Many leaseholders of properties bought under the Right to Buy from a Council or held under a lease from a housing association have been facing very substantial service charges for works programmes carried out on blocks and estates, often with funding for some works provided from ‘Decent Homes’ funding. The Government has now brought in directions on a mandatory cap on service charges for future works, but only in very limited circumstances.

The “Social landlords reduction of service charges: mandatory and discretionary directions 2014“ came into force on 12 August 2014.

The upshot of the mandatory directions is that a social landlord which undertakes “repair, maintenance or improvement” wholly or partly funded by

  1. the Decent Homes Backlog Funding provided through the 2013 Spending Round; and
  2. any other assistance for the specific purpose of carrying out works of repair, maintenance or improvement provided by—
    1. any Secretary of State; or
    2. the Homes and Communities Agency.

is limited in the amount of service charge or major works charge it can levy on its leaseholders for the work.

The limit is as follows:

such service charges and any services charges which the social landlord proposes subsequently to make for costs incurred in respect of such works in any period of five years [shall not] exceed a total sum (“the total sum”) of—

  1. £15 000 for a dwelling situated within a London authority; and
  2. £10 000 for a dwelling not situated within a London authority;

On some estate wide ‘decent homes’ major works programmes, that cap could amount to a very significant sum for the landlord to have to find. Major works charges of £30,000 or £40,000 are not uncommon. If capped at £15,000 and spread over 100 leaseholders, the difference could be £2 million or so.

To qualify for the cap on service charges, a leaseholder must be an individual who occupies the property as their only or principal home. This would not include a buy-to-let property or the ‘family’ home that the kids now live in alone. Note also that the leaseholder has to have to have been the qualifying lessee when the works were undertaken, so someone who buys the lease after the works but before the final works charge would not benefit – something to watch out for when purchasing.

The reduction will only have effect for leaseholders in these specific circumstances. For leaseholders of social landlords in London, this is likely to mean ‘decent homes’ funding in 2015/16, as this is when the funds from the 2013 spending round  will come into play. It is not at all clear how leaseholders are supposed to work out which funding round any ‘Decent Homes’ funding being used by the landlord has come from, so they may have to rely on the landlord in that respect.

Out of London, it would seem that any funding provided by the Homes and Communities Agency would be caught, if provided after 12 August 2014.

The Government also released Discretionary Reduction Directions.

These give a social landlord a power to waive or reduce service charges, having regard to the following criteria:

  1. any estimate of the costs of the works of repair, maintenance or improvement notified to the lessee or any predecessor in title before the purchase of the lease of the dwelling;
  2. whether the purchase price paid by the lessee took account of the costs of the works of repair, maintenance or improvement;
  3. any benefit which the social landlord considers the lessee has received or will receive as a result of the works of repair, maintenance or improvement, including an increase in the value of the lease (including the reduction of a negative value of the lease), an increase in the energy efficiency of the dwelling, an improvement in the security of the dwelling and an improvement in services or facilities;
  4. whether, upon receipt of an application by a lessee, a social landlord, having regard to the criteria set out in paragraph 4, considers that the lessee would suffer exceptional hardship in paying the service charge; and
  5. any other circumstance of the lessee which the social landlord considers relevant.

Additionally, in cases of exceptional hardship, where the leaseholder has made an application, the landlord hold have regard to:

  1. whether the dwelling is the lessee’s only or principal home;
  2. the total amount of the service charges paid or are payable by the lessee since the purchase of the lease of the dwelling;
  3. the amount of the service charge payable in the year in which the lessee applies for the reduction because of exceptional hardship;
  4. the financial resources available to the lessee;
  5. the ability of the lessee to raise funds to pay the service charge;
  6. the ability of the lessee to pay the service charge if the landlord extended the period for payment; and
  7. any other relevant consideration.

These powers can be applied retrospectively to charges already made and/or paid.

But these are discretionary powers. The landlord therefore has to consider exercising them, if requested, but does not have to grant a waiver or reduction.