Leaseholder Service Charges

September 2010

The purpose of thispaper is to provide a summary of the working of leaseholder service charges.

Where a local authorityor housing association has sold a flat under ‘right to buy’ legislation the newowner becomes a leaseholder and is obliged to pay service charges for servicesthat continue to be received from the landlord such as maintenance of lifts andcleaning of communal areas. Landlords can only recover costs that have beenreasonably incurred and are in accordance with the lease and relevantlegislation. Lessees have a right to be given information about service chargesand may inspect the accounts on which the charges are based. They can challengeservice charges if they believe these are unreasonable.

It is the centralprinciple of service charges that it is the landlord who takes the decisions asto how to commit the expenditure of the leaseholders' money. This applies inall situations where flats are centrally managed and applies equally where theleaseholders themselves manage their building. However, legislation providesprotection to the service charge payer and imposes rigorous obligations uponthe provider. Charges must be reasonable and may be challenged at the LeaseholdValuation Tribunal.

Right to buylegislation has led to there being a significant number of local authority andhousing association leaseholders principally in blocks of flats. Leaseholdersare obliged to pay service charges to meet the costs of capital investment intheir homes (for example, works to roofs of flats) and their share of certainrevenue costs (such as communal heating schemes, maintenance of lifts andlighting of common areas). There is a significant body of legislation thatgoverns leasehold service charges including the Housing Act 1985, the Landlord& Tenant Act 1985 and the Commonhold & Leasehold Reform Act 2002.

The latter act requiresthat charges must be based on actual costs and must be reasonable. Sinkingfunds or reserve accounts are seen as good practice because they avoid the needfor landlords to seek large amounts from leaseholders in years when significantamounts of expenditure are incurred – for example, on a major capital scheme.Communities & Local Government promoted the benefits of sinking funds andreserve accounts in a consultation paper in July 2009. The Audit Commission,Housing Corporation and others have identified examples of good practice insetting and administering leasehold service charges.

For full briefing paper please click here.

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