Summaries of rights and obligations - Service Charges - England
A note on the information that must accompany a service charge demand.
By Ana Kandri, Legal Adviser
Owning a flat brings with it a number of responsibilities, including the financial one of paying service charges to the landlord or the managers to reimburse them for the cost of running the building in which the flat is contained.
The roof may need to be repaired or replaced. The outside of the building may need to be decorated. The building insurance cover must be put in place, involving paying a premium to the insurance company. All these functions and obligations are likely to be down to the landlord or the property managers to deal with, and spelt out in the lease.
Equally the lease is likely to spell out that the leaseholders must pay a service charge to the landlord or managers to cover the costs for these things being done.
Leaseholders wish to be confident that their money is being spent properly, wisely and efficiently. Being open and transparent is the hallmark of a good landlord and property manager.
But what rights does a leaseholder have to get hold of information and documents relevant to the service charges?
And how can they deal with the situation where these are not readily disclosed with perhaps the property manager being deliberately obstructive?
Read on and learn how.
What does the lease state about disclosure of information and documents?
Check the lease carefully or if in doubt ask a LEASE adviser to do so.
If it is properly drafted the lease should provide for service charge accounts to be given to leaseholders at the end of the lease financial year. Such accounts may well be drawn up by an accountant. They should give a breakdown of what items and how much for them have been paid by the landlord or managers during the financial year. For example electricity bills, insurance premiums, gardening costs, repair bills.
The lease may also entitle the leaseholder to inspect documents supporting the service charge accounts such as invoices and receipts.
Over and above whatever is contained in the lease the law under ss.21 and 22 of the Landlord and Tenant Act 1985 (LTA 85) gives leaseholders some remedies.
These two sections of the LTA 1985 give leaseholders, the opportunity to obtain a) a summary of the costs and b) inspect documents in relation to such costs. This obligation applies only in relation to service charges that have been incurred during the previous financial year or (if the lease does not refer to a financial year) the last twelve months. You can send an official request to the landlord or the managing agents (if there is one) for such information by using our templates which you can download from our website.
What if the landlord sues for unpaid service charges?
Where the landlord starts a claim in the county court for service charges and a leaseholder wants information for, say, the last two or more years, the lease the LTA 1985 may not be of any use to enable a leaseholder to obtain such information. Accordingly, the Practice Direction on Pre-action Conduct and Protocols and the Protocol on Debt Claims may prove useful to try and obtain this information.
Following these protocols is also recommended by the Royal Institute of Chartered Surveyors Code (RICS code) third edition which states that regard must be had to the Practice Direction – Pre Action Conduct made under the Civil Procedural Rules prior to commencing any court action for recovery of outstanding service charges.
The code applies to residential leasehold properties in England and it covers all length of leases or statutory tenancies where variable service charges are payable. The Code does not apply where the landlord is a public sector authority or a registered social landlord, but it does apply where a public sector authority or registered social landlord is an agent managing for a private sector owner. Having been approved by the Secretary of State, the code can be used for evidential purposes before courts and tribunals as well as disciplinary measures by RICS in relation to its members and regulated firms.
Pre-action Protocol for Debt claims
The Protocol came into force on 1 October 2017. It applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader). The Protocol does not apply to business-to-business debts unless the debtor is a sole trader. It refers to the creditor (business) and the debtor (individual). The Protocol is intended to complement any codes of practice or rules to which the creditor is subject.
The Protocol does not apply:(a) where the debt is covered by another Pre-Action Protocol such as Construction and Engineering or Mortgage Arrears; or b) to claims issued by Her Majesty’s Revenue and Customs that are governed by Practice Direction 7D (Claims For The Recovery of Taxes and Duties).
In the context of landlord and tenant relationship, this Protocol could apply to debt claims made by businesses rather than individual landlords. It would be applicable when a landlord who is a public body, a company, a sole trader, a residents’ management company or a management company appointed by the landlord, starts a claim against a leaseholder for outstanding service charges in the county court. If it is necessary to issue a claim, a court can, and usually will, take into account how much each side has followed the relevant pre-action protocol.
The Protocol sets out four key pre-action steps;
- issuing a letter of claim;
- the form for the debtor’ response;
- disclosure of documents; and
- Alternative dispute resolution.
In relation to information for service charges, part 5 of the Protocol sets out the obligation for full disclosure of relevant documents to promote discussion and early resolution of the dispute.
It states that “where any aspect of the debt is disputed (including the amount, interest, charges, time for payment, or the creditor’s compliance with relevant statutes and regulations), the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position. If the debtor requests a document or information, the creditor must (a) provide the document or information; or (b) explain why the document or information is unavailable, within 30 days of receipt of the request.”
Examples of non-compliance would be: general information provided rather than a breakdown of accounts; the period of time for which the service charges are outstanding; not providing a copy of the lease.
The Practice Direction on Pre-action Conduct and Protocols
The Practice Direction on Pre-action Conduct and Protocols could apply to a request to disclose service charges information. It states that the purpose of the Pre-action Protocols is to explain the conduct and set out the steps the court would normally expect parties to take before making any civil claim.
Where there is a protocol the parties should follow it before starting court proceedings.
If there is no Protocol the parties should try and make sure they have exchanged enough information to; (a) understand each other’s position; (b) make decisions about how to proceed; (c) try to sort out the issues without proceedings; (d) consider a form of Alternative Dispute Resolution (ADR) to assist with settlement; (e) support the efficient management of those proceedings; and (f) reduce the costs of resolving the dispute.
The steps will usually include;
- The claimant writing to the defendant with concise details of the claim. The letter should include the basis on which the claim is made, a summary of the facts, what the claimant wants from the defendant, and if money, how the amount is calculated;
- the defendant responding within a reasonable time – 14 days in a straightforward case and no more than 3 months in a very complex one. The reply should include confirmation as to whether the claim is accepted and, if it is not accepted, the reasons why, together with an explanation as to which facts and parts of the claim are disputed and whether the defendant is making a counterclaim as well as providing details of any counterclaim; and
- The parties disclosing key documents relevant to the issues in dispute.
If the dispute proceeds to litigation, then the courts would expect the parties to have complied with the Pre-action Protocol or the Practice Direction and take compliance with these into account when giving directions or ordering costs.
When there has been non-compliance, the court may decide to relieve the parties from this obligation, stay the proceedings until the parties have complied or may order that sanctions are to be applied.
Sanctions from the court for non-compliance may include an order that;
- the party at fault pay some or all of the costs of the proceedings;
- the party at fault to pay costs on an indemnity basis;
- interest is not payable for a period or at paid at a lower rate if the claimant is at fault and has been awarded a sum of money;
- Interest to be awarded at a higher rate (not exceeding 10%) if the defendant has been at fault and the claimant has been awarded a sum of money.
In conclusion, a leaseholder who is faced with the threat of a debt claim for service charges and has not obtained the relevant information in relation to these charges can make use of the above remedies to try and obtain such information. The main one would be the right to obtain such information under the terms of the lease. Failing that, ss21 and 22 of the LTA 85 can force disclosure of information for the previous financial year. If the arrears relate to two or more years, the Pre-action Protocol for Debt Claims and The Pre-action Protocol and Practice Direction provide that this information should be supplied before initiating such claim at the County court.