Increasing the level of regulation of residential service charges has kept legislators very busy over the past 20 years. Now, as of 1 October 2007 a new tranche of legislation has come into force: Section 153 of the Commonhold and Leasehold Reform Act 2002.

Service charges and statements of rights

This legislation inserted a new section (21B) into the Landlord and Tenant Act 1985, making it a requirement that, on making a demand for service charges, all residential landlords provide to tenants a notice summarising their rights and obligations in relation to service charges. The Service Charges Regulations 2007 set out what information must be included in that notice.

Administrative charges and statements of rights

At the same time, clarification was provided as to what information should be included in the 'statement of rights' which, since 2003, residential landlords have been required to provide to tenants when making demands for "administrative charges". The concept of "administrative charges" covers landlords' costs for matters such as granting an approval under the lease, or taking action in relation to a tenant's default. Until now, landlords have been in the dark as to what exactly should be included in such a notice. That information is now set out in the Administration Regulations 2007.

Ensuring tenants know their rights

Each and every time a landlord makes a demand for service charges or administrative charges, it must also give the tenant a notice including all the information set out in the relevant regulations, which will include:

  • The fact that the tenant has the right to apply to the leasehold valuation tribunal for a determination as to whether the charge is payable;
  • Information on other tenant rights in respect of charges under the lease (such as the right under Part 4 of the Landlord and Tenant Act 1987 to apply for a lease variation);
  • The fact that the tenant has the right to obtain a summary of costs from the landlord and to inspect documents relevant to the charge;
  • The fact the tenant has the right to appoint a surveyor or accountant to carry out an audit.

Those rights existed prior to 1 October 2007. However, the recent changes have reversed the burden so that tenants no longer have to request details of their rights from their landlord.

Consequences of default

From now on, if a landlord fails to provide a notice with a demand for charges, the tenant will have the right to withhold payment of that charge until such a notice is received. The only exception to that rule is where service charges were due for payment before 1 October 2007 and the landlord served the first demand for those charges before that date, in which case a notice need not be supplied with any further demands for those charges, even if those further demands are served on or after 1 October 2007.

Where the tenant has the right to withhold payment because of failure to provide the requisite notice, any provisions in the lease relating to non-payment or late payment will cease to have effect until the landlord provides one. So, for example, a landlord will not be able to recover possession of the premises by reason of non-payment, or charge interest on the unpaid amount, until a notice is provided. 

The effect of the change?

There is a view that landlords will feel the strain, not only in the administrative burden of producing and serving the notices, but also in the effect they are likely to bring about. 

It has been suggested that larger landlords and managing agents will face a daunting task: having to comply with the provisions on a large scale. At the same time, smaller landlords and individuals may struggle to afford the initial cost of compliance.

There are concerns that the changes will bring about an increase in disputes in the Leasehold Valuation Tribunal.

There are also concerns that they will bring about a backlog of non-payment, whilst ongoing disputes are dealt with, during which time it would become increasingly difficult for landlords to provide a good standard of service to other tenants.

However, it is not necessarily the case that landlords will be worse off. In most cases, landlords will seek to recover the cost of producing the notices from the tenant under the lease. It would certainly be worthwhile checking the provisions of any current leases to see whether that is a possibility, and ensuring that it is provided for in any new leases. If the cost is recoverable, then it will not be landlords who will be out of pocket, but tenants who will have to pay for the privilege of knowing what their rights are. Only time will tell whether the benefit to tenants will be worth the increased cost.

Looking forward to better management?

These changes should be assessed in the overall context of regulation of service charges: designed, ultimately, to bring about better management of residential leasehold properties by increasing transparency between landlords and tenants and limiting the opportunity for fraud or abuse.

Other reforms which are yet to be introduced under the 2002 Act as part of that process include amendment to section 21 of the 1985 Act, which currently requires landlords to provide tenants with a written summary of costs for each accounting period. The amendment would require landlords to issue, in a prescribed format, regular statements of account within six months of the end of each accounting period. Every statement would set out not only the shared costs charged to the tenants as a whole, but also the individual positions of all the tenants in relation to service charges. The statement would also need to be certified by an accountant. These requirements would be modified in relation to local authority landlords and registered social landlords, so as to take account of accounting requirements particular to that sector, and to ensure that the relevant information is provided at a reasonable cost.

There are also plans to introduce requirements that service charge funds are kept in designated trust accounts, so that it would no longer be lawful to mix funds held in respect of different buildings, and to revise provisions relating to the holding of advance service charge payments.

These further proposed changes have, again, given rise to concerns over the increased practical and economic burden on landlords. It has been suggested that many landlords and managing agents are already using systems to ensure they account to their clients properly and segregate funds accurately, and that the reforms will force them to spend unnecessary time and money duplicating that work. It has been said that it would be inappropriate and time-consuming to show on statements of account the position of every individual tenant in relation to service charges. Most alarming, it has even been suggested that the over-burdening of landlords will result in many residential landlords moving out of the market altogether. However, the financial cost will again largely be borne by the tenants.

With the consultation period for the government's Consultation Paper on Regular Statements of Account and Designated Client Account having expired on 4 October 2007, it is unlikely to be too long before a decision is made as to whether those further reforms will be introduced. It may be some while longer, however, before we see whether the reforms improve the management of residential properties and whether it is worth the increased cost for tenants.

Perhaps there is scope for reconsidering the attractions of inclusive rents? Tenants are likely to be attracted by the certainty of outlay this would give them, while the landlord (who is, after all, best qualified by experience to calculate likely long-term expenditure levels, and best-placed to assume that risk), would at a stroke simplify their management and reduce overheads.