Service Charges: Unreasonable Laws

shacaction

2 years ago

The Landlord and Tenant Act 1985 says that service charges must be reasonably incurred, and incurred on services or works completed to a reasonable standard.

Apart from the fact that certain parts of the legislation apply only to leaseholders but not full renters, and that there is also differentiation in the protections that apply depending on whether charges are fixed or variable, there is another major problem with the provisions.

The problem is that the word ‘reasonable’ is hopelessly subjective, and its double use in a single clause negates any protection the law might have offered tenants and residents.

There is no legislation, or even statutory guidance, which sets out a clear list of services or works that a landlord can charge for. Nor is there clarity about what the rental payment covers.

SHAC therefore provides the following opinion:

Charges for basic landlord duties

This includes compliance with statutory fire safety measures and the provision of safety equipment such as alarms and extinguishers.

Carrying out safety checks on gas, water, and electricity supply and equipment should also fall under the heading of basic health and safety activity. This should be covered by rent.

The lease says no

If a resident’s lease stipulates that the landlord will cover certain charges, they should not be included in service charges bills. All too often, it would seem that there is no mechanism in place for letting the service charge team know about this.

Making good

If the landlord or one of their sub-contractors has botched a repair job, the cost of any attempts to put it right should not be passed on to tenants and residents. It regularly is.

Fees as a percentage of cost

The Act refers to costs being applicable where they are incurred on the provision of services or the carrying out of works. By definition, just adding a percentage (for example a 15% administrative or management fee) does not actually reflect the true cost to the landlord of administering or managing services.

Indeed, it creates a perverse incentive to procure expensive goods or services. The higher the cost of services provided to tenants and residents, the more the landlord receives as a fee based on a percentage. A more expensive service does not automatically cost the landlord more to run.

Services provided by the council

This includes waste removal, the maintenance of street lighting, and public parks. We have seen all of these included in service charge statements, even though the housing association doesn’t provide them. The costs are covered by the Council Tax paid by tenants and residents.

Supporting private enterprise

Sometimes housing associations sub-let part of an estate to a business such as a nursery or shop, or leases out the car park. In this case, the cost of maintaining and servicing the premises or car park should not be borne by tenants and residents. The landlord is already recouping the money from the business. Arguably, the landlord should be returning any profits to the tenants and residents.

Services not provided

Our review of service charge statements shared with SHAC show some blindingly obvious fraudulent charges. Particularly prevalent examples are maintenance costs for non-existent lifts, salaries for invisible concierges, and work on communal gardens or spaces when the property opens straight onto a street.

Complaints to landlords about such charges can drag on for months, and the courts are equally slow and difficult. Michael Gove, Secretary of State for Housing, and the Housing Ombudsman have both periodically named and shamed landlords over service charge abuse, as have the press. None have made much impact. It would seem that only jail time for guilty executives will start to change things.

Double accounting as cross-subsidy

The allocation of block and estate costs should be based on either a formula dividing the cost by the total number of flats, or a sliding scale taking account of the size of the flat. Instead, where the estate includes some whose tenancies are rent-only, housing associations are increasingly choosing to load block and estate charges onto those paying a separate service charge.

Some suggest that the landlord is making service charge-paying tenants and residents subsidise non-charge paying tenants. In fact, it is double accounting. Costs for non-charge paying tenants are recovered through rents.

No Excuses

SHAC has met with the executives of some of the largest housing associations in the UK. Discussions on service charge abuse are always on the agenda. At such meetings we are told that the housing association spends more on service charges than they recoup from tenants and residents.

To support this statement, housing executives point to the Global Accounts published by the Regulator of Social Housing; accounts that the housing associations have submitted to the Regulator. We know these accounts to be a work of fiction, riddled as they are with inaccuracies.

We also hear this line parroted by regulatory, governmental, and housing umbrella organisations like the National Housing Federation. The sector has clearly utilised its propaganda machine effectively.

Kate Henderson (CEO) and David Orr (Chair) of the NHF have done an effective job as apologists for their housing association members in relation to the service charge racket

We counter that given the staggering level of inaccuracy in the service charge statements sent to tenants and residents, housing associations and their umbrella bodies cannot rely on these accounts as evidence of spend.

This pleading also fails to take into account the income landlords receive through rent. This also covers a proportion of the cost of service delivery.

No Small Errors

When challenged over inaccuracy, executives tell us that since service charge accounts are large and complex, a few errors inevitably creep in. Yet the inaccuracies SHAC witnesses are not errors. They almost exclusively favour the landlord.

Genuine errors should fall fairly equally between overcharging and undercharging. Research by SHAC and Find Others however identified more than £2 million in overcharging across just 27 service charge accounts, and negligible undercharging.

While it is true that service charge accounts are large and complex, the same could be said of the association’s corporate accounts, yet they manage to get these right because their financial investors (and the Regulator) scrutinise corporate accounts and would not accept the level of inaccuracy that is found in service charges.

The banking sector and many other businesses likewise have to manage large, complex accounts, but we expect (and generally receive) a high degree of precision in our bank statement.

The laws governing what landlords can and cannot do were written by the landlord class. Around one third of MPs are landlords compared to around 3% in the general population. Inevitably, the laws that the MPs write favour the landlord.

Demanding Better

SHAC members are now demanding redress. We call on government to introduce new legislation providing two clear lists to differentiate the items covered by rent and those which can be charged separately.

New legislation must cover all equally. There is no reasonable explanation for giving leaseholders but not tenants the statutory right to view a breakdown of charges and invoices. Nor is it valid to apply different protections depending on whether charges are fixed or variable, especially since both terms are ill-defined.

Government must also provide faster and better access to justice for those who end up in dispute with their landlords, not just because the charges are unreasonable, but because they are often blatantly fallacious.

In the meantime, SHAC will continue to support the growing trend of tenants and residents withholding payment of disputed service charges.

25 August 2023