one or two items or none at all, depending on the circumstances (of course serious questions would need to be asked as to why a service charge exists if there are ?no services).

When advising your client, whether it is a grant of a new lease or the transfer of an existing one, it is important to review the list of services and the service charge account. Usually you would ask to see a schedule of charges for the preceding three years to establish whether there is any unusual or excessive expenditure. If you see any items of high expenditure (for example decoration of the exterior or roof repairs) then this should indicate that they will not come up again for a while.

Sinking fund

The lease may also provide for a reserve or sinking fund to allow for large items of expenditure. This should also be explained to your client. For instance, I have been asked: “if the sinking fund is not used and I sell, do I get that money back?” ?You will also need to keep a careful eye on any situation, where a sinking fund applies, and the reserve of funds is depleting without any large items of expenditure applying. This is an indication that the level of service charge is inadequate for the fees being paid and for maintenance of the sinking fund. You should raise enquiries about this to avoid your client being surprised by a sudden increase in service charge or being asked to cover an item of large expenditure because there are insufficient funds.

You will be trying to match-up the services listed in the lease to those being carried out to ensure that there is nothing in the list which is not being covered or which may be in the schedule of payments but is not required in the list of services contained in the lease. More often than not, a landlord will be able to get away with some additional charges if the lease contains a catch-all clause allowing for the best interests of the estate or building.

You should also ensure that the lease contains mechanics for situations involving overpayment or underpayment of service charge where it is paid in advance based on an estimate

Proportionate

Having all the correct information is also important when dealing with a sale or purchase of a leasehold property as service charges will need to be apportioned appropriately. It is normal for the seller to pay all service charges up to date on or before completion and then recover a sum of money, from the buyer, which equals the balance of service charges from the completion date to the next payment date. It would be unusual for it to be the other way around. Although there may be a situation where the current service charge information is an estimate and in such a situation, the buyer’s solicitor should request that a retention is held just in ?case there is a shortfall at the end of the year when the final service charge account is produced.

The Lender’s Handbook provides that the lease reserves an appropriate ground rent and that receipts are provided for rent and service charge payments.

There are mechanisms in place to ?allow a tenant to appeal onerous service charges but that is a topic for another time. Here, I simply wish to highlight the importance of reviewing the service charge clause and the schedule of payments and reporting these to your client and the lender, if necessary.