Planning ahead – defending a challenge to the reasonableness of the service charge
Adam Fotiou, property management solicitor at Bradys, sets out practical advice on meeting the legal requirements for a service charge item to be deemed ‘reasonable’ and thus recoverable, should it ever be challenged by a leaseholder. Adam is experienced in appearing before the First-tier Tribunal and understands the challenges faced by RMCs, freeholders and their managing agents.
Pursuing service charge arrears can often reveal leaseholder dissatisfaction with the services received as a reason for non-payment.
This dissatisfaction will often manifest itself as a complaint over the ‘reasonableness’ of service charge items. Under Section 19 of the Landlord and Tenant Act 1985, any service charge deemed ‘unreasonable’ will not be due and therefore not payable by a leaseholder.
A time-intensive and costly task
Determining whether any service charge (to which a leaseholder’s arrears relate) is ‘unreasonable’ before the First-Tier Tribunal is typically a highly labour intensive and costly task – often disproportionately so in comparison to the value of the sums in dispute.
Examining a single item of service charge can involve the collation a high volume of documents, the attendance of witnesses to give evidence, the cost of instructing expert witnesses, as well as the significant overall time spent in case preparation.
The burden of this task is exacerbated the older the service charge item under scrutiny; in this situation you are at the mercy of the standard of record keeping that prevailed at the time and soundness of memory of witnesses, assuming any witnesses exist who were involved at the relevant time!
At times, litigation is simply unavoidable, whether because of mistakes committed by the RMC or managing agent, or a leaseholder who simply wants their “day in court”. However, litigation can be made easier if RMCs, freeholders and their managers can always keep in mind what they need to be able to justify the reasonableness of a cost that has been incurred, should it ever be necessary.
This can be something as basic as tightening up record keeping – for example, ensuring that property inspection reports are supported with photographic evidence of every aspect viewed – or improving the detail of communications and transparency of actions at the time.
As a reminder, Section 19 examines the reasonableness of service charges in three separate ways:
- If a cost has been incurred, that it has been incurred reasonably. This will require an examination as to whether the RMC/managing agent’s decision to incur that cost in the circumstances was a reasonable one that achieved compliance with its obligations under the lease – it can be one of many options available to achieve that goal and does not have to be the ‘most reasonable’. Does the cost withstand scrutiny when tested in the open market? This does not mean that the cost must be the cheapest available for it to be reasonable, provided the outcome achieved is a reasonable one. Often it is beneficial to be able to demonstrate that the market was indeed tested.
- If the services or works to which the costs relate were of a “reasonable standard” – often this translates into a value being attached to the cost of the service or works based on their standard, rather than works or services of an unreasonable standard rendering none of the cost payable.
- If the cost is one that has been estimated as part of the service charge being demanded in advance (i.e. the cost has not yet been incurred) then “no greater amount than is reasonable” is payable.
What does the First-Tier Tribunal expect to see from you?
Evidence is the all-important word in this instance.
The FTT will first and foremost decide on reasonableness based on the evidence before it from all parties and will apply its own knowledge and expertise where appropriate.
Leaseholders will often be well-prepared with photographic records, alternative quotes and so forth.
RMCs, freeholders and managing agents can improve their prospects of successfully arguing that an item of service charge is reasonable and recoverable by keeping the following six points in mind at all times:
- Can you demonstrate why a cost or service is needed by reference to a specific incident(s) or the specific characteristics of the buildings and/or grounds that are being maintained?
- Can you explain why you selected a particular method of repair, maintenance or a service over others, and why you engaged a particular contractor/supplier to deliver that method (especially if the cost of their service is not proven to be the cheapest)?
- Did you test the market by seeking a competitive quote(s) for the works or service?
- What feedback, if any, was received from leaseholders on any proposal works or services and can you demonstrate that any feedback was taken into consideration in the decision-making process?
- Can you demonstrate that you kept budgeting considerations and thus the impact of the cost on the financial means of leaseholders in mind?
- Can you align your decision making against professional practice codes?
The points made above play a more significant role for particularly expensive service charge items where the burden to justify the reasonableness of the cost is greater. Where a cost in dispute is relatively minor, there is less burden on the parties to provide evidence to justify their case and a tribunal is more inclined to apply its own knowledge and expertise to decide if that cost is reasonable.