Leasehold reform has been a significant topic of discussion in recent years. One notable area of discussion has been the potential impact of the Leasehold and Freehold Reform Act 2024 on service charges for leaseholders in the UK.
The reforms aim to increase transparency and fairness in the calculation and presentation of service charge demands. Key changes include the standardisation of demand formats, mandatory detail in the breakdown of service charge costs, tighter regulations on allowable charges, and enhanced rights for leaseholders to challenge unreasonable charges.
This article explores these changes and their financial implications for both leaseholders and freeholders alike.
Service Charge Demand Format
Currently, service charge demands can be produced in any format. They must include the landlord’s name and address and the “summary of leaseholders’ rights and obligations”, but that’s where the requirements end.
Under the new regulations, all service charge demands must be provided to leaseholders in a specified format. The information included and the way it’s presented to leaseholders will also be specified.
These details have yet to be laid out in the forthcoming Regulations, but any breach of the requirements will make any non or late payment provisions in the lease unenforceable. Leaseholders will also be able to apply to the First-tier Tribunal to force landlords to supply their demands correctly.
Future Demand Notices
Currently, service charges relating to a cost incurred more than 18 months previously cannot be charged to leaseholders unless the landlord provides written notice of the pending charges within the time limit.
There is no specified format for these notices- only that they must be sent to leaseholders within 18 months of either paying the fees or receiving an invoice. They must detail the charge amount and state that the charges will be collected in due course.
Under the new regulations, a prescribed “future demand notice” must be served instead. The notice will have to be provided in a standardised format and contain the required information to be enforceable. Again, the Regulations will soon lay out the terms.
Fixed vs Variable Service Charges
The Act provides equal protection for leaseholders who pay a fixed service charge amount, and those whose demands vary. Currently the protection against excessive demands is reserved for those paying variable demands. The same protection is now afforded to both.
For those paying variable charges and who are one of a certain number of leaseholders (this has not yet been specified), the Act provides further protection by obligating landlords to provide accounting information in a specified format at the end of each accounting period. This must be accompanied by a written report drawn up by a qualified accountant, detailing the expenditure. The cost this incurs can be added to the service charge bill.
Whether you’re paying a variable or fixed rate service charge, the Act requires landlords to provide a service charge report at the end of each accounting period. Leaseholders can apply to the First-tier Tribunal if this is not provided.
Information Requests
While the details of this are still pending, the Act provides leaseholders with the right to request detailed information from their landlord or managing agent to support a service charge demand. Contracts, invoices, receipts and a written explanation of the decision-making behind the expenditure can all be requested to help leaseholders judge whether a demand is reasonable.
Insurance Costs
Insurance premiums will continue to be charged to leaseholders via their service charges. However, tighter rules are now in place including the abolishment of commission payments to landlords and managing agents, and strict timelines for the provision of information for leaseholders.
Additional insurance costs will no longer be recoverable via service charges. The “permitted insurance payment” will be detailed soon, but it’s expected that the only cost that can be passed to leaseholders will be the necessary premium.
If landlords or managing agents charge anything other than the permitted payment, leaseholders will be able to apply to the First-tier Tribunal for the cost to be refunded. Leaseholders can also apply for damages.
The Cost of Litigation
This is probably the most impactful element of the Act. Landlords will no longer be able to charge their legal fees back to leaseholders via the service charge. The Act goes far enough to ensure that this rule will override any provision in the lease that states the contrary.
The onus will be on landlords to convince the First-tier Tribunal that their costs should be covered by leaseholders who challenge their service charge demands in court. Leaseholders will also have the right to claim their litigation costs from their landlord if they take their case to Tribunal.
When Will the Act Come into Effect?
The Act has been given Royal Assent, but the new Government elected on the 4th July will need to decide when the regulations are released and enforced. This is expected to take some time, but there is hope that all elements of the Act will be in place by the end of 2024.
