Service Charge Management
The decades-old thorn in the side of leaseholders is that of their covenant (promise) to pay service charges so that the freeholders can carry out their own covenants to manage the common areas of the building.
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, according to the costs incurred or to be incurred, i.e. how much the actual or estimated cost of services will be. Some leases however still have fixed service charges, meaning the charge cannot be altered, no matter how much the leaseholders actually have to pay.
Service charges are controlled by the following mechanisms:
- 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 a) recoverable in advance or arrears of provision of works or services, b) collected regularly or c) as costs arise;
- How the budget is set and service charges 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);
Statutory Control of the Recovery of Service Charges/Rent
Relevant sections are:-
- s47/s48 of the Landlord and Tenant Act 1987 which stipulate that all rent/service charge demands must state the name and address of the landlord and supply an address for service in England and Wales.
- s21B of the Landlord and Tenant Act 1985 (notice to accompany demands for service charges) stipulates that every demand for service charge must be accompanied by a written summary of rights and obligations. The form of the summary is prescribed. There is also similar provision for administration charges made under a lease.
- Landlord and Tenants (Notice of Rent) (England) Regulation 2004 states that rent will not be due until such time as a prescribed notice has been served on the leaseholder
Note: The service charge provisions of the above do not apply to fixed service charges.
Information on demands, the Debt Pre-Action Protocol and the eighteen month rule can be read here.
BEST PRACTICE GUIDELINES
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.
The guidelines are as follows:
- All monies that leaseholders pay are trust monies under s42 of the Landlord and Tenant Act 1987 (contributions to be held in trust) which means they must be held in ring-fenced bank accounts;
- Landlords and managing agents are not required to have separate bank accounts for each individual property or scheme, unless the lease requires one;
- It is a breach of trust if those monies are a) used by one scheme to fund the requirements of another and b) pay the freeholders’ bills. Therefore the funds must be able to be clearly and separately identified.
- .All lessees paying variable service charges should receive an annual service charge statement from their landlord or residents’ management company (including right to manage companies (RTMCo’s) within six months of the end of the accounting year so tht leaseholders are provided with the full details of service charge costs following the service charge period;
- The annual service charge statement should include an income and expenditure account and a balance sheet and be prepared on an accruals basis;
- Where relevant costs can be recovered in the service charges, all annual statements of account should be subject to an examination by an independent accountant before being issued to lessees;
- If the service charge statement is prepared on behalf of an RMC or RTMCo then it should be a separate statement to the annual accounts for the company the latter of which are to be filed at Companies House;
- Leaseholders can request a summary of costs in accordance with s21 of the Landlord and Tenant Act 1985 (service charge information) which must be provided by the freeholder within one month of the request, or within six months of the end of the accounting period in question, whichever is the latter.