The question as to exactly what a landlord can recover in respect of a service charge is often a problem for tenants who receive demands for payment that they consider are very high. A common issue is what the landlord is entitled to recover as part of a service charge.
What is a service charge?
A service charge is an amount that is payable (by the tenant to the landlord) either as part of or in addition to the rent. Among other things, it covers costs for services, repairs, maintenance, improvements and insurance. In undertaking works the landlord must behave reasonably. The amount that is payable is limited to cover works that it was reasonable for the landlord to undertake and works that are completed to a reasonable standard. If a tenant considers that a service charge is unreasonable then they can challenge them.
What is reasonable?
There is no clear definition of what is reasonable and each individual situation must be considered on its own facts.
The starting point will always be the terms of the lease. If there is no clause in the lease requiring a tenant to pay service charges (which is very unusual) then none will be payable. If the lease does provide for payment of a service charge then consideration must be given to the specific wording of the lease. What is covered is not always clear and therefore disputes often arise between landlords and tenants. Even where there is an express terms within the lease permitting the landlord to recover certain costs, the matter may not be entirely straightforward.
The costs of repairs v improvements is one area where there is often disagreement. This was considered recently by the Upper Tribunal (Lands Chamber) in the case of Miss C Waaler v London Borough of Hounslow  UKUT 0017 (LC). Miss Waaler was presented with a demand for payment of service charges in the sum of £55,195.95 relating to extensive works which included replacement of the flat roof to each block with a pitched roof and replacement of original wood framed windows with new metal frames. Replacement of the windows meant that further works requiring replacement of the exterior cladding and removal of the underlying asbestos were necessary. Miss Waaler challenged the amount of the service charge. Subject to some minor adjustments, the First Tier Tribunal found that the majority of the sum was payable and Miss Waaler appealed the decision. The main issue was whether the works were repairs or improvements and if they were improvements whether Miss Waaler should have to pay them because whilst the lease imposed a duty on Miss Waaler to contribute to the costs of improvements, her landlord did not have an obligation to carry out improvements. It was argued on Miss Waaler’s behalf that if they were improvements she should not have to pay the costs because the landlord did not have to undertake them (as they were not repairs). The Tribunal did not agree that the costs of improvements were not recoverable under the terms of the lease but they did decide that repairs and improvements should be treated differently.
In respect of repairs, the landlord was obliged to carry out the repairs in accordance with the terms of the lease and therefore he had no choice. Given that they had no option and had to carry out the repairs, the Tribunal decided that they had a right to choose how to discharge their obligations. The only requirement was for them to act reasonably.
In relation to improvements the Tribunal decided that different considerations should apply because the terms of the lease meant that the landlord could choose whether to carry out improvements (they did not have to).
If a landlord chooses to undertake works which go further than they have to do (in accordance with the lease), they “must take particular account of the extent of the interests of the lessees, their views on the proposals and the financial impact of proceeding”. A landlord will not be able to justify the costs of very expensive improvement works just because there is a term in the lease permitting them to recover such costs.
What does this mean?
When looking to recover the costs of improvements from tenants, if the improvement works were carried out voluntarily, a landlord must be able to justify the works and show that they have considered the view / position of a tenant.
Tenants should always bear in mind that whether a landlord is able to recover the costs of repairs / improvements and the extent that they are able to do so will always depend upon the terms of an individual lease. Caution should be taken because many newer leases provide landlords with a wide discretion to undertake improvement works and to recover the costs.
If you are unsure of your legal position then you should seek independent legal advice.