Is my tenant’s contribution to insurance and structural maintenance costs a service charge?

This article was first published in Lexis PSL Dispute Resolution.

A is purchasing a freehold property which is subject to a long residential lease of the first floor. A will occupy the ground floor, which currently has no lease. The first floor lease is fairly old and basic, and simply provides that the tenant is to pay a 50% contribution to the Landlord's insurance and structural maintenance costs throughout the term of the lease. Would there be any recovery issues for my client? Presumably this would still be classed as a service charge, and the s 20 procedures would need to be abided by and so on?

Landlord and Tenant Act 1985, s18 (LTA 1985) defines a service charge as 'an amount payable by a tenant of a [dwelling] as part of or in addition to the rent—

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

LTA 1985, s30 provides that a landlord means any person who has the right to enforce a service charge and so may include another tenant.

Provided that the 50% contribution paid by the tenant of the first floor flat is variable, rather than fixed, then it will be a variable service charge within LTA 1985, s18. See also the Practice Note: Service charges—overview.

A, as a landlord, will be able to recover no more than is 'reasonable' by way of service charge from the tenant of the first floor flat (LTA 1985, s19). The costs must be reasonably incurred and the services or works must of a reasonable standard.

A will need to ensure that he sends out proper invoices to the tenant and complies with the requirements of the lease.

LTA 1985, s21B provides that a service charge demand must be accompanied by a formal summary of rights and obligations, the content and form of which is prescribed. The Service Charges (Summary of Rights and Obligations, and Transitional Provisional) (England) Regulations 2007 set out the form and content of the summary of rights and obligations that must accompany each demand.

LTA 1985, s20B provides that service charges must be demanded within 18 months of when the cost is incurred. In O M Property Management v Burr [2013] All ER (D) 76 (May) it was held that costs are not 'incurred' for the purposes of LTA 1985, s20B when the liability was incurred by the provision of a service or supply. Rather, costs were incurred when the supplier submitted a demand for payment or when payment was made. It was only at that point that the costs have the required level of clarity.

There are statutory consultation requirements if A wishes to enter into a qualifying long term agreement or carry out qualifying works. A qualifying long term agreement (LTA 1985, s20ZA(2)) is defined as an agreement entered into by the landlord with a wholly independent organisation or contractor for a period of more than 12 months after 31 October 2003, eg agreement for lifts, entry-phone entry system, waste management, cleaning, gardening, insurance and utilities. Qualifying works are defined in LTA 1985, s20ZA(2) as works on a building or any other premises.

Therefore, if A intends to carry out works of structural maintenance which would cost the first floor tenant more than £250, then A must first consult in accordance with LTA 1985, s20. Similarly, where A proposes to enter into a contract for the provision of a service or works for longer than 12 months which has a cost of more than £100 to the first floor tenant then A must consult before proceeding with the contract. The consultation requirements are set out in Tthe Service Charges (Consultation Requirements) (England) Regulations 2003. Failure to comply with the consultation requirements can seriously affect recoverability of service charges. This is because, unless, a tribunal dispenses with the requirement to consult, A will be limited to recovering £250 for qualifying works on the premises or £100 for any qualifying long term agreements.

A will no doubt be concerned as to whether he is required to consult the tenant regarding any service charge items, however small, once the £250 limit for contributions had been reached. A does not. A section 20 consultation should be applied to individual sets of qualifying works. So there is no need to consult if qualifying works are all distinct sets of works, none of which cost more than £250.

You should also note that there are statutory restrictions on terminating a tenancy for failure to pay service charges including Housing Act 1996, s81.

See Practice Notes below for further information:

• Residential—statutory limitations on recovery of service charges and administration charges
   
• Residential—statutory consultation procedure for service charges