A Guide to Resolving Service Charge Disputes

There is an inherent conflict between landlords and tenants in relation to service charges. Tenants, who will often have to pay for works of repair and the provision of services such as cleaning and security, will not necessarily want to pay for the most expensive contractor. The landlord, however, may be mindful of the possibility that a cheaper contractor will not necessarily do a good job and that the tenants may complain about this, involving additional management time and possibly further work. If a compromise cannot be achieved, disputes and litigation can result.

Whether the lease is residential or commercial, service charge disputes can be costly, both in terms of the time which is required to unravel and solve the problem and in terms of the professional fees which may be incurred. This guide is intended to explain to landlords and tenants how their service charge disputes can be resolved if a negotiated agreement is not possible.

There are strict statutory rules governing the recovery of service charges from residential tenants which do not apply to commercial service charges. Commercial service charge disputes tend to turn on the construction of lease clauses. If the meaning and effect of a given clause cannot be agreed between the parties, either party may apply to the Court for a declaration as to its proper meaning. The issues for parties to bear in mind before taking any such action include:

• The fact that service charge clauses are generally narrowly construed by the Courts against the landlord - see Gilje v Charlgrove Securities (2002). Both parties should review the relevant clause carefully before litigating over it. However, in Arnold v Britton & others (2015), the Supreme Court confirmed that service charge clauses are not subject to any special rules of interpretation.
• The extent of the tenant’s interest in the property. For example, in Scottish Mutual Assurance plc v Jardine Public Relations Limited (1999) a tenant had been granted a 3 year lease and the landlord tried to make it contribute towards the cost of replacing the roof of the building. The Court found that the replacement of the roof was not necessary in order for the landlord to fulfil its short-term obligations to the tenant and that short-term repairs would have sufficed.
• Delay in carrying out major works, which may affect a landlord’s ability to recover their full costs – see Princes House Ltd and another v Distinctive Clubs Ltd (2007).

There is often disagreement as to whether a tenant may challenge sums due under a service charge where there is a lease clause making the landlord’s service charge certificate conclusive. In Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd (2020), the High Court held that the certificate was conclusive as to the amount of the costs incurred, absent manifest or mathematical error, or fraud but it was not conclusive as to the question of whether those costs as a matter of principle fell within the scope of the service charge payable by the tenant. However, in November 2020, the Court of Appeal overturned the High Court’s decision. It held that the certificate was conclusive as to the total costs payable by the tenant absent manifest or mathematical error including whether those costs fell within the scope of the service charge payable. So, whilst it depends on the precise wording of the lease clause, a certificate is likely to be conclusive as to the amount of service charges payable by the tenant.

These judicially imposed limitations can offer aggrieved commercial tenants some scope for challenging a service charge estimate or final certificate.

Landlords should also seek to avoid disputes by adhering to the mandatory requirements and core principles set out in the RICS Professional Statement “Service charges in commercial property (First edition)”, which came into force on 1 April 2019. This Professional Statement replaced the previous code of practice and sets out mandatory requirements with which RICS members and regulated firms engaged in this area must comply, together with best practice in the management and administration of service charges in commercial property. The Professional Statement encourages landlords to communicate and consult with their tenants and be transparent in all of their actions and decisions.

The Professional Statement is a good practice guide and is often referred to by landlords and tenants if there are any disputes concerning the treatment of service charges. It is therefore important that landlords, tenants, and their professional advisers are familiar with its principles.

For more on the Professional Statement, please click here.

There are strict statutory rules governing the recovery of ground rent and service charges from long leaseholders of residential flats. These must be complied with otherwise a tenant could have a statutory right to withhold payment of service charges.

The First Tier Tribunal (Property Chamber) (FTT) is an alternative forum for the resolution of most residential service charge disputes for landlords and tenants alike. It offers a more flexible and less expensive route to resolving such disputes and its principal advantages can be summarised as follows:

• The FTT is an independent, impartial and semi-formal tribunal for landlords and tenants. Hearings are open to the public.
• Neither party is required to be represented, evidence is not given on oath and many of the usual Court rules do not apply. The tribunal hears both sides of the argument and then determines the issue on the basis of the evidence provided and the judgment and experience of the tribunal members. Their determination is issued in writing as soon as possible after the hearing.
• A landlord or a tenant may apply to the FTT in respect of maintenance, repair or services provided and in respect of administration charges, (e.g. for providing consent for alterations or information). So-called “improvements” undertaken or proposed by the landlord can also be the subject of an application.
• The FTT has jurisdiction to determine the reasonableness of a service charge. The FTT can determine whether a service charge is payable, by whom, to whom, the amount, the date and the manner payable and whether or not a service charge would be payable if costs were incurred. The FTT can also settle disputes about the landlord’s choice of insurer, administration charges, applications for dispensation from compliance with the consultation requirements of Section 20 of the Landlord and Tenant Act 1985 in relation to major works or qualifying long term agreements, the right to manage, the appointment of managers, the variation of leases and estate charges.
• Charges levied under an Estate Management Scheme (i.e. a scheme approved under the Leasehold Reform Act 1967 or the Leasehold Reform, Housing & Urban Development Act 1993) must be reasonable and a determination of reasonableness may also be sought from the FTT.

Those considering making an application to the FTT should note that:

• The FTT cannot receive an application if a matter has already been formally agreed or admitted by either party, determined by a Court or by arbitration or referred to arbitration. (Certain leases require the parties to consider referring disputes to arbitration and this should always be checked.)
• The County Court has jurisdiction to determine a claim where the service charge has yet to be paid.
• Unlike the County Court, each party generally pays its own costs without any real prospect of recovery, irrespective of which party made the application. However, if the lease contains a clause entitling it to recover costs incurred in connection with the preparation of a Notice under Section 146 of the Law of Property Act 1925 or forfeiture proceedings, a landlord may be able to recover its costs of FTT proceedings pursuant to the terms of the lease.
• Bearing in mind that each party generally bears its own costs, it is sensible to take legal advice prior to making an application and to arrange representation if the argument relates to the interpretation of legislation or the terms of the lease. In cases of a technical nature, the tribunal is generally assisted by expert evidence from property professionals, a surveyor or property manager. There is no requirement that the parties be represented by a solicitor or a barrister.
• In the decision in Avon v Childs (2018), the Upper Tribunal provided important guidance on the issue of “Double hatting”. Double hatting is where FTT judges also sit as County Court judges to deal with issues that would otherwise involve transferring a matter to and from the County Court and the FTT. The FTT’s ability to award costs is limited to occasions where a person ‘has acted unreasonably in bringing, defending or conducting proceedings’, which causes the landlord to subsequently raise an administration charge under the lease which is in itself open to challenge by the tenant. However, following the decision in Avon v Childs, in cases that are issued in the County Court and then subsequently transferred to the FTT, the FTT Judge can change hats and sit as a County Court Judge and assess the costs of those proceedings. Therefore, in some instances, it may be advisable to issue a claim for unpaid service charges in the County Court and then seek for it to be transferred to the FTT for determination.

Mixed-use Premises

If a landlord lets a single flat or a commercial unit to a tenant, the landlord can follow the applicable rules for residential or commercial premises (set out above). If, however, the residential element of a mixed-use scheme is let on a single head lease which includes non-residential or commercial parts then the landlord will need to follow the statutory procedures laid down by the Landlord and Tenant Act 1985 (as amended) (Ruddy v. Oakfern Properties Ltd (2006)). If a landlord does not follow the statutory requirements applicable to residential properties, there is a strong risk that it will not be able to recover service charges from the tenant and in the event of a dispute would be unsuccessful.

If a landlord lets a single flat or a commercial unit to a tenant, the landlord can follow the applicable rules for residential or commercial premises (set out above). If, however, the residential element of a mixed-use scheme is let on a single head lease which includes non-residential or commercial parts then the landlord will need to follow the statutory procedures laid down by the Landlord and Tenant Act 1985 (as amended) (Ruddy v. Oakfern Properties Ltd (2006)). If a landlord does not follow the statutory requirements applicable to residential properties, there is a strong risk that it will not be able to recover service charges from the tenant and in the event of a dispute would be unsuccessful.