I suppose that, compared to the consequences of forfeiture, details of service charge statements may seem like a minor distraction. However, service charge disputes are at the heart of almost every LVT case and make the lives of countless flat owners a misery, especially as a large number of landlords still try it on, as it were.
Their abuses will soon be curbed again – although not nearly soon enough, given that the current measures, now out to consultation, should have been implemented years ago. In fact, I thought they had been and was taken aback to learn they that they had not.

The news is that leaseholders flats will, from sometime this autumn have the legal right to an annual statement showing how their service charges are spent. Moreover, they will also have the legal right to withhold service changes if they do not receive this statement. I must confess that I have been telling people for a long time to withhold service charges that have not been properly accounted for (this always proved very effective).
Many service charge payers already receive some accounting information, but there are no statutory minimum standards – and this means some landlords and managing agents get away with shoddy and sometimes dishonest accounting.

The new rules will help around a million leaseholders understand what they are being charged for in terms of repairs, maintenance, improvements, professional fees and staff costs. It will become much easier to challenge the reasonableness of service charges, while landlords and managing agents will be deterred from abusing the system and over-charging.

Any single item of expenditure accounting for 10 per cent of the total spend, such as lift maintenance, utility bills, cleaning and refuse collection costs, will need to be shown separately. Landlords also will need to show balances of service charge accounts at the beginning and end of each year.

Only reasonable

“People should be able to see what they are paying for and a yearly statement of account will create transparency and ensure that tenants receive information about service charges. Tenants will be better able to check that they are receiving value for money and see whether sums paid towards the upkeep of their property are being used for the right purpose.”

This is all so nice and sensible that I can’t help but wonder why it has taken 10 years to get round to doing it.
Perhaps the answer lies in the government’s stated reluctance to, in its own words, “impose disproportionate costs on landlords”. To this end, the proposals will allow landlords the flexibility to provide information in a form that is more relevant to their accounting process.

Also to this end, changes will allow landlords to retain the flexibility to hold service charges for more than one separate group of service charge payers in the same account. How this will help the leaseholders is hard to see.
I can only imagine how the new rules will impress Noelle Rawe, the owner of a modest basement flat, one of 35 flats in a building on Knightsbridge, central London. In 2001 each flat was sent a demand for £14,400 for major works on the roof and communal areas of the building. Under the 2002 Act, Noelle and fellow leaseholders had a right to see a full description of the works to be carried out and a breakdown of the costs. They also had the right to require the landlord to obtain an estimate from a contractor of their choice, who might do it for less.

Noelle suspected that much of the money being demanded was going to be spent not on the works stated, but to construct two extra flats on the roof, solely to the benefit of the freeholder. She took the case to the LVT which, in 2003, ruled in the leaseholders’ favour. It concluded that some of the proposed works had not been costed as they should have been, that the estimates for refurbishing the lift seemed excessive and that other items should have been met from an existing contingency fund, not from leaseholders. It reduced the bills from £14,000 to £6,300 each.

Threatening residents

Her case, and many others, serve as a warning of how the odds are still in favour of landlords, especially the unscrupulous ones who are prepared to take small risks to intimidate their leaseholders and are rarely punished for their activities.

On the other hand, the new rules could improve the lot of flat owners whose landlords (including management companies of leaseholders who grouped together to buy their freehold) are incompetent and disorganised rather than deliberately bad. Spelling out exactly what needs to be stated, and how, should make it easier for them to do their jobs.

Take the shared-freehold block in Harrow, north London, where one leaseholder demanded to see what he was getting in return for his £1,400 a year service charges. It took him six months to see detailed accounts of the freehold company, even though his neighbours were the directors. He had to threaten the directors with a legal letter, warning them that a failure to disclose the accounts was an offence punishable by a fine of up to £2,500.
When the accounts were finally made available, it transpired that three of the directors had used service charge money that they spent on their own flats and private gardens – strictly illegal. In future, leaseholders will simply announce a service charges strike: no money until and unless they see exactly what they’re paying for.

All the changes now out to consultation were included on the Commonhold and Leasehold Reform Act 2002. I have yet to hear a convincing argument – or any argument for that matter – for the five-year delay.

Copies of the consultation paper Commonhold and Leasehold Reform Act 2002 – A Consultation Paper on Regular Statements of Account and Designated Client Accounts can be obtained from Communities and Local Government Publications, PO Box 236, Wetherby, LS23 7NB. Tel: 0870 1226 236. Fax: 0870 1226 237. Text Phone: 0870 1207 405.  Email communities@twoten.press.net
The paper is also available on the Communities and Local Government website at www.communities.gov.uk. The closing date for the consultation is October 4th. Do make your views known.