Residential Service Charges Update

As increasing numbers of investors now include residential and mixed use properties in their portfolios there are bound to be issues dealing with the residential element of service charges and you really can't be too careful about the administration of residential service charges.

From our perspective it seems like an almost endless stream of cases appear on the subject of residential service charge and this is a short summary of the most significant, highlighting just how much attention to detail is required when setting up and managing service charges for buildings and estates with any residential element.

The first (and most recently decided) case is the most significant in legal terms and unusual in that the landlords were the victors. The Supreme Court in Arnold v Britton declined to bend the usual rules of construction in favour of the tenants of holiday chalets let on long leases. The service charge provisions in the long leases were inconsistent but a significant minority of them provided for a fixed charge service charge with annual uplifts which resulted in a huge individual service charge liability as the term progressed. The fixed service charge increased in an amount that was massively higher than inflation and well beyond the actual service costs. The Supreme Court held that, because the service charge was a fixed amount, it would be legitimate for the landlord to continue to collect that fixed amount without any need for the landlord to follow the Service Charge Consultation Regulations and without any scope for appeal to the First Tier Tribunal as to the reasonableness of the sums charged. A warning though: the outcome was manifestly unjust to quite a number of the tenants at the holiday park and all of the Law Lords suggested petitioning Parliament for a change in the law. That makes it difficult to say that fixed charge service charges will continue to be outside the service charge consultation requirements and incapable of challenge in the First Tier Tribunal on grounds of reasonableness. For now, however, they are. In an unusual case involving a right to manage company ("RTM") administering the service charge, the Upper Tribunal found that the RTM had not complied with the regulations on service charge consultation to the letter. The RTM had failed to make adequate arrangements for the tenants to be...