Service charges – what’s the fuss?

Oilman

The first rule of the £leasehold caper is the freeholder must pay nothing.

For the freeholder to pay would be outrageous. The freeholder may buy the freehold for less than 2 to 5% of the total value of the land and buildings and thereby own the reversion interest in the buildings – that will do nicely – but they must never be expected to pay for anything, the courts would howl with derision and dismay. How unfair!

Given the nature of leasehold, there will be communal costs. Things like building insurances, building maintenance, grounds maintenance, cleaning etc. There may be old boundaries that have seen no repairs for a hundred years prior to the infill leasehold development. Never mind, the lease will make clear that the leaseholders have to pay an equal apportionment of all the costs, old boundary and all.

So far, so simple.

The problem is the practice. This is where it can turn very complicated very quickly.

In the world outside leasehold, sensible landlords of property and ‘real’ homeowners spend on essentials and seek out the best deal – not the cheapest but the best. People do not as a rule throw their money away.

In leasehold normal rules of prudence and reasonableness do not apply. The goal is often to make a profit. This is possible because leaseholders are captive consumers. The lease contract makes sure of this. They pay all the bills.

Did I hear you say there surely must be codes of practice? Laws even?

As to codes I can offer two:

1. The RICs Code of Practice – Service charge residential management Code and additional advice to landlords, leaseholders and agents. Now in its 3rd edition. It is a thorough piece of work. Let the code Foreward speak for itself:

“Whilst the Secretary of State has approved this Code under section 87(7) of the Leasehold Reform, Housing and Urban Development Act 1993 (excluding the section ‘RICS Guidance Notes’ on page 7), approval of the Code does not have the effect of making a breach of the Code a criminal offence or create civil liability. (See section 24 of the Landlord and Tenant Act 1987, as amended by section 85 of the Housing Act 1996.)

In this Code the word ‘must’ is used to indicate a legal obligation. Breaches could lead to either civil and/or criminal action. The word ‘should’ is used to indicate best practice…”

In layman terms, the code is advisory and full of “shoulds”. You might find yourself referring to the Code at a tribunal only to be told, “We have to operate in the real world”.

2. ICAEW tech 03/11 – Guidance on accounting and reporting in relation to service charge accounts for residential properties on which variable service charges are paid in accordance with a lease or tenancy agreement. Another excellent code all about service charge accounting. Let the Foreword speak for itself:

“There is no statutory requirement for the routine preparation and content of service charge accounts…Although the fact that the Code is backed by Statutory Instrument (SI 2009/512) in England does not have the effect of making a breach of the Code a criminal offence or create civil liability, the contents of the Code may be used in evidence and taken into account, if relevant, in court and tribunal proceedings.”

What this means is that the Tech 03/11 best practice is spawned from the RICs code and creates no liability for breach. I once referred to the ICAEW Tech 03/11 at a tribunal to be told it was ‘merely guidance’.

And there is the rub. The £leasehold caper is a wild west of ineffective legal protection and no-come-back codes full of ‘should’ not ‘must’. The simple concept of maintaining premises long ago turned into a cynical very nice little earner. Even apparently clear cut legal protections can evaporate when tested in court. It is as if the law makers hate imposing on landlords and their poor managing agents.

Leaseholders do have a right to apply to a tribunal to test the reasonableness of a service charge. Should they do so they may well find themselves facing the same industry insiders acting as ‘judge’ who have an unusual view of the term ‘reasonable’. It is a very stretchable term in leasehold. Even if the leaseholder(s) win their argument, they can arrive home to find the freeholder has charged them for its barrister fees under the contract.

A cynic might conclude that freeholders and agents rely on the above catch 22. Even if that is over cynical, the law actually expressly helps managing agents avoid the minimum need to be transparent. The law almost encourages agents to become holding companies. This is where the same folk work from the same building for the same directors who award themselves contracts under their different hats.

Once upon a time managing agents could not charge more than 15% of the total service charge. Somewhere along the way this was dropped so that they could charge a ‘reasonable’ unit fee. It is now possible to pay more to the managing agent than the cost of all services managed. The basic unit fee is simply the loss leader. Agents make more profit from add-on fees such as sales packs, admin fees, and major works supervision.

It is a mighty lucrative caper, leasehold. And the beauty of it is, nothing is illegal. Well, there are technically a few criminal offences, but there is little evidence these are actually prosecuted. None I have stumbled on anyway. Please let me know if you know of a case.

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