The Landlord and Tenant Act 1985 sets out the basic ground rules for service charges, defining what is considered a service charge, setting out requirements for reasonableness and for prior consultation of leaseholders.

Section 18 (1) of the Act defines a service charge as an ‘amount payable by a tenant of a dwelling as part of or in addition to the rent

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

The items included in (1) above are those required to be reasonable and on which a LVT may make a determination of reasonableness.

Note that the definition of section 18 (1) does not overrule the lease. The item or service must still be included in the lease in order to be chargeable.

Demands for Service Charges
All demands for service charges must be in writing and must contain the landlord’s name and address. The service charge is not payable until this information is given and if the landlord’s address is outside England or Wales, the demand must contain an address in England or Wales at which notices may be served by the leaseholder.

Normally the lease will provide for the service charge to be demanded in advance, but occasions will arise when the demands are issued after completion of the works or provision of the service. In these cases a statutory time limit applies: the landlord must issue the demand within 18 months of his incurring the cost. If the demand is provided later than this, the landlord cannot recover the costs at all, unless a notice is served during the 18 months stating that costs have been incurred and that the tenant will be required to contribute to them by payment of a service charge.

The holding of service charges – Trust Accounts
In collecting service charges or in holding sinking funds or reserve accounts, the landlord holds the leaseholders’ money for purposes of future expenditure to their benefit – in other words, acting as trustee for the funds. Section 42 of the Landlord & Tenant Act 1987 requires that, where leaseholders are required under the terms of their leases to contribute towards the same costs, the monies must be held in one or more accounts, and be held in a trust.

Summary of service charges accounts
Leaseholders have a statutory right to seek a summary of the service charge account from the landlord under section 21 of the Landlord and Tenant Act 1985. The request must be in writing and can be sent direct to the landlord or to the managing agent. It can require a summary of the ‘relevant costs in relating to the service charges payable’ in respect of the last accounting year, or where accounts are not kept by accounting years, the past 12 months preceding the request.

Where a landlord has received such a demand he must provide the summary within one month (or within six months of the end of the 12-month accounting period, whichever is the later).

The summary should show:

• how the costs relate to the service charge demand, or if they will be included in a later demand;
• any items for which the landlord did not receive a demand for payment during the accounting period;
• any items for which a demand was received and for which no payment was made during the accounting period;
• any items for which a demand was received and for which payment was made during the accounting period; and
• whether any of the costs relate to works for which an improvement grant has been or is to be paid.

Where the service charge is payable by the leaseholders of more than four dwellings, the summary must be certified by a qualified accountant as a fair summary and sufficiently supported by accounts, receipts and other document produced to the accountant. Where the landlord is a public sector body, one of their offices who is a qualified accountant may certify the summary, but otherwise the accountant must be independent of your landlord.

Rights to further information (inspecting accounts and receipts)
As well as receiving the summary, the leaseholder has the right unde section 22 of the Landlord and Tenant Act 1985 to inspect documents relating to his service charge as a follow-up to provide more detail on the summary. Within a period of six months from receipt of the summary, the service charge payer (or the secretary of a Recognised Tenants’ Association) may write to the landlord requiring him to allow access to and inspection of the accounts, receipts and any other documents relevant to the service charge information in the summary and to provide facilities for them to be copied.

Facilities for inspection must be provided within one month of the request, and must be available for a period of two months.

There are further rights of investigation of service charges and management provided by the right to a management audit under the Leasehold Reform Act 1993 and the right to appoint a surveyor under the Housing Act 1996.

Failure to provide a summary or allow access to further information
Where a landlord fails without reasonable excuse to comply with either a request for a summary or to inspect supporting document they commit a summary offence on conviction and are liable for a fine of up to £2,500 (level 4 on the standard scal). The local housing authority has the power to bring proceedings, or they can be brought by the leaseholder. Local authorities are exempt from prosecution.

You can download more information on legalities of service charges by clicking here