Service Charge Amendments

Amendments: 78C, 78D, 78E, 78F, 78G, 78H, 80A, 80B

This group of amendments are wholly in line with existing provisions in the Bill to increase the transparency of costs passed on to leaseholders and to protect them from exploitative behaviour by landlords.

In this group there are amendments to:

  • define when a landlord incurs costs to prevent manipulation of the 18 month rule under which costs incurred before then cannot be charged unless leaseholders have been given notice;
  • a new tighter test of “value for money” to replace current test of “reasonably incurred” in relation to service charge costs;
  • go further than the Government on the automatic provision of information to leaseholders;
  • prevent landlords from placing contracts with related parties or connected persons;
  • limit the duration of contracts that a landlord may enter into;
  • provide a definition of “cosmetic works” that may be undertaken without the consent of a landlord, and
  • measures to prevent the assignment or payment of insurance payouts by landlords to third parties, such as their lenders or bondholders.

These amendments are consistent with the overarching aims of consumer protection in leasehold matters and which would be applicable whatever form of legal construct emerges as between block control and management and unit ownership and occupation.


My Lords, I do not think I am actually the next in line to speak on this, but I have Amendments 78C to 78G and 80A and 80B standing in my name. The intentions behind the Bill in relation to greater transparency and fairness are welcome, but, in my view, they do not go far or fast enough to deal with the current crop of egregious monetising schemes, where there seems to be no end to the inventiveness of the worst offenders.

My amendments go further than the Government’s proposals, for this reason. Some of what is in the Bill will take time to work through and, during that time, the same old abuses—or variants of them—will continue. I want the worst ones to stop immediately the Bill receives Royal Assent. It is part of an essential consumer protection package.

Amendments 78C to 78G, which I will deal with first, seek to close loopholes in the current law, require landlords to achieve value for money in the management of their buildings, promote competition in the property management sector and clamp down on the charging of unnecessary ancillary fees. Amendment 78C clarifies that the costs are to be treated as incurred as soon as there is an unconditional obligation to pay them, even if the whole or part of the cost is not required to be paid until a later date.

The moment when costs are incurred is particularly important in relation to Section 20B of the Landlord and Tenant Act 1985. That section prevented tenants being charged costs incurred more than 18 months before a demand for payment was made, unless they were informed that costs had been incurred and therefore would be payable.

Surprising as it may seem to your Lordships, there are conflicting decisions as to when costs are incurred for the purposes of Section 20B. In Jean-Paul v Southwark London Borough Council in 2011 in the UK Upper Tribunal, Lands Chamber, reference 178, it was held that costs are incurred only when payment is made; but, in OM Property Management Ltd v Burr in 2012, in the UK Upper Tribunal, Lands Chamber, reference 2, it was held that costs are incurred on the presentation of an invoice or on payment. Both leave it open to landlords to ask a supplier to delay the presentation of an invoice, or themselves to delay payment, to postpone the commencement of the 18-month time limit. I do not see this amendment as controversial, as it prevents abuse of the system and brings landlord and tenant law into line with accepted accounting practice.

Amendment 78D covers a situation under Section 19(1)(a) of the Landlord and Tenant Act 1985, where service charge costs are payable

“only to the extent that they are reasonably incurred”.

This amendment replaces the “reasonably incurred” test in relation to service charges with a stricter one of providing “value for money”.

It is established case law that, if a landlord has chosen a course of action that has led to a reasonable outcome, the costs of pursuing that course of action are reasonably incurred even if there was another cheaper outcome that was also reasonable. This wide margin of appreciation leaves leaseholders at risk of overcharging. A value for money test would require landlords to interrogate all options before spending leaseholders’ money. It is not an unreasonable test; it is one that most people use in daily life when considering any significant purchase.

Amendment 78E requires landlords to provide tenants with a range of information, and to update it regularly. It goes further than the Government’s Clause 55, under which landlords are required to provide information only on request. If leaseholders are to be encouraged to take greater interest in the management of their buildings, I do not think we should place obstacles in their way. It should not be difficult for a landlord of a well-manged building automatically to provide and keep up to date a data room of information.

Amendments 78F and 78G continue the consumer protection theme of these amendments by promoting competition in the property-management sector. Amendment 78F prevents landlords contracting with related parties or connected purposes, thus removing an obvious conflict of interest. The danger for leaseholders if a landlord company places contracts with its subsidiary is well illustrated by the Charter Quay case, in which the managing agent, which happened to be owned by the landlord company, was roundly criticised by the tribunal for placing onerous service contracts with other subsidiaries.

In the same vein, to promote competition through regular retendering, Amendment 78G places a maximum contract duration of five years. Although under current law landlords must consult leaseholders before entering into a qualifying long-term agreement—that is, a contract of more than 12 months—there is no limit on its duration. In practice, even limited consultation requirements are relatively easily avoided. Contracts between a holding company and one or more of its subsidiaries, or two or more subsidiaries of the same company, are not qualifying long-term agreements; neither are contracts for a year or less, even if they have been regularly renewed.

Amendment 78H seeks to reduce costs on leaseholders by setting out in statute details of cosmetic works that can be undertaken without approval from a landlord. Most leases contain very tightly drawn provisions in this respect, which are against undertaking virtually any type of work, no matter how insignificant, without the landlord’s consent. Provisions such as a prohibition of the

“cutting, maiming or injuring, or suffering to be cut, maimed or injured, any roof, wall or ceiling”,

are very common. The fees for consenting to some minor works often run into hundreds of pounds, so this amendment attempts to find a way to streamline that.

One may debate at length the areas where a more relaxed regime might impair the amenity of other residents, but I seek to establish the principle of getting away from the monetisation of consent for every mortal thing—from pets to paint colour, and light fittings to lino floors—and putting it in the past. There ought to be greater freedoms for leaseholders but, in noting that the Law Commission report implied that consent for floor coverings should be relaxed, I would only observe from experience that engineered timber floor finishes in particular are often a potent source of noise transmission affecting other residents—so the matter is nuanced. At this stage, I simply wish to sound out the Government’s willingness to draw up, say, a code of practice, or otherwise take steps to free up this area.

I now turn to Amendments 80A and 80B, which are really rather different. I would have had them disaggregated had I been a bit more alert on Friday afternoon, because they relate to insurance moneys. Amendment 80A requires landlords to pay the proceeds of a building insurance policy into a separate fund that is held on trust for leaseholders. It also requires landlords, on receipt of insurance proceeds, to begin immediately to repair or rebuild a building, as far as reasonably practicable.

Service charge funds already have to be held on trust for leaseholders and I contend that building insurance payouts should be treated in the same way. As noble Lords are aware, I have raised my concerns about the risk of landlord insolvency. It has been suggested to me that, if a landlord became insolvent, any insurance proceeds held by the landlord on entering insolvency would form part of the company’s insolvent estate, leaving leaseholders in a damaged or destroyed building as unsecured creditors. Holding insurance proceeds on trust would go some way to protect them from risks relating to landlord borrowings—of which more in relation to Amendment 80B.

Most leases require landlords to reinstate damaged buildings—as, I think, does statute in the case of damage caused by fire. Subsection (3) of the proposed new clause in Amendment 80B places that duty beyond doubt. It requires landlords to move quickly to repair or rebuild the damaged or destroyed building. It goes some way to closing a loophole commonly found in leases that gives landlords the right to terminate where it is not possible to reinstate a building within a certain period. That is often three years, which is likely to be insufficient time to effect reinstatement of a larger or complex building.

Amendment 80B closes what I consider to be another loophole for insurance. Most leases require that the landlord insures the building, with the cost charged to leaseholders. However, what concerns me is the ability of landlords to assign the proceeds of insurance policies as security for their borrowings.

For instance, leaseholders in properties owned by subsidiaries of the three Long Harbour fund holding companies—a landlord to over 103,000 homes—are likely to be concerned that their subsidiaries have assigned the

“rights in each Insurance Policy, including all claims, the proceeds of all claims and all returns of premium in connection with each Insurance Policy”

to the Irish holding companies as part of an intercompany loan agreement. They will be even more concerned to learn that, according to the same standard insurance contract:

“All monies received or receivable by a Borrower under any insurance policy maintained by it (including all monies received or receivable by it under any Insurance Policy) at any time (whether or not the security constituted by this deed has become enforceable) shall at the option of the holding company

be applied in making good or recouping expenditure in respect of the loss or damage for which those monies are received or”—

this is significant—

“towards … discharge or reduction of the Secured Liabilities”.

Similar assignment provisions can be found for companies with loans from Rothesay Life. When leaseholders challenged those provisions, the excuse was that they formed part of a standard form of finance agreement. Lenders apparently insist on the provision so that they can have control of the funds and stop the landlord taking the insurance proceeds and walking away. In this case, somebody else walks away with the money, but the leaseholder still does not get the benefit of that being paid to their building. Some insurance policies note a lender as the priority payee so that it will receive the insurance proceeds instead of the insured party—you could not invent this stuff.

It seems to me that such provisions conflict with the terms of most leases that require a landlord to reinstate a building. Lest leaseholders in a damaged building are forced to fight a holding company or lender, possibly overseas, for the funds needed to repair, this clearly needs addressing. Even if the funds were made available to leaseholders, the holding company or lender could withhold that element of the proceeds relating to its subsidiary’s or borrower’s interest in the building, leaving leaseholders with a shortfall. I am sure that noble Lords will agree with me that this situation cannot be allowed to persist.

Some of the costs that have arisen are as a result of Fire Safety Act and Building Safety Act provisions set up by the Government. Some time ago, I asked the people I work with to set up an online resource, which I commend to noble Lords. It is I hope that it will help a number of people to unpick what is a very complex situation.