Service charges are one of the principal areas for dispute between leaseholders and their landlords. This leaflet sets out the provisions the law has made in relation to various matters, including:

the setting and recovery of service charges; the rights of both the leaseholder and the landlord to challenge or substantiate the charges before a lease extension Tribunal; the obligations placed upon the landlord to consult the leaseholders before carrying out works or entering into agreements; the statutory controls on demands; accounting for the charges. The law also sets out how and when ground rent may be collected and how the landlord can pursue arrears or non-payment. The leaflet looks at recovery of ground rent and at the procedures and obligations of the parties on forfeiture of the lease.

The leaflet is primarily directed towards leaseholders; however, variable service charges may also be payable by some tenants.

The advice provided applies to all tenants whose lease or tenancy agreement provides for payment of a service charge which varies from year to year.

Service charges are levied by landlords to recover the costs they incur in providing services to a dwelling. The way in which the service charge is organised is set out in the tenant's lease or tenancy agreement. The charge normally covers the cost of such matters as general maintenance and repairs, insurance of the building and, where the services are provided, central heating, lifts, porterage, lighting and cleaning of common areas etc. The charges may also include the costs of management by the landlord or by a professional managing agent and for contributions to a reserve fund.

Details of what can (and cannot) be charged by the landlord and the proportion of the charge to be paid by the individual leaseholder will all be set out in the lease. The landlord, or, sometimes, a management company that is party to the lease, provides the services, while the leaseholders pay for them. The landlord will generally make no financial contribution, but sometimes he has to pay for the services before he can recover their costs.

Some landlords levy charges for consents to alter flats or provide information when a flat is being sold. These are not service charges but administration charges and are dealt with separately (see later).

Originally, the costs of services were included in rental payments, but as costs and inflation escalated, landlords wanted to make sure they recovered all their costs every year. Some old leases still provide for a fixed charge to be levied. These charges cannot be varied, regardless of the actual costs to the landlord. However, most service charges are based on the actual or estimated cost of the services and thus vary from year to year. These are known as variable service charges.

The lease will dictate the format of the charge. It will usually give the dates of the service charge period. More often than not the period is a year, but sometimes it is a half-year or a quarter.

The lease will usually set out the percentage payable by the lessee, but sometimes the lease just stipulates a 'fair' or 'just' proportion. If differing groups of occupiers benefit from different services, there may provision for more than one percentage to be paid.

The lease will say whether advance payments are to be made and, if so, whether they are based on the previous year's cost or an estimate of the cost in the year to come. There will always be provision for a final charge at the year end when the actual costs are known. If interim payments have been made, and they exceed expenditure, the final 'charge' will be a credit.