Soaring service charges lead to a rise in disputes with tenants
Over the last two years, the property industry has seen an increase in the number of disputes between freeholders (landlords) and flat owners (leaseholders). The Association of Leasehold Enfranchisement Practitioners (ALEP) reports that its members are seeing a growing number of enquiries from flat owners seeking legal redress against inflated service charges.
Latest figures* reveal that management companies have boosted their service charges by up to 33%over the same period in some cases, significantly contributing to the rise in the volume of disputes.
Freeholders use service charges to cover the cost of providing certain services such as the maintenance and upkeep of the building and its communal areas, including gardens, lifts and corridors, as well as repairs, cleaning and insurances.
The figures show that the average flat owner pays £1,863 in service charges every year, more than £45,000 over the course of a typical 25 year mortgage. Interestingly the service charges for new build flats are 96% higher than for older properties at £2,777. New builds are also subject to higher ground rents, with the average flat commanding £371 in ground rent, compared to £327 for properties built before 2016.
Service charges differ dramatically between developments. Indeed, a new build in Croydon, coming on stream later this year, will see flat owners pay £1.55 per square foot in service charges, while a development in nearby Lambeth (due for completion in 2017), will charge a staggering £7 per square foot in service charges.
Mark Chick, a Director at ALEP who also heads up the Landlord and Tenant team at Bishop & Sewell, comments: “Above all leaseholders (flat owners) need to remember that they do have rights and there are organisations on hand to deliver advice. Before purchasing a leasehold property, buyers need to consider the level of service charges and how it is going to affect the long-term capital costs of ownership. It is important to keep in mind that this may have a significant impact on their overheads in the long run.”
Developers of new build properties often incorporate high end amenities such as swimming pools, cinema rooms and 24-hour concierge services into new projects. In many cases these facilities are completed after flat owners move into their properties, but once the facilities come online they can cause service charge rates to rise.
Mark continues: “Those looking to purchase a leasehold flat need to be very careful about a development’s specification. By undertaking thorough research, leaseholders can ensure that there are not going to be any ‘hidden costs’ with regards to service charges as it is unlikely they will be able to renegotiate a new contract once these changes take place.”
To negate the threat of any landlord / tenant disputes (freeholder/leaseholder), ALEP recommends that freeholders present clear, transparent details about the property’s service charges and ground rents to current and prospective flat owners.
The Disclosures Act 2014 states agents and owners of property now have a very clear legal responsibility to report any facts that relate to their property, including service charges and ground rents. The Act ensures obligation lies with the seller and their agents to reveal any information that is likely to have an impact on the value of a property or the buyer’s enjoyment of the property.
Mark Loveday, Barrister at Tanfield Chambers advises landlords (freeholders) to keep three points in mind with regards to service charges: “Firstly, the landlord (freeholder) or management company can only demand service charges strictly in accordance with the terms of the lease of the individual flat. For example, if the lease says that service charges must be certified by an independent accountant, the landlord (freeholder) may not demand the service charges unless the certificate has been obtained.
“Secondly, there is a great deal of legislation which protects leaseholders and frequently imposes obligations on the landlord or management company. The principal legislation is the Landlord and Tenant Act 1985 which, amongst other things, states service charges must be reasonable. Landlords (freeholders) should familiarise themselves with their own rights as well as the rights of their tenants (leaseholder/flat owner).
“Finally, professional managing agents are governed by strict codes of conduct, for example the RICS Residential Service Charge Management Code. If they fail to abide by the terms of the code then they lay themselves open to legal proceedings. Above all, landlords (freeholders) need to ensure that service charge costs (and how often they’ll be collected) are signposted upfront to leaseholders.”
In certain cases, disputes will escalate to tribunal. Tribunals have the jurisdiction to do various things such as determine service charges and enforce restrictions or allow a majority of flat owners to take over the management of a building. Indeed, figures between 2004 and 2013 show that service charge and management claims in tribunals more than doubled in that period.
For more information on ALEP or to locate an ALEP member, please visit – http://www.alep.org.uk/