Getting your service charge demands right
30th September 2021
30th September 2021
It is a source of immense frustration for landlords, RMCs or RTM companies to be told that, because of some defect with the demands issued to a leaseholder, action cannot be taken to enforce a demand and recover payment from a defaulting leaseholder.
This Legal Update is intended as an aide-mémoire for those issuing service charge demands, to ensure that your demands are valid and can be enforced in the event of non-payment. This Legal Update does not deal with demands issued for ground rent under Section 166 Commonhold and Leasehold Reform Act 2002, which we have covered in our previous Legal Update here.
Whilst not strictly legally required, it is generally advisable for service charge demands to include the following information:
Lessee’s name and property address
It goes without saying that the recipient of the demand should know that the demand is for them and which property the demand relates to. In this regard, see our Legal Update here on ‘Avoiding the excuses’ which includes advice on record keeping.
Not to be confused with the date the charges are due or the period which the charges relate to. This should be the date the demand is actually issued to the lessee.
Description of the charges
The demand should specify whether the charges on the demand relate to service charges or some other charge, such as contributions towards the reserve fund, a major works charge or year-end balancing charge. The relevant period to which the charges relate/when the charges are due should also be specified in the description of the charges.
Either on the face of the demand or covering letter, you should clearly set out how the lessee should make payment including bank account information.
It is imperative that, when issuing service charge demands, you comply with the lease requirements in terms of how the charges have been calculated and demanded. A failure to issue demands which comply with the lease machinery can see the charges irrecoverable, either temporarily (e.g. until a contractually valid demand can be issued) or permanently (if the charges subject to the demand have been incurred longer than 18 months prior to a new demand being issued).
Does the lease allow for interim demands, or are charges only to be demanded ‘in arrear’ once the costs have been incurred? Has the contractual machinery of the lease for the issue of interim demands been complied with, such as the provision of any budget at the commencement of the year/accounts at the end of the year and/or certification of the accounts or budget? See here for a cautionary tale on this point.
Do the demands require payment on the correct date(s)/do they relate to the correct period(s) as specified in the lease?
Major works costs
Where one-off demands or ‘levies’ have been issued for major works costs, does the lease allow for the costs to be charged in this manner? Many leases do not, but instead require major works costs to be budgeted at the start of the year and included in the interim demands in the same way as the routine day-to-day service charges (for more, see here).
Where the demand includes a balancing or deficit charge due following conclusion of the year end accounts, has the contractual machinery in the lease for the issue of balancing charges been complied with, such as the provision of accounts and/or certification?
Are the charges being demanded costs that the lessee has to contribute towards under the lease?
Has the correct apportionment been applied? Whilst the Upper Tribunal has found a demand issued for the incorrect apportionment to be a valid demand nonetheless (see here), where a lesser amount has been demanded, this could see any deficit time barred under Section 20B of the Landlord and Tenant Act 1985 if a corrected demand is not issued within 18 months of the charges being incurred for the remaining balance.
Is there anything else that the lease requires?
Check to see if the lease requires anything else of or on the demand when it is issued. For instance, if the lease were to stipulate that the demand must be printed on yellow paper, then the demand must be on yellow paper! This is an extreme (and unlikely!) example, but the point cannot be stressed enough.
In addition to contractual requirements, legislation also prescribes certain requirements to be complied with for demands to be enforceable. Save in the case of Section 20B, a failure to comply with these statutory requirements will see the charges only temporarily suspended as the charges will not be payable until there has been compliance. That said, no administration charges (legal costs, admin fees or interest) will be payable by the lessee during the period they are entitled to withhold payment for reason of non-compliance by the Landlord/RMC/RTM, so these statutory requirements should be observed from the outset.
Landlord’s name and address
Under Section 47 of the Landlord and Tenant Act 1987, the landlord’s name and address must be specified on the demand. This must be the landlord’s actual address, or in the case of a company, the registered office or place of business. If that address is not in England and Wales, an address in England and Wales for service of proceedings must be specified. A managing agent’s address is not sufficient (see here). In the case of an RTM Company, the RTM Company’s name and address must be specified, but there is no requirement for a Section 47 notice in the case of RMCs (although it is good practice to include it on the demand). Where more than one party is specified on the demand, it should be clearly specified who the landlord is (see here).
Landlord’s name and address for service
Under Section 48 of the Landlord and Tenant Act 1987, the landlord must provide an address in England and Wales at which notices (including notices in proceedings) may be served on him by the leaseholder. This need not be the landlord’s actual address and can be the managing agent’s address, but it is usually most practical for the Section 47 and 48 addresses to be the same address, to avoid confusion. As with Section 47, there is no requirement for this notice where the demand is issued for an RMC (but it is good practice) and in the case of an RTM company, the RTM company’s details should be included. Where more than one party is specified on the demand, it should be clearly specified who the landlord is.
Summaries of rights and obligations
In the case of service charges, the demand must be accompanied by the Summary of Rights and Obligations (Service Charges) under Section 153 of the Commonhold and Leasehold Reform Act 2002. An up to date version can be downloaded via the Leasehold Advisory website here.
In the case of administration charges, such as agent’s admin fees, legal costs, interest or any other charges under the lease which are not a variable service charge, the demand must be accompanied by the Summary of Rights and Obligations (Service Charges) under Section 158 of the Commonhold and Leasehold Reform Act 2002. An up to date version can be downloaded via the Leasehold Advisory website here.
Under Section 20B of the Landlord and Tenant Act 1985, service charges must be demanded within 18 months of being incurred, unless a notice under Section 20B(2) has been issued during that period (see here). It is therefore imperative that a demand for charges is issued within time, to avoid any charges becoming time barred from recovery.
Ensuring the demands issued are valid and can be enforced, whilst seemingly straightforward, can often be a difficult task, particularly when it comes to overly prescriptive leases which set out very strict service charge machinery. At KDL Law we are expert in advising on and enforcing service charge demands in the event of non-payment. If you have any doubt about the demands issued for your development, do get in touch with a member of the team.
If you have any queries regarding this Legal Update, please contact firstname.lastname@example.org or 01435 897297.
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