Service charges are the cause of the majority of disputes between leaseholders and freeholders. Ultimately, a leaseholder accepts that service charges will be payable when they purchase a lease. However, there are ways that leaseholders can challenge freeholders over service charges.
Under the Landlord and Tenant Act, leaseholders can take legal action if they believe that the freeholder has acted unreasonably but can also challenge the reasonableness of a service charge or demand further information from the freeholder.
In order for a freeholder to demand the payment of service charges, they must inform leaseholders of their rights and how they can challenge the payment. Failure to do so means that the leaseholder is not obliged to pay. A leaseholder right to information means that they should also be sent a summary of the costs included in the service charge within 6 months and if this is not provided, they need not pay the service charge. If there are 5 or more homes involved in the summary, a qualified accountant will be required to approve the summary as fair. Leaseholders can then request that the freeholder makes facilities for the inspection of the summary available within 21 days and freeholders who fail to do so can be fined up to £2,500. Similarly, if a leaseholder seeks to inspect a summary of the insurance payments that a landlord has tried to include in the service charge and the relevant information is not received from the freeholder within 21 days, a fee of up to £2,500 will again be chargeable.
If leaseholders wish to challenge the reasonableness of a charge, they can do so at the Leasehold Valuation Tribunal which will make a judgement provided that the court has not already made a judgement and the leaseholder has not previously agreed to the charge. Leaseholders must therefore be careful not to implicitly agree a certain charge.
The LVT will take the following into account:
• Whether a charge is due and who should be paying it by which date
• Whether the work done under the service charge is of a suitable standard
• Whether the costs involved in the service charge were fairly charged
• Whether there was a fair advance payment
Section 19 of the Landlord and Tenant Act 1985 dictates that fees deemed to be unreasonable by the LVT cannot be recovered by the freeholder.
Should a leaseholder fail to pay the service charge, the freeholder can take forfeiture action at the LVT (the process of repossessing the property should the leaseholder breach the lease. The Housing Act 1996 only allows forfeiture action to be taken if the charge has been approved as reasonable by a court or the LVT and if the leaseholder has agreed the charge. The amount of money involved must also exceed a minimum limit and the freeholder must have served a valid Section 146 notice on the leaseholder.
Leaseholders threatened with forfeiture should pay the charge because they simply have too much to lose. If they are unable to pay the charge, they should approach their mortgage provider which be unlikely to want to take on such a huge unsecured debt and may help out in the short-term.
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