Fixed service charges

[Abulexy]

I have some long leases with fixed service charge. The impact of these leases limits my ability to recover all the management costs on the building. I am considering lease variation will this work? What options do I really have to overcome the financial risk?

[leaseholder64]

From a legal point of view, they are not service charges if they are fixed! Being variable is an essential part of the definition of service charge in the Landlord and Tenant legislation.

If the leases fail to provide for all costs to be recovered, they are legally defective and the FTT can rule in favour of a change in the lease at the request of just one party.

There is a grey area if the lease could possibly be interpreted as requiring the freeholder to pay the shortfall.

[Abulexy]

Thanks for your comments, it looks like an application to FTT then.

[andydd]

We'd need to see more of the exact lease wording..ground rent is often fixed and it maybe a very low amount (if for example the lease was made in 1800), but in that case..its tough..it was upto the FH to read the lease before purchase, Im not sure how it would work in your case, as mentioned, it maybe that its simply not deemed t be a "service charge"..its not clear if a FTT would allow a variation, leases can of course be varied with consent between the parties.

[Abulexy]

In a situation where the administration charge is fixed by the lease which makes it difficult to recover all the actual management cost, what options do i have to cushion or reduce the financial impact or risk?

[leaseholder64]

Administration charges don't pay for things like upkeep of the property. Did you really mean administration charges. If specific administration charges are specified, and they don't cover costs, that is your hard luck.

[Macromia]

From a legal point of view, they are not service charges if they are fixed!

That would depend on the exact wording within the lease.
If there is anything at all in the lease that could indicate that there was an intention to link the payments to the cost of services, and allow some possibility of varying the amount, it could potentially be a considered to be a service charge.

If the payments really are fixed it is likely to not be considered a service charge payment, but a tribunal might still find that the leases don't adequately allow for the recovery of costs and allow them to be altered - it depends what the lease says the fixed payments are for.

[HazeltonLane]

Could these definitions be relevant here?

Fixed Service Charge: Those where the landlord fixes the charge according to the landlord’s own estimates and costs. The Landlord bears responsibility for any deficit between the cost of services and the amount of money collected in charges. Similarly, the Landlord is entitled to retain any surplus that accrues if the Landlord collects charges in excess of the cost of providing the services.

Variable Service Charges: Those that can be changed, increased or decreased, in accordance with the provisions of the tenancy agreement or licence. The main effect of variable service charges is that it allows surpluses and deficits to carry forward to the next accounting year.

This is from the Peabody Service Charges Policy.

[leaseholder64]

Those sound good definitions to me. Only the variable ones are covered by the statute on service charges, as service charges are specifically defined as charges that vary with costs.