Laurent Vaughan, a Senior Associate in Bishop & Sewell’s Landlord & Tenant team, considers service charges and the need for leasehold reform.
The Government focused on onerous ground rents last year when it introduced legislation which would effectively put an end to freeholders being able to charge ground rent when granting new leases. The recent political announcement by Michael Gove when he declared that he is committed to ‘abolishing’ leasehold as an ‘outdated’ and ‘feudal’ form of property ownership may whet the Government’s appetite to introduce further legislation, the extent of which still remains to be seen.
According to the Association of Residential Managing Agents, the average service charge in London should be in the region of £2,000 a year for a two-bedroom flat although it is worth noting that this figure will obviously be different for different sized flats and depending upon the services provided. However, with rising inflation, millions of leaseholders across the country have seen their service charges rise and unfortunately, there is currently no legislation in place which would cap the annual level of increase.
Neither the Law Commission nor the Government have made any pledges to address the widespread problems that some leaseholders experience concerning service charges. In the meantime, leaseholders face an uphill battle against those managing agents and freeholders who take advantage of the leaseholders in respect of the excessive cost that are sometimes included in their service charge bills.
Where there is a dispute or query regarding service charges levied, an application can be made to the First Tier Tribunal for a determination of the amount of service charges that is reasonable and properly payable. The First Tier Tribunal will assess the reasonableness of the service charge cost by reviewing the market rates of the cost of services and particular items.
A well-reported victory was secured by leaseholders of a block of flats in Canary Wharf in December last year after the Tribunal determined that they were overcharged by £1.6 million – comprising an overpayment of £1.5 million to a managing agent for insurance-related services and £121,000 in linked taxes. It is also widely reported that some managing agents are selecting insurance policies that maximise their own profits, rather than policies that offers the best value for leaseholders.
Whilst there is scope under the existing legislation for leaseholders to write to landlords and obtain a copy of the insurance policy, which landlords must oblige within twenty one days, the Canary Wharf case demonstrates the complete lack of transparency with that some leaseholders experience, concerning commission payments. It is often difficult for leaseholders to prove that the commission payment had been the driving factor behind the decision by the agents to select a particular policy. Although the victory was significant for the leaseholders in that case, other leaseholders may not have the same level of time and money needed in litigating against unscrupulous managing agents.
Leaseholders may be better off preserving their energy (and money!) by bringing a claim to take over the management of the building through a ‘Right To Manage company’ (RTM). In other words, take control of the management of their building without having to demonstrate any mismanagement on part of the managing agent or freeholder. In doing so, the RTM company will be able to procure cost- effective services, including insurance contracts over which they will be able to gain control.
With the Government facing negative press coverage following a series of scandals, and a general election on the horizon, it remains to be seen whether they will introduce further legislation this year in order to find favour with the electorate as part of its Levelling Up agenda.
We wait with baited breath.
Bishop & Sewell’s Landlord and Tenant team are industry experts on Leasehold Reform legislation, including Enfranchisement, Lease Extensions and Right to Manage. If you would like to discuss any of the points raised in this article, please do not hesitate to contact Laurent Vaughan Senior Associate in Bishop & Sewell LLP’s Landlord & Tenant team on 0207 079 4193 or [email protected].
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