Navigating service charge disputes: A guide to Section 27A and beyond

Often there has been a significant increase in service charges since the lessee’s purchase, which the lessee believes is unjustified. 

The starting point in such disputes is to consider the parties’ contractual position under the lease. Some of the essential questions in relation to terms are: 

• Are Service Charges reserved as additional rent and determined by actual, deemed and anticipated expenses and outgoings incurred by the freeholder?
• Is the freeholder entitled to charge reasonable and proper fees and disbursements if it does the work rather than employing a managing agent?
• Insurance – is the freeholder required to insure the Building?
• Is the freeholder required to keep proper books of account of all costs, charges and expenses incurred?
• Is the freeholder required to maintain the building in which the leasehold property is situated?

Service charge disputes: liability to pay and reasonableness

The F-tT (First-tier Tribunal) has a concurrent jurisdiction (together with the County Court) to determine whether a lessee is liable to pay service charges which the freeholder has demanded, in accordance with Section 27A Landlord and Tenant Act 1985. 

If a lessee commences such a claim by making an application then the F-tT would have to consider both: (a) the contractual terms of the Lease, and (b) the relevant statutory provisions regulating service charges under the Landlord and Tenant Act 1985, being sections 20, 20A, and 21B

Liability to pay service charges: jurisdiction

Section 27A provides (so far as material and paraphrased):
 

“(1) An application may be made to the F-tT for a determination whether a service charge is payable and, if it is, as to –

(a)    by whom 
(b)    to whom 
(c)    the amount 
(d)    the date payable, and 
(e)    the manner payable.

(2) Subsection (1) applies whether or not any payment has been made. 

(3) An application may also be made … for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to – 

(a) – (e) above. 

(4) No application under subsection (1) or (3) may be made in respect of a matter which – 

(a) has been agreed or admitted by the tenant 
(b) is to be arbitrated 
(c) has been determined by the court
(d) has been arbitrated.

(5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.  
...

(7) Jurisdiction concurrent with that of the court.”

It is important to note both the wide breadth of this jurisdiction, together with the fact that it encompasses both “past” and “future” service charges. Furthermore, payment per se is not an admission of liability which would otherwise exclude the F-tT’s jurisdiction. Therefore, if a lessee has made payment in respect of a service charge demand “under protest” and expressly without agreeing or admitting the same was due, then such a service charge payment could form part of a section 27A application.  

Limitation of service charges: reasonableness

Section 19 provides (so far as material and paraphrased):

"(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period – 

(a) only to the extent that they are reasonably incurred, and 
(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;

and the amount payable shall be so limited.  

(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 have been made by repayment, reduction or subsequent charges or otherwise.” 

Again, this concerns both past, as well as prospective, service charges.  

Often disputes concern works that have been undertaken at a building to remedy maintenance issues, such as the ingress of water. Lessees are often concerned because a freeholder spend significant sums of money attempting various repairs which may not have cured a problem. 

Service charges are levied, including demands based on the provision of a “sinking fund” for anticipated further expenditure, and yet no corroborating documentary evidence is provided in relation to the remedial works. For example, no estimates, contracts, invoices, receipted bills and so forth. Furthermore and perhaps rather surprisingly, it is often the case that no “statutory consultation” has taken place, which is something we will expand on below. 

In such circumstances the “reasonableness” and “standard/quality” of these “works” may put in issue as part of a s. 27A application. 

Limitation

Section 20B of the Landlord and Tenant Act 1985 effectively imposes an 18-month limitation period in respect of service charges for residential premises. So far as material it provides: 

“(1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment … is served on the tenant, then (subject to sub-section (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.  

(2) Sub-section (1) shall not apply if, within the period of 18 months beginning with date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that it would subsequently be required under the terms of its lease to contribute to them by payment of a service charge.” 

Therefore if a freeholder issues service charge demands relating to disrepair issue and  such demands concern “relevant costs” incurred more than 18 months previously then they will be “time barred” and such service charge demands could also form part of a section 27A application.

Consultation obligations and limitation of service charges: “qualifying works”

Section 20 provides (so far as material and paraphrased) under the Landlord and Tenant At 1985 (amended by the Commonhold and Leasehold Reform Act 2002):  

“(1) Where this section applies to any “qualifying works” … the relevant contributions of tenants are limited in accordance with sub-section (6) or (7) (or both) unless the consultation requirements have been either – 

(a)    complied with …, or
(b)    dispensed with by the F-tT 

(2) “Relevant contribution” … is the amount which he may be required under his lease to contribute by the payment of service charges towards the relevant costs incurred in carrying out the works. 

(3) This section applies to qualifying works if relevant costs incurred in carrying them out exceed an appropriate amount [if the service charge contribution sought from a tenant exceeds £250 then the threshold is met].  
… 
(6) Where an appropriate amount is set … the amount of the relevant costs incurred in carrying out the works … which may be taken into account in determining the relevant contributions of tenants is limited to the appropriate amount [£250 by statutory instrument].

(7) Where an appropriate amount is set … the amount of the relevant contributions of the tenant … would otherwise exceed the amount prescribed … is limited to the amount so prescribed or determined.”

As noted above, where remedial repairs are a matter of dispute and controversy and a freeholder has not complied with the statutory consultation regime under Section 20, such failure to comply means that a lessees contribution is limited to £250 unless dispensation were to be given by the F-tT.  Again, this aspect of disputes often form part of the s.27A application.  

Consultation requirements: supplementary

Section 20ZA provides (so far as material and paraphrased):

“(1) Where an application is made for a dispensation … the F-tT may make the determination if satisfied that it is reasonable to do so.

…

(4) In section 20 and this section “the consultation requirements” means requirements prescribed by regulations made by the Secretary of State. 

(5) Regulations under subsection (4) may … include provisions requiring the landlord – 

(a) to provide details of proposed works  
(b) to obtain estimates for proposed works … 
(c) to invite tenants … to propose names of persons from whom the landlord should try to obtain other estimates
(d) to have regard to observations tenants made by tenants … in relation     to proposed works … and estimates, and 
(e) to give reasons in prescribed circumstances for carrying out works.”   

The statutory consultation procedures for residential property as now contained in ss. 20 and 20ZA of the Landlord and Tenant Act 1985 as amended are supplemented by the details set out in the Service Charges (Consultation Requirements) (England) Regulations 2003 as amended (“the 2003 Regulations”).

“Relevant costs” means “the costs, or estimated costs, incurred or to be incurred by or on behalf of the landlord, … in connection with the matters for which the service charge is payable.” “Service charges” means “an amount payable by a tenant of a dwelling in addition to the rent – (a) which is payable directly or indirectly for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs.” Section 18, Landlord and Tenant Act 1985.

Appointment of a manager

A frequent topic of dispute concerns the competence, or otherwise, of a freeholder to manage a building. Often managing agents have not been employed and a freeholder assumes such role himself/herself. 

The F-tT has exclusive jurisdiction to appoint a manager on the application of a tenant (Form Leasehold 2) where a building contains two or more flats under the Landlord and Tenant Act 1987, Pt. II, s. 24. The procedure entails the tenant serving a preliminary notice upon the landlord containing the prescribed information. In essence, such notice must identify details about the tenant; the matters of complaint; that the tenant intends to make an application to the FtT; details of how to remedy the landlord’s failings and so forth. 

The legislative scheme is designed to warn the landlord and give it the opportunity to remedy its shortcomings. If it can and does the matter ends there. If it cannot or does not, then an application to the F-tT for the appointment of a suitable manager may proceed. 

In 2022 the F-tT published a new detailed practice statement setting out its expectations as to the form of applications for the appointment of a manager. In essence: (a) the parties must identify the proposed manager – ideally before the application is made; (b) an individual person as opposed to a firm or corporate entity will normally be appointed; (c) the proposed manager would need to show the relevant experience, membership of appropriate professional body, insurance, complaints procedure and so forth; (d) to have inspected the Building and its constituent flats, be familiar with the lease terms and management problems; and (e) to have prepared a management plan.  

The usual complaints made concerning a freeholder’s management of a building include: (a) failure to comply with the contractual service charge machinery as per the lease; (b) failure to comply with statutory obligations superimposed upon the contractual relationship; and (c) inconsistencies when information about past service charge expenditure has been provided. Additionally, where the landlord tenant relationship appears to have broken down.

If you would like to discuss this further, or require legal assistance, please contact Mustafa Sidki on 020 8461 6140, or a member of our Dispute Resolution team.