Covid-19 and leasehold service charges
Landlords will no doubt be facing issues which affect service charges and the services linked to them as a result of Covid-19. This will include dealing with services that are not able to be provided as a result of social distancing requirements and staff absences through self-isolation, and the recovery of additional costs arising from managing the pandemic, such as those related to compliance with health and safety guidance. Can additional costs be charged to residents, and what happens about charges for services which are reduced or not provided at all?
The answers will likely be fact specific and based on the terms of the specific lease. A key initial question is whether the service charge is fixed (which includes both totally fixed and indexed charges) or variable. If variable – which is widely defined and means any sum payable for services by a leaseholder where that sum varies by reference to the actual cost of the service – the Landlord and Tenant Act 1985 and related regulations apply and you will need to demonstrate compliance with all aspects of it to recover the service charge. These requirements include:
- Costs must be reasonably incurred and a Tribunal has power to determine whether they are, if leaseholders challenge. Without detailed evidence of the reasonableness of charges, a Tribunal may determine that charges are unreasonable and apply deductions.
- Service charge demands must include a summary of rights and obligations to be valid- this is a strict requirement and if the necessary summary is not served with each and every demand then the sums do not legally become due.
- For non-Registered Provider landlords, service charge monies must be held on trust.
- If there are qualifying works (more than £250 per unit per annum) or qualifying long term agreements (more than £100 per unit per annum), consultation is required. This includes procedural requirements such as asking leaseholders if they wish to nominate contractors, and attempting to obtain estimates if they do so. There is no exception to this requirement for works or agreements put in place to respond to the pandemic, although it is possible to apply to a Tribunal seeking dispensation from the requirement to consult.
- A leaseholder may demand a summary of the service charge account, which must meet certain requirements, and may then inspect related documentation (though here non-compliance leads to a fine rather than service charge recovery issues).
Whether or not the 1985 Act applies, the terms of the lease must be assessed as to whether or not a charge is payable – if it does apply though the terms of the lease will be subject to the above rules and limitations whatever it says about what is payable by the leaseholder.
Some initial questions and thoughts:
Can I charge for Covid-19 related costs that would not otherwise have been incurred, such as additional PPE?
For those operating a fixed service charge, that seems unlikely. For those operating a variable model, it will be a case of assessing the terms of the lease and establishing whether there is a head of cost in it to which the costs incurred can be allocated. Leases will not have a pandemic related costs heading, but it's likely they will include provisions relating to the costs of complying with law and guidance which might be useful. This assessment is likely to need to be made in respect of each item of cost incurred and each may fit more or less neatly into the terms of the lease. "Sweeper" clauses, allowing recovery of "any other costs" or some similar wording could be used, but care is required as these have routinely been treated very narrowly by Tribunals and so should only be considered as a last resort, having taken legal advice and understanding the potential risks of challenge.
Again, regardless of what the lease says, the 1985 Act requirements must be complied with, in order to recover costs incurred.
Should a landlord charge all of these costs to residents?
This is perhaps a follow-on question from the above. Knowing what you can lawfully charge will allow you to understand what you are likely to recover. From there, you can make decisions about which costs will actually be charged and which will not. Anything that can lawfully be charged but is not would amount to a concession to leaseholders – the landlord would be waiving a charge it was entitled to seek to recover.
There is no legal requirement for a landlord to pay to keep residents safe from the effects of the pandemic - though again leases should be considered for any terms which could be said to amount to a contractual obligation to do just that. There are some limits on what can be charged to tenants under s11 of the Landlord and Tenant Act 1985, which requires a landlord to keep a let dwelling and service installations in repair – but this does not apply to long leaseholders and in any event the obligations would likely be of limited application to dealing with the pandemic.
Are residents entitled to a refund for a reduced or suspended services?
For fixed service charge models, this will depend on the lease. If the lease makes payment conditional on the provision of the services, leaseholders might have rights to make a deduction. It is probably more likely that the resident must pay regardless of the services provided, and consider whether it has a claim against the landlord for breach of the lease terms in respect of services promised but not delivered. Leases commonly contain provisions stating that a landlord is not liable for services not provided for matters outside its control, which may mean there is no breach.
A leaseholder could seek to exercise the right of set-off (reduction in payments against breaches which have caused them a loss), although many leases specifically exclude leaseholders from exercising the right of set off. If set off is not available, then unless the landlord and leaseholder can agree something, a leaseholder with a variable service charge would have to issue a claim in the First-tier Tribunal (Property Chamber) for a determination that the service charge is unreasonably high, or for a leaseholder with a fixed service charge a claim for breach of the lease would have to be brought via Court proceedings. This could make such a process unattractive to leaseholders as it will involve spending time and money, with no guarantee of reward.
In a variable model, if the actual costs of service delivery are lower because the landlord doesn’t provide as much, then naturally the service charge would be expected to be lower. However, that won't necessarily mean no cost for no services as some costs cannot be reduced to nil even where the services are completely suspended. And of course the extra pandemic related costs could easily outweigh any savings against reduced services. As to whether a refund is payable, that will depend on the terms of the lease – most leases will not provide for an overpayment to be refunded, instead it will be credited to the next year's service charge payment.