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Posted 21 August 2014
by Simon Sanger-Anderson

Caps on service charges

Caps on service charges

On 12 August 2014 new mandatory and discretionary directions were issued by the Secretary of State for Communities and Local Government under ss219 and 220 Housing Act 1996 in respect of the charging of service charges to leaseholders. Both directions apply to all social landlords.

The directions are in response to large charges for works (such as roof replacements) that are suddenly levied on leaseholders.

Mandatory direction

The mandatory direction applies only where:

  • the leaseholder is in occupation of the property (so not to those who then let the property out to another)
  • the leaseholder who is in occupation of the property at the date on which the work starts (so, not to a purchaser but landlords will need to ensure that they notify the leaseholder within 18 of incurring the costs of the work in accordance with Landlord and Tenant Act 1985 s20A (2))
  • the works are in respect of works of repair, maintenance or improvement
  • the works are wholly or partly funded with assistance from a relevant programme.

A relevant programme is defined, at the moment, as being:

  • “the Decent Homes Backlog Funding provided through the 2013 spending round; and
  • any other assistance for the specific purpose of carrying out works of repair, maintenance or improvement provided by –
  • any Secretary of State;
  • or the Homes and Communities Agency.”

The effect of the direction is that a social landlord cannot recover more than £10,000 (£15,000 in London) for those works covered by the funding for a 5 year period. The consultation on the proposals clarifies that the period of 5 years will be on a rolling basis and will commence with the first set of funded works attracting these restrictions.

The restriction on funding only applies to works that are funded by one of the programmes. Therefore any works that are not funded do not fall within this direction. That means that the everyday service charge provisions for items such as running minor repairs, gardeners and window cleaners continue to be charged as normal in accordance with the lease and on top of this service charge limit.

Discretionary direction

This direction also applies to costs of repair, maintenance or improvement. There is no need for these works to be funded at all by any programme and therefore this direction applies to all costs that fall within this description.

The direction enables social landlords to reduce or waive their service charge. If a landlord is considering doing this then there are certain criteria set out in section 3 that should be considered. In brief these are:

  • What the estimate of the costs were
  • Whether the purchase price paid took into account these costs
  • Any benefit the leaseholder has received
  • Whether the lessee would suffer exceptional hardship
  • Any other relevant circumstances of the leaseholder.

The direction goes on in section 4 to set out factors that are to be considered in considering exceptional hardship of the lessee.

This is a peculiar direction as it is asking social landlords to consider not pursuing service charge costs against a lessee. These are costs that have been lawfully demanded and (we hope) correctly incurred. If the lessee has any issue with why they have been incurred then their recourse should be to the Residential Property Tribunal asking for a determination. A landlord also has to comply with the consultation requirements of The Commonhold and Leasehold Reform Act 2002, for works over £250 in any year. Given this the lessee will be aware that there are large scale works due to be carried out and therefore payments will be due to cover these. Further, a landlord may, in certain circumstance, provide the leaseholder with a loan (secured on the property) to pay any service charges. We fail to see why any landlord would wish to waive service charge fees when it would be beneficial for those to be recovered to cover the cost of the works and therefore not be borne by other budgets or lessees. If a lessee cannot pay their service charge the recourse would be to seek forfeiture of the lease.

The mandatory direction fails to comment on the position of sinking funds. Under some leases these can be used to accumulate a pool of money to pay for or towards large scale works, such as roof replacement. Whilst that money will be being paid towards works that may attract funding when they come to be undertaken, the sinking fund can be collected over many years and therefore at its inception there might not be any works covered by the direction. It is therefore unclear whether monies collected in a sinking fund would ever be caught within the £10,000 limit either at the point of payment from the lessee or at the point that those monies were applied to works that are subject to the specified funding.

Further advice

Please contact our specialists Simon Sanger-Anderson, Sarah Schooling, Jenny Lloyd or Nicola Rumsey at Broadwalk House, Southernhay West, Exeter EX1 1UA
call: 01392 207020 or email: has@tozers.co.uk


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About the author

Simon Sanger-Anderson

Partner

Partner and solicitor within the employment team, Simon also leads the firm's cross departmental Social Housing Practice Group