- Service charges, which are paid by leaseholders in order for freeholders to carry out their own covenants (promises) within the lease and which are not required to be filed at Companies House;
- Money belonging to the company through the payment of ground rent, and lease extensions (again paid by leaseholders). These are known as the statutory accounts and they do have to be filed at Companies House at year-end.
Best Practice Guides
There are ‘best practice’ guidelines for handling service charges contained within the ICAEW Technical Release TECH 03/11 which are laid down by the Institute of Chartered Accountants for England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA) and the Royal Institution of Chartered Surveyors (RICS) and whilst not included in property management legislation, freeholders and agents face financial and legal issues if they fail to adhere to them.
Controlling Service Charges
It is the lease that contains mechanisms of controlling service charges such as:
- Who shall certify or approve the accounts;
- The costs that can be recovered;
- The periods of time for which accounts should be prepared;
- Whether service charges are recoverable in advance or arrears of provision of works or services, collected regularly or as costs arise;
- How the budget is set and the service charge is apportioned;
- Whether there is a sinking or reserve fund (and a building surveyor can put together a capital expenditure report which will highlight how much is to be placed in these funds each year);
- Whether the service charges are fixed or variable: when service charges are ‘variable’ this means that the amount payable may go up or down, according to the costs incurred or to be incurred. If the service charge is ‘fixed’ under the terms of the lease or tenancy agreement it does not change.
Fixed and Variable Service Chargea
Originally service charges were included in rental payments. However, due to the escalation of cost and inflation, landlords wanted to ensure they recovered all their costs every year. The result has been variable service charges, meaning that they can go up or down each year, depending on how much the actual or estimated cost of services will be. Some leases still have fixed service charges, meaning the charge cannot be altered, no matter how much the leaseholders actually have to pay.
STATUTORY AUTHORITY FOR SERVICE CHARGES
The statutory authority for service charges are as follows:
The Landlord and Tenant Act 1985
Under 27a, (liability to pay service charges: jurisdiction) which deals with lessee applications to the FTT over the ‘reasonableness’ of service charges. If leaseholders feel that work being carried out on their building is unnecessary, they also have the right to take their landlord to the Tribunal under this section which will help the Tribunal to determine whether or not the cost of the disputed works is in fact payable and;
s20c (limitation of service charges; cost proceedings) which was expanded by preventing the freeholder from putting the costs of any legal proceedings through the service charges even if the lease allows it.
The Landlord and Tenant Act 1987
Under s42 (service charge contributions to be held in trust). Service charge monies are ‘trust money’ and all variable service charge payments should be held in ring-fenced designated bank accounts. Such accounts must contain the words ‘trust’, ‘client’ or the property name in the bank account title and they must not be mixed up with the business accounts of whoever is holding them. Unless required by the lease, there’s no obligation to put reserve funds into separate bank accounts and;
s48 (notification by landlord of address for service of notices)
The Commonhold and Leasehold Reform Act 2002;
Whilst this Act contains provisions to update parts of the two above Acts, the sections relating to accounting for, and reporting on, variable service charges and the holding of service charge contributions in a designated bank account have not yet been implemented. This means that the original provisions of the following apply;
s21 of the Landlord and Tenant Act 1985 (request for summary of relevant costs by a lessee): If there are more than 4 flats in the block, leaseholders (or a recognised residents association) have the statutory right to request a summary of all relevant costs incurred by the landlord for works and services that make up the service charges. if there are more than four dwellings then the summary must be certified by a qualified accountant who is also a Registered Auditor.
Once the request is received the Landlord must provide the information within one month or within six months or the year end, whichever is later. Failure to meet these deadlines is a criminal offence. The reasonable cost of the summary is properly chargeable to the service charge account and it is required to be prepared by a qualified accountant. The summary is required to distinguish between the following:
- Items/costs for which no payment has been demanded of the landlord within the period to which the summary relates;
- Items/costs for which payments has been demanded by the landlord but not paid within that period; and
- For which the landlord has paid within that period.
The summary is also required to include the total of any money received by the landlord for service charges and still standing to the credit of the tenants paying these charges at the end of the period and any costs which relate to works for which grants have been paid or will be paid and show how they have been reflected in the service charge demands.
The original provisions of s42 of the Landlord and Tenant Act 1987 (contributions to be held in trust) also continue to apply as per the above.
The Housing and Regeneration Act 2008.
Changes to s21 (as above) and s22 of the LTA 1985 (request to inspect supporting accounts) have not come into force even though both sections are intended to allow leaseholders to receive a summary of service charge expenditure incurred in the last accounting period, and then be allowed to inspect the accounts and documents that support that summary.
Additionally, primary legislation under the 2002 Act was only amended, so the Housing and Regeneration Act 2008 supercedes the 2002 Act regarding statement of accounts under Schedule 12 of the Act (provision of information about service charges and to service charge funds) with s303 (provision of information and designated accounts) referring to clauses relating to ‘a regular statement of account’ as the ‘provision of information’ and the ‘accountant’s report’ with that of a report by a ‘qualified person’.