Service charge Billing

SC Invoice

Why no transparency, huh?

The Government decided in summer 2010 that it would not introduce significant protections designed into the 2002 Commonhold and Leasehold Reform Act relating to the accounting for lessees’ service charge monies.

It seems the lucrative £leasehold caper refuses to be fettered with even basic financial transparency commonly required in other financial services. Instead, the ICAEW allegedly introduced a ‘binding’ code of practice (Tech 03/11) for accounting for service charges, but this code does not ensure billing transparency for those required to pay all the bills.

The truly cynical aspect of the UK’s residential £leasehold caper is how it is designed for leasehold home ‘owners’ to pay all the costs but have no effective right to transparency in their bills or accounts.

Instead there are toothless legal rights that on face value claim to ensure leaseholders are entitled to information. Only problem is nobody enforces these basic ‘rights’ for the leaseholders and the industry is well aware of this. Not the prosecuting authorities. And not even the tribunals or Court of Appeal. The £leasehold caper is free to play.

In Morshead Mansions Ltd and Mr Di Marco, A3/2013/1718 [2014] EWCA Civ 9 the leaseholder started with a modest ambition seeking:

  • Summaries of accounts to be issued

  • s22 facility to inspect accounts receipts and other documents

For such modest aims the leaseholder ended up at the court of Appeal. You could not make it up. The Court of Appeal carefully considered the “statutory landscape” (which included a criminal offence) and finally concluded:

“…it is unlikely that Parliament also intended the landlord (and its directors) to be potentially liable, at the suit of a private individual, to a fine of an unlimited amount or, in an extreme case, up to two years imprisonment as a sanction for failing to comply with an injunction.

Where do you turn next? The Supreme Court? Just to get access to financial information? We are not talking about a mobile phone monthly subscription, but thousands of pounds.

Parliament in the past focused on matters such as transparent credit card billing and utility billing, yet still permits freehold landlords and their agents to bill for service charges without any transparency requirements, other than needing to identify the freeholder (s47 and s48 L&T Act 1987) and provide a summary of rights.

Freeholders and their agents currently can issue stand-alone invoices with no running balance of b/fwd account or payments made, as is standard in utility bills and credit cards. This allows the freeholder/agent without warning or further proof to allege arrears exist, often at the point of sale or after sale when the seller or buyer has little chance to prove a negative, i.e. that a previous bill was not issued.

The RICS Code, 3rd Edition includes this:

7.8 You should provide regular statements of service charge payments, in accordance with the frequency set out in the lease, to all those who are making payments.”

If only grammatically, 7.8 reads to provide individual statements of the payments made by the leaseholders. Notice it says “should” and not “must”. The only time in 20 years I have seen such a statement of charges and payments was after an agent departed due to our RTM takeover and had to close their records to issue final bills.

The problem with the relevant practice codes (RICs and ICAEW) is the liberal use of “should” instead of “must“. Agents and freeholders can drive a team of horses between the gap. They are treated as “advisory” and ignored, and I am not aware of any agent or landlord being penalised for failing to follow the codes.

A simple reform would be to require service charge and ground rent invoice demands to include a b/fwd balance showing the previous invoice amount due and any payments made since that invoice, by date of receipt.

There is no reason with modern accounting/book keeping software for freeholders/agents not to be able, at a mouse click, to generate a running balance invoice each half year, or a personal statement of account (not to be confused with the year end summary accrual accounts) given modern access to live downloads of bank statements per ICAEW best practice1. Their accounting system must have an Accounts Receivable asset account for invoicing and receipts and an Accounts Payable liability account for vendor bills and payments, or it will not work.

Per the lease, a freeholder/agent must either provide a year end invoice (easier to be complete as to costs incurred) or more commonly an advance estimate of charge. It is the advance estimate that counts as the recoverable and actionable debt, as clarified by the Upper Tribunal (Lands Chamber)2 in 2017.

There is no reasonable excuse for the freeholder /agent not to have an up to date statement of account available at a few mouse clicks for each leaseholder (customer) in its book keeping system

As with any billing, the most recent payment may not be captured within the current bill but would appear on the next one. If after the year end summary accounts a deficit recoverable arises, a new invoice would be issued in line with the lease, again with a running balance.

At present, the absence of running balances is one of the simplest exploitations against leaseholders when they go to a tribunal only to find the freeholder or agent produces copies of alleged contemporaneously issued unpaid stand-alone invoices and find the tribunal accepts these as fact.

The leaseholder cannot prove a negative and has no running balance statement to prove their history of charges and payments is up to date.

Remember that the 2002 Act contained simple remedies. These were later dropped.

In whose interests?

And why?

 

1See ICAEW Tech 03/11 “RESIDENTIAL SERVICE CHARGE ACCOUNTS- 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” Appendix A (para 11.)

 

2Charles Knapper and others (members of the Point Curlew Tenants’ Association) v (1) Martin Francis (2) Rebekah Francis [2017] UKUT 003 (LC)

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