The Future of Leasehold Service Charges: Key Proposals from the Government Consultation

The second part of the consultation sought opinions on a set of additional service charge reforms proposed by the Government that go beyond those already contained in the Act, which include improvements to the major works procedure and stricter regulation of managing agents.

This article recaps the reforms introduced by the Act last year and summarises key new proposals considered in the consultation.

Part 4 of the Act: An Overhaul of Service Charges Practice

Information about Service Charges

Currently (under the LTA 1985), landlords must send tenants a ‘section 20B notice’ setting out the costs incurred in connection with services, repairs, maintenance, insurance or management of the building within 18 months of incurring those costs, and a service charge demand requiring tenants to pay a service charge on account of those costs.

Tenants have rights under s.21 and s.22 to request more information about costs incurred, including a written summary of why they were incurred and inspection of relevant documents and receipts.

Under the new regime instead:

• Landlords must routinely supply the details that leaseholders once had to request.

• Service charge demands must now be in a government-prescribed form that proactively contains information about costs, future major works planned, dispute-handling information and more – whether the tenant requests it or not. The consultation terms this as a ‘standardised service charge demand and annual report’.  

Also to be routinely supplied to leaseholders under the new regime, regardless of whether they are requested, are:

• A written statement of account breaking down income and expenditure for maintaining the building over a 12-month period within 6 months of the relevant account period ending;

• A notice of the timing and amount of future service charge demands so that leaseholders can make plans for their payment;

• Detailed information about the chosen buildings insurance policy– including features of the policy, whether remuneration received by insurance brokers is shared with landlords and managing agents, potential conflicts of interest and the total policy premium;

• An administration charge schedule detailing the amount leaseholders may be liable to pay for specific requests – for example keeping a pet, making alterations to or subletting their flat.

Additionally, Part 4 expanded tenants’ rights to request information, notably adding the right to inspect all contracts entered in connection with management of the building – including those with managing agents, insurers and contractors.

Currently, service charge enquiries from leaseholders account for the majority of queries received by the Leasehold Advisory Service, indicating widespread confusion and concern in this area. Requiring landlords to provide more comprehensive information as a matter of course is aimed at improving leaseholders’ understanding of what they are being charged for, so that the volume of disputes and enquiries is reduced.

However, this will also impose heavier administrative burdens on landlords and managing agents and that will no doubt have a knock-on effect on the fees incurred with the latter and so service charges may increase as a result.

Litigation Costs

Failure to comply with these reforms, once implemented by future secondary legislation, may result in challenges to the First-tier Tribunal (FtT) to enforce compliance and damages up to £5000.

The position regarding litigation costs recovery is to flip around against landlords - where landlords have in the past sought to recover litigation costs from leaseholders as a contractual right under the lease, Part 4 will require court approval for landlords to do so. Additionally, Part 4 grants leaseholders a new statutory right to recover their own litigation costs from landlords, which is very rarely provided for in leases.

Leaseholders are likely to welcome the new right to recover costs when challenging unfair service charges, as well as the added oversight of court approval for landlords’ cost recovery. However, the effect may be to produce a more defensive approach by landlords and their agents with more applications made to the FtT to approve matters in advance of costs being incurred and a greater level of fees incurred as a result that then potentially flows through the service charge.

The Consultation’s Key New Proposals

Major Works

The government expressed concerns about leaseholders being surprised by large one-off bills for unprecedented major works just a few months before work is to be carried out, an issue that has been reported to cause financial strain among some leaseholders.
To this end, the consultation proposes to enforce better planning and increased notice of future works. It also proposes a mandated reserve fund for all new leases, which would be held in trust and built up over time by the normal service charge specifically to cover major works. New legislation would be introduced to make it easier to set up such funds. Such reserves would of course drive service charges up – though leaseholders may welcome the increased financial certainty.

The government also proposes to streamline the current consultation process for major works, by which leaseholders are entitled to influence ‘what works are carried out, when and by whom’. This includes raising the financial threshold for when leaseholders must be consulted about works in line with inflation, to increase efficiency in carrying out minor repair and maintenance jobs.
Leaseholders cash flow and the value of their flats may be strongly impacted by these changes; those blocks that have not been actively managed such as smaller tenant managed blocks may be shocked by the level of costs they need to provide for and contribute towards in advance. This could have a knock on effect on the value of their flats as this is disclosed during the marketing process.

Regulation of Managing Agents

Notably, the consultation also proposes to introduce mandatory professional qualifications for managing agents to ‘drive up the standard of service provided … and ensure they are made more accountable to leaseholders’.

This would mark a significant change in leasehold practice considering that currently there are no formal entry requirements – anyone can practice as a managing agent regardless of skills, training or experience.

While the proposal could greatly improve transparency and leaseholder confidence in those managing their buildings, it may come with trade-offs – in particular, higher management costs resulting in higher service charges for leaseholders. However, some may see this as justified by the improved quality of service and accountability that qualified professionals might offer.

Notably, the consultation includes a proposal to introduce the right to veto a managing agent appointment and the right to switch to another one. These new rights could empower leaseholders to play a more active role in the management of their buildings, increasing satisfaction and trust in their managers and increasing agents’ accountability.

Reforming Service Charges: What Comes Next?
With the consultation now closed, the government will begin reviewing the responses and considering to what extent they may impact the forthcoming secondary legislation required to bring the Part 4 reforms into force.

Stakeholders can anticipate a formal government response outlining any adjustments to its proposals based on industry feedback.
Leaseholders may initially welcome the proposals but in time find it proves to be expensive for them (or a headache for tenant owner managed blocks where they do not employ managing agents). 

Mark Vinall, Partner, Ashley Wilson Solicitors LLP