7.5 Service Charge Arrears - Refusal to Complete a Lease Extension
The Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) governs the process by which qualifying tenants can extend their leases. A common issue that arises during this process is the impact of outstanding service charge arrears, particularly when these are subject to formal disputes, such as ongoing tribunal applications. This article examines the key provisions of section 56(3) of LRHUDA 1993, explores the implications of disputed service charges, and addresses the current status of relevant amendments proposed by the Leasehold and Freehold Reform Act 2024 (LFRA 2024). It aims to equip solicitors with practical insights for advising clients in this complex area of leasehold law.
The Role of Section 56(3) in Lease Extensions
Section 56 of LRHUDA 1993 sets out the obligation of the landlord to grant a new lease to a qualifying tenant who has served a valid notice under section 42. Subsection (3) imposes specific conditions that must be met before a tenant can require the execution of the new lease. It stipulates that the tenant must tender to the landlord:
- Any sums payable by way of rent or recoverable as rent in respect of the flat up to the date of tender;
- Any sums for which the tenant is liable under section 60 (costs incurred by relevant persons); and
- Any other sums due and payable under or in respect of the existing lease.
Service charge arrears typically fall under the first or third categories, either as sums "recoverable as rent" or as amounts due under the lease, depending on the lease terms. This provision effectively allows a freeholder to deny completion of a lease extension if these sums, including service charge arrears, remain outstanding. However, the situation becomes more nuanced when such charges are in dispute, particularly in the context of a tribunal application.
Handling Disputed Service Charges
When service charges are subject to a formal dispute, such as an ongoing tribunal application, section 56(3) provides a mechanism to prevent delays in the lease extension process. If the sums are not fully ascertained, meaning their final amount is pending determination, the tenant may offer "reasonable security" for their future payment. This ensures that the tenant's right to a lease extension is not frustrated by the dispute, while protecting the landlord's interest in recovering sums ultimately deemed payable.
What Constitutes "Reasonable Security"?
The legislation does not define "reasonable security," leaving room for practical solutions tailored to the circumstances. Common approaches include:
- Depositing Funds: The tenant may deposit the disputed amount (or an estimated sum) into a joint account, the tenant’s solicitor’s client account, or directly to the landlord, with a clear reservation of the right to challenge the charges.
- Court or Tribunal Oversight: In some cases, disputed sums can be paid into court or held in escrow pending resolution of the dispute.
If a landlord refuses to complete the lease extension despite the tenant offering reasonable security, the tenant can seek a county court order to compel completion. Courts may also award costs against a landlord who acts unreasonably in such circumstances, reinforcing the importance of proportionality in negotiations.
Practical Considerations for Solicitors
Solicitors should advise tenants to:
- Document the Dispute: Ensure that any tribunal application or formal challenge to the service charges is well-documented, as this will support the argument that the sums are not yet ascertained.
- Propose Reasonable Security Promptly: Early offers of security can demonstrate good faith and prevent delays in the lease extension process.
- Engage with Landlords: Open communication with the landlord or their representatives can help clarify the disputed amounts and agree on a suitable form of security.
Conversely, when acting for landlords, solicitors should ensure that any refusal to complete tackles a clear failure by the tenant to meet the section 56(3) requirements, as unreasonable refusals may lead to adverse cost orders.
Case Law Insights
While there is limited case law directly addressing section 56(3) in the context of individual lease extensions, analogous principles can be drawn from collective enfranchisement cases. For example, in Dinglis Properties Limited v Sinclair Gardens Investments (Kensington) Limited [2004] LVT, the tribunal addressed disputes over service charges in the context of enfranchisement, indicating that such disputes can be resolved alongside other terms, though lease extensions typically handle these separately. Solicitors should be cautious when applying such precedents, as the statutory frameworks for enfranchisement and lease extensions differ in scope and procedure.
Impact of the Leasehold and Freehold Reform Act 2024
The Leasehold and Freehold Reform Act 2024 (LFRA 2024) proposes amendments to LRHUDA 1993, including modifications to Schedule 11, paragraph 7, which would explicitly allow disputed payments under section 56(3) to be made into the tribunal as a form of satisfaction. This provision aims to streamline disputes involving intermediate landlords and provide a clear mechanism for handling contested sums. However, as of 2 September 2025, Schedule 7 of LFRA 2024 is not yet in force. The relevant commencement regulations (Nos. 1, 2, and 3 of 2024/2025) have activated other provisions, such as those removing the two-year ownership qualifying period (effective 31 January 2025) and right to manage reforms (effective 3 March 2025), but Schedule 7 awaits commencement under section 124(3) of LFRA 2024.
Until these amendments are enacted, solicitors must rely on the existing framework under section 56(3), ensuring that clients offer reasonable security for disputed sums to progress lease extensions. Once Schedule 7 is in force, paying disputed sums into the tribunal will become a statutorily recognised option, potentially simplifying the process and reducing the risk of disputes derailing lease extensions.
Summary
For solicitors advising on lease extensions under LRHUDA 1993, section 56(3) is a critical provision when addressing outstanding service charge arrears, particularly those in formal dispute. By leveraging the option of reasonable security, tenants can safeguard their right to a lease extension while disputes are resolved. Solicitors must carefully navigate these provisions, ensuring compliance with statutory requirements and anticipating the potential impact of forthcoming amendments under LFRA 2024. Clear communication, robust documentation, and strategic use of security mechanisms are essential to achieving successful outcomes for clients in this complex area of leasehold law.