L1-L2 Property Management

Question 1

What is a service charge?

Answer 1

Payable by leaseholderto thelandlordfor services the landlord is obliged to provide under the terms of thelease

SCs can include maintenance / repair, and sometimes improvement of: exterior, structure, roofs, foundations, window frames, guttering, communal drains and pipes and common areas, also staffing, insurance of the building, the cost of management and contributions to a reserve fund.

Only services that are included in the lease can be re-charged to leaseholders.

Lease will state whether the proportion paid by the leaseholder is fixed or variable.

Question 2

What is a fixed service charge?

Answer 2

Fixed: (particularly in older leases)

This could be a:

fixed amount
fixed percentage
fixed cost per sqft subject to annual inflation

Question 3

What is a variable service charge?

Answer 3

Variable: (most SCs are variable)

Amount and proportion leaseholder pays varies from year to year.

Subject to statutory controls under the LTA 1985

Question 4

What document should you refer to on provision of service charges?

Answer 4

(RTL) The lease will state how the charges should be apportioned between the leaseholders.

Only services that are included in the lease can be re-charged to leaseholders.

Lease will state whether the proportion paid by the leaseholder is fixed or variable.

Question 5

What is the key legislation setting out service charge controls and provisions?

Answer 5

LTA 1985

Question 6

What is the purpose of the Landlord andTenantAct 1985?

Answer 6

Sets out rights and responsibilities of both landlord and tenant

Sets out the basic rules for service charges

Defines WHAT is considered a SC

Sets out requirements for ensuring costs are REASONABLE

Landlords must consult leaseholders before entering into any agreement for work /services which would lead to a SC

Question 7

What is S18 of the Landlord andTenantAct 1985?

Answer 7

Section 18 (1) defines SC as ‘an amount payable by a tenant of a dwelling as part of or in addition to rent

which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management; and

the whole or part of which varies or may VARY according to the RELEVANT costs.’

Question 8

What is S19 of the Landlord andTenantAct 1985?

Answer 8

Section 19 states that SC are only payable to landlord to the extent that costs are REASONABLE

Question 9

What do leases commonly state about SC apportionment?

Answer 9

Costs are to be apportioned on a ‘FAIR AND REASONABLE’ basis

In this case, the landlord will need to determine the basis of apportionment

Question 10

How can the landlord apportion SC?

Answer 10

Should be done via SCHEDULES - so occupiers can contribute to services included in their lease that THEY benefit from

Common methods are (included but not limited to):

Floor area apportionment

Equal share

Density apportionment

Question 11

What should the basis and method of SC apportionment be?

Answer 11

The basis and method of allocating and apportioning the service charge expenditure should be TRANSPARENT and clearly communicated to all.

Question 12

What should be considered with REASONABLENESS?

Answer 12

FREQUENCY: if too often, may be viewed as excessive. Equally, if works are not done often enough and the property deteriorates = deemed unreasonable.

STANDARD: if not completed to a high standard = deemed unreasonable.

SIZE: smaller properties will require less maintenance.

BENEFIT & USE: SC must only be applied to a Tenant for services they have use and benefit of unless the lease states otherwise. EG Tenants should not be charged to use a communal garden for which they have no right of use or access.

LEVEL OF COST: important to demonstrate VALUE FOR MONEY and costs are in line with the market. If higher, important to justify why.

Question 13

When creating a budget, what should you have regard for?

Answer 13

The Lease

Legislation (LTA 1985)

RICS SC best practice, including:

Service charge residential management Code and additional advice to landlords, leaseholders and agents (3rd edition)

Service charges in commercial property (1st edition)

Question 14

What is happening to the Service charge residential management Code and additional advice to landlords, leaseholders and agents (3rd edition) 2016?

Answer 14

Consultation and revision of code = published later this year

ensure housing associations and local authority housing providers follow the new code

event fees to be accounted for

life cycle costing to be accounted for

Industry standard cost classifications and consistent cost headings to reflect commercial SC code

requirements of agents and landlords to declare all commissions and a justification

requirement for landlords and agents to set realistic SC budgets for new developments.

Question 15

What should be used to inform SC budget costs?

Answer 15

Best information available should be used to inform budget estimate.

Can be:

Actual costs where contracts already in place

Estimates based on likely out-turn of current year and actual accounts for last completed financial year are also a useful indicator of costs

Comparable evidence from similar schemes can be used for budgeting purposes

Question 16

What should be considered with SC management fees?

Answer 16

Must reflect actual costs of managing services and amount recoverable by owner = limited to proper and actual cost incurred in the provision or supply of services.

Management fees should be fixed and not charged as a percentage of the budget.

Asset management fees (for commercial properties) and fees relating to collection of rent/ground rent should not be charged to occupiers

Question 17

When should SC accounts be distributed in residential?

Answer 17

Distributed within 6 months of date expenditure exceeded the budget / any tighter timescales required by the Lease

Copies made available to all Leaseholders paying variable SC (L&T 1985).

Question 18

When should SC accounts be distributed in commercial?

Answer 18

Distributed within 4 months of the end of the service charge year (RICS Commercial Code).

Question 19

What does Section 20B of the LTA 1985 stipulate?

Answer 19

Obliges a landlord to make SC demands within 18 months of expenditure

Question 20

How would you audit SC accounts?

Answer 20

Should be subject to an annual examination by an independent accountant unless the costs cannot be recovered.

Question 21

What is done with surplus SC monies?

Answer 21

RTL

Surplus may be refunded to the tenant / credited to reserve fund / held on account as credit for the following year’s SC

Question 22

How should SC monies be held?

Answer 22

Must be held in trust and ideally in one or more client account. (S42 L&T 1987)

RICS code requires that monies held should be ring fenced by holding them in a designated bank account and should include the name of the client / the property (or both) within the title of the account

Question 23

What does S42 LTA 1987 state?

Answer 23

SC monies must be held in trust and ideally in one or more client account

Question 24

What must SC demands be?

Answer 24

Must be in writing

Under Section 47 and 48 LTA 1987, written demand must include name and address – in England and Wales – for landlord and where notices may be served on him by the tenant

Must include a Summary of Tenant’s Rights and Obligations (S21B LTA 1985).

Timing and frequency for issuing demands must be in line with the provisions in the lease

Question 25

What is the relevant sections and LTA for serving SC demands?

Answer 25

Section 47 and 48 LTA 1987

Question 26

If a managing agent is in place, what address should be stated on the demand?

Answer 26

Demand must carry landlord’s name and address and NOT that of the managing agent.

Question 27

What is a Summary of Tenant’s Rights and Obligations (S21B LTA 1985)?

Answer 27

This is a prescribed document.

If demand issued without the summary, the leaseholder can lawfully withhold payment

Briefly sets out tenant’s rights and obligations in relation to variable SC

Question 28

What does section 20 of the LTA 1985 stipulate?

Answer 28

Dictates requirements for consultation with clients, leaseholders, residents, occupiers and any recognised tenants’ associations if certain financial limits will be exceeded when undertaking work in residential blocks

Question 29

What are the aims of the RICS Service Charge Residential Management Code (2016)?

Answer 29

Improve general standards and promote best practice, uniformity, reasonableness and transparency in the management and administration of long leasehold resi property

Ensure timely issue of all documentation including budgets and year end accounts

Reduce causes of disputes and give guidance to resolving disputes

Intended to be read by landlords, leaseholders, managing agents, managers and occupiers of leasehold property

Question 30

What areas does the RICS Service Charge Residential Management Code (2016) cover?

Answer 30

Ethics

Appointment of a managing agent

Duties / conduct of a managing agent

Complaints and disputes

Client money

Service charges, ground rent and admin charges

Health and safety: risk management

Repairs and other services

Contractors and suppliers

Works to extend or develop an existing block or new phase

Insurance

RTM and residents’ associations

Question 31

Why are Registered Providers to be included within the scope of the new SC Code?

Answer 31

current and previous editions have excluded Housing Associations and Local Authority Housing providers (Registered Providers of Social Housing).

will now fall within scope of draft 4th edition to reflect increasing number of leasehold residential properties being owned and/or managed by registered providers.

Question 32

What are Industry standard cost classifications in relation to the new SC Code?

Answer 32

pre-defined approach of standardising cost headings for use in SC budgets and statements of actual expenditure

standardised approach is designed to create transparency and consistency across industry.

Question 33

What is an apportionment schedule?

Answer 33

Apportionment schedules set out the percentage of service charge for which each leaseholder is liable and the rationale behind the percentages/apportionments.

Apportionments should reflect the lease terms and be clearly communicated to leaseholders for transparency as set out in the current draft.

Question 34

What are major works under Section 20 of the Landlord & Tenant Act 1985?

Answer 34

or “qualifying works” means works (whether on a building or any other premises) the cost of which is recoverable from the tenant under the terms of the lease through the SC

Question 35

What are the requirements to consult under Section 20 of the Landlord & Tenant Act 1985?

Answer 35

where leaseholders are required to contribute more than £250 towards the cost of a set of works OR

more than £100 for service contracts of more than 12 months THEN

the landlord must follow the Section 20 consultation procedure.

Question 36

In what case can the landlord avoid consulting with leaseholders when needing to carry out major works?

Answer 36

LL may apply to the FTT for dispensation from the need to consult

May do this if the work is urgent and it is not possible to wait the 2 months that consultation can take

BUT NEED TO BE CAREFUL, CONSIDER CASE LAW

Question 37

Landlord and Tenant Act 1954?

Answer 37

Part II of the act gives business tenants a degree of security of tenure.

A business tenant protected by the act may not be evicted simply by the giving of notice to quit or by the ending of a fixed term of the tenancy.

The landlord must serve a notice on the tenant, stating which of the seven grounds of opposition they wish to rely upon to oppose a new tenancy.

Protection includes:

Statutory Continuation

Right to Renew:

Question 38

What would you use if you were determining commercial service charges?

Answer 38

Service charges in commercial property PROFESSIONAL STATEMENT UK 1st edition, September 2018 Effective from April 2019

Question 39

Can you think of any recent case law?

Answer 39

Section 20 - Marshall v Northumberland & Durham Property Trust Ltd [2022]

Section 20 - Daejan Investments Ltd v Benson & Ors [2013]

Question 40

What does the service charge code state about reserve funds?

Answer 40

No attempt to collect funds for a reserve fund should be made when the lease does not permit it.

Where there is no provision in the lease for reserve funds, there is no entitlement to create or hold one, and any money collected for such a purpose can be demanded back by the leaseholders.

Question 41

How did you apportion the service charge costs?

Answer 41

x

Question 42

How did you apportion the service charge costs?

Answer 42

Liability based on occupied area and scheduling

Based upon fair, reasonable and relevant costs

For the sake of transparency, it will be necessary to allocate the costs to separate schedules and then apportion the costs only to the type of tenants that receive the benefit or use of the particular service.

Question 43

How is the relationship between the landlord and property manager defined?

Answer 43

Prompt notification of material variances to plans or forecasts ensures better relationships between landlord, managing agent and leaseholder

Section 30 of the Landlord and Tenant Act 1985 however, extends the definition of a landlord to ‘include any person who has a right to enforce payment of a service charge’.

Question 44

How did you have regard for mixed use estates?

Answer 44

Service charges in commercial property PROFESSIONAL STATEMENT UK 1st edition, September 2018 Effective from April 2019 states

Unlike in relation to residential dwellings, there is no statutory control over commercial service charges

works and services will in respect of both commercial and residential leases, depend on a strict interpretation of the wording of the lease

The cases of Heron Maple House Ltd v Central Estates [2002] 1 EGLR 35 and Oakfern Properties Ltd v Ruddy [2006] EWCA Civ 1389 have determined that an owner of a lease that includes both residential and non-residential elements will also need to follow the statutory procedures laid down by the Landlord and Tenant Act 1985 (as amended) to ensure that nonrecovery does not result due to an infringement of the legislation designed to protect residential
occupants only

Question 45

What is the DENSITY apportionment method?

Answer 45

This is estimated and apportioned on a PER PERSON BASIS

RESI: Estimate number of users in each flat

COMM: the HCA have an employment densities guide; for example an office is 1 person per 12m2, so using size of office, divide by 12m2 to get no. potential occupiers

THEN ADD UP THESE OCCUPIERS

THEN DIVIDE TOTAL ANNUAL SC (say £100k) by total number of users to give £ LIABILITY / USER

Question 46

What are the flaws of the density apportionment method?

Answer 46

it is not able to adequately account for the potential benefit and use derived by the users or customers of those occupiers whose operations are footfall driven (e.g. retail and restaurant users).