Service Charges Current Issues Mike Edmunds : Lambeth Living
Key areas which lead to financial loss There have been some high profile cases recently, where large financial losses have occurred for landlords. Main areas are:- Serving notices Billing with terms of lease. Audits, not being carried out as per lease. Certification of costs Issuing account for capital works outside lease accounts cycle Rolling up accounts, not having correct invoice periods
Key areas which lead to financial loss Section 20B Management cost Section 20( QLTAS & Frame works) Confusion over QLTA S and tenant variable service charges. Management of Lvt & legal cases, Understanding jurisdiction from county court. Waiving the right to forfeit the lease.
Serving Notices Summary of Rights and Obligations Section 21B of the Landlord and Tenant Act 1985 (inserted by the Commonhold and Leasehold Reform Act 2002) and the content and format of the summary for England is prescribed by the Service Charges (Summary of Rights and Obligations, and Transitional Provisions) (England) Regulations 2007. LRX/81/2010Tingdene Holiday Parks Limited v. Cox and others, Upper tribunal. Statement must accompany demand, serving missing document does NOT comply. If no demand made then 20b will apply. Judges comment I do not see how a summary sent some 11 days after the demand to which it was intended to relate could be said to have accompanied the demand. It manifestly did not accompany it, and I can see no basis for an argument that there was compliance with Section 21B."
Serving Notices: Summary of Rights and Obligations LRX/110/2010( Hearing 04 July 2011) In Amourgam v. Valepark Properties Limited the Tribunal decided that all demands made after 1st October 2007 should be accompanied by the required summary even if it related to items of expenditure incurred before 1st October 2007.The one exception is where it is just a chasing demand in respect of service charges where the original demand was sent before 1st October 2007
Billing with lease. Lease: Fundamental Rules What does it say in the lease? Is it understood? Do you follow this consistently? Nothing in statute requires it to be fair, but charges/costs from which calculation is made must be reasonable Does the lease reqiure an annual audit of the service charges. Read the terms of certification carefully.
Legislation : Leaseholders Rights Section 21 of the Landlord & Tenant Act 1985 Under Section 21 of the Landlord & Tenant Act 1985 (as amended), a tenant may require the landlord in writing to supply him with a written summary of the costs incurred in the previous 12 months accounting period (where service charge accounts are made up for periods of twelve months) ending not later than the date of the request. This right does not extend to requiring the landlord to provide written summaries in respect of accounting periods prior to the last period. Provide information within one month of request,or within 6 months of the end of accounting period, whichever is latter
Section 21 of the Landlord & Tenant Act 1985 (as amended) The written summary must:- Identify any costs which relate to grant aided funding. Set out the costs in a way showing how they have been or will be reflected in demands for service charges. Summarise any costs for which no invoice was received within the 12 month period. Summarise costs for which an invoice was received but no payment was made within the 12 month period. Summarise any costs for which an invoice was received and payment was made in the 12 month period. Specify the total service charge payment already paid to the end of the appropriate 12 month period. Contain where more than 4 leaseholders. a certificate by a qualified accountant that the summary is fair, supporting accounts, receipts and other documentation.
Certification of Accounts If the service charges are payable by the residents of more than four dwellings. S28 of the Landlord and Tenant Act 1985 currently requires that the summary of accounts requested under s21 must be certified by a qualified accountant.
Certification of Accounts: Qualified Accountant The meaning of qualified accountant is contained in s28 of the 1985 Act and requires that for all landlords other than local authorities, the qualified accountant must be independent of the landlord Local authorities may rely upon a suitably qualified accountant employed by them. It is common practice for a registered social landlord to use their external auditors for this purpose.
Inspection of Accounts Under s22 of the Landlord and Tenant Act 1985, within six months of receiving the summary of relevant costs, a leaseholder or secretary of a recognised residents association can ask to be given reasonable facilities to inspect, or make copies of, all the accounts, receipts and other documentation that support the summary. This request must be in writing, and the landlord must make the facilities available within 21 days. There must be no direct charge for inspecting the documentation, but the costs incurred in making the facilities available can be treated as a management cost andincluded in the service charge. Leaseholders should be allowed to take, or be sent, copies of any item and a reasonable charge can be made for that.
The right to an independent management audit Section 76 of the Leasehold Reform, Housing and Urban Development Act 1993 Gives leaseholders the right to carry out a management audit. The purpose of the audit is to examine whether or not the landlord is managing in an efficient and effective way and whether service charges are being properly administered. This right applies where: There are more than two leaseholders in a premises More than two thirds of the leaseholders want an audit, or one leaseholder where there are only two involved
Section 76 of the Leasehold Reform, Housing and Urban Development Act 1993 The auditor can require the landlord to: Supply a summary of service charge costs for the most recent period unders21 of the Landlord & Tenant Act 1985 Allow inspection of supporting accounts, receipts and documentation and allow facilities for copying. In order to exercise the right to the management audit, Leaseholders must appoint, at their own expense, an auditor who is a qualified accountant, valuer or surveyor and who is not one of the leaseholders concerned; and Serve a notice under section 80 of the 1993 Act signed by all the leaseholders who want the audit. The notice must give the names and addresses of the leaseholders and the auditor, and specify the documents the auditor wishes to see. If an inspection is carried out, a date should be proposed by the leaseholders or their auditor of between one and two months from the date of service of the notice.
Requests for information held by a superior landlord In such cases leaseholders or the secretary of a recognised residents association can request a summary of relevant costs and inspections of documents from their immediate landlord or that landlord s managing agent in accordance with s23 of the Landlord and Tenant Act 1985.
Failure to comply with requests for cost summary or inspection If a landlord fails to comply with requests for a summary of costs or does not provide facilities for inspecting accounts, it is a criminal offence under s25 of the Landlord and Tenant Act 1985 for which a fine can be levied. Whilst local authorities are exempt from this criminal offence, housing associations are not. It is vital to have procedures to record requests from leaseholders for cost information for monitoring responses.
Section 21 Certification Auditing & Certifying accounts Accounts often state:- In accordance with sections 18-30 of the Landlord and Tenant Act 1985, this statement is certified as a fair summary of the Management and Maintenance costs for your block from our accounts.. Have you actually complied???
Types of Audit:- a) Internal audit procedure using internal procedure, signed off under Section 21 by using authorities own accountant. Almo may get council to sign off. RSL it will not comply with Section 21. b) Agreed Upon Procedures External Audit. Carried out by external qualified auditor. Limited scope, doesn't look at payments, transactions. Primarily based on internal management information and will be carried out on the assumption that information provided by the organisation is reliable and, in all material respects, accurate and complete. To comply with section 21 local authority accountant would have to sign off. No good for RSL wanting to comply with section 21.
Types of Audit:- c) Full external audit to comply with section 21. Practice note 14 the Audit of Registered Landlords lays out responsibilities, opinions & wording of section 21 compliant audit. Approved Codes of Practice (NHF/RICS/ARMA) NB Cost implications. NB Check lease requirements?
LVT& Upper Tribunal Cases Jurisdiction: Can the LVT Raise Issues? LRX-159-2007 Swan lane Estates ltd v Woods & Others: Lands Tribunal. The LVT was not required to sit in silence and find the applicants liable for service charges when the LVT had good reason to query as to whether the charges were legally due. NB Application made under application under S.27A of the Landlord and Tenant Act 1985 as amended ( the Act ) for a determination whether a service charge is payable. Cases flipped from county court where the court has determined certain matters LRX/102/2010, July 2011, John Lennon v Ground rents (Regisport) Ltd. The provisions relating to the transfer of proceedings from a County Court to an LVT are contained in paragraph 3 of Schedule 12 to the 2002 Act Items for determination are limited to court order.
Vexatious civil proceedings Record number of applications by one leaseholder:- In Attorney General v Singer & Singer, Divisional Court, January 24, 2012 the Attorney General sought a civil proceedings order, under s.42, Senior Courts Act 1981, against Mr & Mrs Singer. The effect of such an order is that no civil proceedings or civil applications may be made by the person subject to the order without the leave of the High Court. Leaseholder made more than 30 applications to the LVT, the county and magistrates courts arising from the service charge. The Divisional Court noted, while the Singers had had limited success in the LVT, they had none in the county or magistrates courts and the applications rarely had any basis in law, tended to repeat arguments that already been unsuccessful and were often branded as being without merit. The appeals they pursued were also unsuccessful. The LVT, on their most recent application, had decided that the application was an abuse of process and vexatious. Not only that, Mr Singer had been prosecuted for harassment.
Compliance with Lease 1.Barrington-V-Sloane Properties(26 February 2007) -Service charge certificate not final, Lands Tribunal. Lease provided for annual certification by the landlords accountant. Major works spanned across service charge years 2000 to 2003. Landlords accountant apportioned and certified the costs of works for each year on the basis of an estimate of the value of works carried out in that year.. Tenant claimed certificate not binding as they didn t take account of costs incurred. in each year. Tribunal agreed certificate was not binding as the accountant had gone outside limits of decision making authority and lease.
2.Leonora Investment Company Limited v Mott McDonald Limited (2008) EWCA Civ 857(Court of appeal ) The leases provided that the landlord would both send to the tenant: notice in writing of the estimate of anticipated service charges applicable for the year ahead, and prepare and send to the tenant a statement of actual service charges for each service charge year, as soon as practicable, after the end of the year. The landlord took the view that the costs of certain works were regarded as outside the normal service costs. The landlord therefore intended to invoice for these costs separately and did not feature them in the demand. The works were carried out in December 2002 and the landlord simply sent an invoice in January 2003. The invoice was not paid.
3.RITA AKORITA v MARINA HEIGHTS LIMITED Upper tribunallrx/134/2009 Lease required that before anything became payable by way of a final service charge it was necessary that the amount to be paid had been properly certified by the Lessor s Surveyor. Lessee contended that no such certificate from the Lessor s surveyor has been issued in respect of various years. The Tribunal concluded that obtaining a Surveyor s Certificate was a condition precedent Conclusion: Where a lease provides for the amount payable to be certified by the landlord s surveyor or accountant, the issue of a valid certificate will usually be a condition precedent to the tenant s liability to pay Are you billing with the terms of your lease s?? CHECK
Redrow Homes (Midlands) Ltd. v. Hothi and others [2011] UKUT 268 (LC): Delays in issuing accounts The leases provided for a balancing charge at the end of the financial year following the supply of audited service charge accounts with a certificate signed by the auditors. The accounts had not been calculated. The Tribunal decided that the tenants lease did include an implied term that service charge balances must be calculated within a reasonable time and that the landlord was in breach of this obligation. However the breach did not mean that the tenant was relieved from paying. Remedies available to the tenant included: 1.Seeking a court order for the accounts to be produced. 2.Aplication to the LVT for a determination of the service charge payable if they consider that the adjustment calculation has been unreasonably delayed.
Redrow Homes (Midlands) Ltd v Hothi Contract law to consider:- Where no time for performance is fixed by the contract the law implies an undertaking by each party to perform his part of the contract within a time which is reasonable having regard to the circumstances of the case The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence, except in one of the following cases: (1) the parties expressly stipulate that conditions as to time must be strictly compiled with; or (2) the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered of the essence; or (3) a party that has been subjected to unreasonable delay gives notice to the party in default making time of the essence.
18 months of uncertainty: where we are now with S20B? The Evolving case law saga, has it finally concluded??
What the legislation says: 20B Limitation service charges: time limit on making demands (1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection(2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred
What the legislation says (2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge
Compliance with Section 20B Section 20B: 1 Westminster City Council v BJ Hammond and others [1995] NO/CL5/21431 The court held that for the purposes of s20b (1) the relevant costs are incurred when the obligation to make each payment comes into existence. The court also held that in order to constitute proper notice under s20b (2) the notice had to give similar information to an actual demand - i.e.: The fact that relevant costs had been incurred (in this case the amount of the interim payments which had become payable up to that date); the notice would need to detail the dates between which the costs were uncured. The nature of the works and reason for the expenditure; The amount of the costs incurred and the proportion attributable to the individual leasehold and; That such amount would be demanded at some stage in the future. In summary this case set out what a notice should contain,
Where it doesn t apply Where payments on account do not exceed actual expenditure, so that no further is either needed or made: Gilje v Charlegrove Securities Ltd [2002] 1 EGLR 41; [2003] 3 EGLR 9; [2004] HLR 1. Where costs are yet to be incurred; Abdel- Malek
Section 20B:2 Gilje v Charlegrove Securities Ltd & (2003) EWHC 1284 (Ch); (2004) 1 All ER 91 Accounts showed that the amounts expended and claimed by way of service charge were less than the interim quarterly service charge demands for those years. The claimants argued that by virtue of s.20b Landlord & Tenant Act 1985, the defendants were not entitled to recover by way of service charge any expenditure in those accounts as the expenditure had been incurred more than 18 months previously. The court concluded that s.20b LTA 1985 had no application where (a) payments on account are made to the lessor in respect of service charges; (b) the actual expenditure of the lessor does not exceed the payments on account; and (c) no request by the lessor for any further payment by the tenant needs to be or is in fact made. Submission of the final accounts for the two years in October 2001 was not a demand for service charges.
Gilje v Charlegrove Securities Ltd Important to note judges comments: so far as discernible, the policy behind section 20B of the Act is that the tenant should not be faced with a bill for expenditure, of which he or she was not sufficiently warned to set aside provision. It is not directed at preventing the lessor from recovering any expenditure on matters, and to the extent, of which there was adequate prior notice. Etherton J at [27]
LBI v Abdel-Malek LRX/90/2006 Staged payments 17 Sept; 14 Oct; 27 Nov 2003 Letter 28 November 2003 Estimated invoice: costs in S20 Notice Accepted no demand made for cost of works LVT Resp not shown costs in S20B incurred Lands Tribunal Reqd to show costs incurred not to be incurred
Jean-Paul v London Borough of Southwark Appeal to Upper Tribunal (Lands Chamber) Case Number: LRXl133/2009, 09/May/2011, George Bartlett QC, LVT Demands not made in accordance with the lease Would be payable once valid demands made Lands Tribunal Letters sent chasing payment of estimated charge in S20 Notice satisfied S20B(2) Upheld re: letters, even though an overstatement Costs only incurred when payment is made
Brent London Borough Council v Shulem B Association Ltd [2011] EWHC 1663 (Ch) CHANCERY DIVISION MR JUSTICE MORGAN Section 20B: 5 Appeal against the decision of Judge Cowell in the Central London County Court. Raises issues about the degree of formality which is required as to a lessor's demand. Mr Morgan stated that decisions in the County Court and in various tribunals have not been consistent. Old lease required billing on actual costs only. The Lessor Brent claimed to have issued two demands, the case is very much about how these demands complied or not with the legislation. The Lessee claimed the first was not a valid demand.
Brent London Borough Council v Shulem B: Case concluded S20B(1): requires a valid demand for payment of the service charge under the relevant contractual provisions : para 53 S20B(2): para. 65 Must state a figure for the costs which have been incurred by the lessor Will be valid even if the figure in a later demand is less Must tell the lessee that he will subsequently be required under the terms of his lease to contribute to those costs by the payment of a service charge Not necessary to tell the lessee the proportion nor what the demand will be
Brent London Borough Council v Shulem B: Case concluded if the lessor knows that it has incurred costs but it is unable to state with precision what the amount of those costs was [i]t should specify a figure for costs which the lessor is content to have as a limit on the cost ultimately recoverable a lessor can err on the side of caution and include a figure which it feels will suffice to enable it to recover in due course its actual costs, when all uncertainty has been removed even if it knows that the costs may turn out to be somewhat less : para 58
Brent London Borough Council v Shulem B: Case concluded if the lessor does operate subsection (2), time is put at large. There is no further requirement that the lessor s demand for payment of the service charge is within 18 months of the notice given under subsection (2). Further, once a demand for payment of the service charge is given and the lessee comes under a liability to pay it, then the limitation period under the Limitation Act 1980 applies : para. 60
Section 20 Risks QLTA s did the consultation include all the future costs in the schedule of rates. Frame work consortiums can conflict with the regulations Are you managing these two issues.? Southall v Tiwari LRX/962010/June 2011 Leaseholders who wish to make comments upon proposed major works should ensure that observations are properly submitted during the Section 20 consultation process.
Manage your risks Billing outside lease Not complying with lease Section 20B Poor accounting systems and invoice retention. New performance contracts with shared profits on savings and performance relayed payments Tenants service charges
Mike Edmunds Head of Home Ownership Services Lambeth Living medmunds@lambethliving.org.uk