Lessees should not underestimate the right to inspect

Gordon Whelan is National Head of Service Charge Accounting at Haines Watts. Gordon has specialised in service charge accounting since 2006 and is an Honorary Consultant to The Federation of Private Residents’ Associations (FPRA)

Lessees should not underestimate the right to inspect
Section 22 of the Landlord and Tenant Act (LTA) 1985 gives lessees the right to inspect “accounts, receipts and other documents” supporting a summary of service charge expenditure. But how powerful is this statutory right? Does it really give the lessee the ability to take a Landlord or Managing Agent to task over service charge expenditure?

Section 22 LTA 1985 – Request to inspect supporting records
Section 22 states that where a tenant has obtained a summary of relevant costs then they may request in writing that within six months of receiving the summary that the Landlord provides facilities for inspecting the “accounts, records and other documents supporting the summary”.

The landlord must provide the facilities within one month of the request and they must be available to the lessee for a period of two months. Failure to allow access without a reasonable excuse is a summary offence and liable to a maximum fine of £2,500.

Scope of the inspection
What is the extent of the inspection that can be undertaken by the lessee? There seems to be some confusion over this point. We were recently asked to assist with a section 22 request and the Managing Agent insisted that the inspection only extended to the invoices that supported the expenditure headings in the Income and Expenditure report.

This confusion can also be found in the Code of Management Practice for the Association of Retirement Housing Managers (ARHM). Clause 5.4 of the Code states that, “the service charge accounts should include a note explaining that leaseholders have the right to request to inspect supporting receipts and invoices” along with a reference to section 22. The Code does not reflect the full wording of the legislation and thereby inadvertently suggests that the scope of inspection is restricted to receipts and invoices. I am indebted to Shula Rich, leasehold campaigner and a director of the Federation of Private Residents’ Associations (FPRA), for bringing this point to my attention.

In the case of Taber v MacDonald 1999 (31 LHR 73) a prosecution was brought for failure to comply with a section 22 demand. The Divisional Court Judge in the case interpreted section 22 to mean that the inspection extended to every single voucher that had been available to the reporting accountant when the section 21 report on the summary of expenditure was produced. Again, this interpretation restricts the scope of inspection to just vouchers and seems incorrect to me and at odds with the wording and intention of the legislation. To inspect “documents” widens the scope significantly and implies that the intention of the legislation is to allow the lessee to follow the audit trail from the headings of expenditure in the accounts through to the original source document that committed the service charge expenditure in the first instance. This can extend to documents that originate from outside the accounting records including, contracts with suppliers, purchase orders and legal documents.

The role of the investigative accountant
It may be useful for lessees undertaking a section 22 inspection to enlist the support of an experienced service charge accountant to assist with the inspection. With their knowledge of finance systems and audit techniques they can play a valuable role in ensuring that the inspection is effective and focused.

The role of the investigative accountant is quite different to the role of the accountant reporting on service charge expenditure. In the traditional reporting role the accountant must be independent of the users of the accounts. In an investigative role the accountant takes their instructions from one party only and in a section 22 inspection the lessee can determine the procedures to be followed by the accountant at the outset of the engagement.

ARMA’s Guidance Note D14 highlights that section 22 is part of the principle in property management of openness and transparency and all ARMA agents are expected to have built in procedures to allow lessees to scrutinise expenditure without having to issue a section 22 request. Our recent experience with non ARMA agents suggest that these principles are not shared across the board. Far from openness, the strategy has been to be obstructive and to make the inspection as difficult as possible. Lessees may value some support in these circumstances.

Section 22 should be an effective right for lessees wishing to inspect their service charge expenditure.

It would help if there was clear consensus about the definition of “accounts, receipts and other documents” and the extent of lessees’ statutory right to inspect documents concerning their affairs.

Haines Watts is a top twelve National firm of accountants with a dedicated team of accountants specialising in the audit and certification of service charge accounts. For more information about the team and the services they provide, please visit their website at hw-servicecharge.com.

 Reviewed: July 2019