Landlords beware: the consultation requirements for variable service charges are changing
Getting service charges right is something that all landlords find difficult. The Commonhold and Leasehold Reform Act 2002 introduces a number of amendments to the provisions of the Landlord and Tenant Act 1985 that deal with service charges.

In August the Office of the Deputy Prime Minister published a consultation document and draft regulations which will have a significant impact on public sector landlords.

Who is affected?
The changes will affect both local authorities and registered social landlords. For local authorities, it will only affect the service charges they charge their leaseholders. For registered social landlords, it will affect service charges for both leaseholders and assured tenants. In both cases only variable service charges are affected.

What is a variable service charge?
The Landlord and Tenant Act 1985 contains consultation provisions regarding service charges for works. These only apply to variable service charges – charges that vary according to the cost of services provided – and not to fixed service charges.

Many RSLs have moved towards variable service charges since rent restructuring. Getting them right has always been difficult and these new provisions do not make it any easier. Could this be a reason to move towards fixed charges?

What is the government proposing?
The government is proposing an extension of the consultation requirements to include contracts for services as well as works.

  • At the moment you only have to consult if your service charge for works costs more than £50 a dwelling or £1000, whichever is the greater. In future you will have to consult if you plan to carry out works which will cost a service charge payer more than £250.

    Getting variable service charges right has always been difficult and these new provisions do not make it any easier

    This means that leaseholders and assured tenants who currently receive section 20 notices, see at least two estimates and have an opportunity to comment on a range of small works will no longer have those opportunities. A landlord will still be able to consult, but it will no longer be compulsory. n The consultation process is going to be longer. Service charge payers will first have 30 days in which to nominate a contractor. The landlord has to get an estimate from that contractor. The landlord then has to get at least one more estimate, and both estimates have to go to the service charge payers and/or the recognised tenants’ association. The landlord will have to provide written reasons for why they have chosen a certain contractor.

  • Partnering has been a real problem for major refurbishment contracts where there are leaseholders. The new proposals will mean that if a contract falls into the special provisions of long-term contracts and has been consulted on, there is no requirement in future to get estimates from two contractors or to get an estimate from a contractor nominated by the service charge payers.

  • A long-term contract will be an agreement for the minimum period of more than 12 months. For any contract, whether for works or services, landlords will have to consult service charge payers if they are going to have to pay more then £25 a year. So a local authority letting a major PFI contract would be able to consult once at the beginning and leaseholders would have to pay, regardless of whether the precise specification of the works being carried out changes over time.

    This provision brings long-term service contracts into consultation provisions for the first time. The three-year gas servicing contract, the five-year grounds maintenance contract and the two-year lift maintenance contract – all could be caught if the service charge payers (this may include your assured tenants) end up paying more than £25 each.

  • Many housing associations have properties managed by other bodies. If a management agreement means tenants pay £25 or more a year in their service charges, then it will also be caught by these provisions and the landlord will have to consult with tenants before entering into the agreement.

    Local authorities letting housing management contracts where there are leaseholders in the stock, and where the cost of the managing agent is £25 a year or more, will also have to use these consultation provisions. Tenants and leaseholders will have a right to put forward a contractor.