Rent and Service Charges

Housing Ombudsman Service Charges Insight Report

In early December 2023 the Ombudsman published its insight report into service charges. I was amazed by its content, guidance and case studies. It covers everything and clearly distinguishes between what it can do and what it cannot.

The Ombudsman recognises that service charges can be one of the most complex areas of its jurisdiction and given the cost of living crisis cause breakdown between landlord and resident. The video is an example of protests that can take place by disgruntled residents.

On LinkedIn I asked the Ombudsman if they could ensure the links to the case studies were working. They promptly responded and amended. They also clarified a few queries I had. The key points that stuck out for me based on what I’ve experienced are as per below.

S21 and S22 Landlord and Tenant Act 1985, Request for Service Charge Accounts, Invoices and Receipts

To clarify section 21 is where for a variable service charge, a leaseholder or tenant can request the landlord to provide a written summary of costs and must do so within strict time limits.

With section 22 this where a leaseholder or tenant can request the landlord to provide accounts, receipts and invoices which support the service charges.

S21 and S22 have rarely been enforceable whereby Local Authorities do not exercise their disrection to do this via the Magistrates Court. It is a criminal offence for a landlord to not provide the documents when requested by a resident within the strict timeframe.

However the Housing Ombudsman has stated that “where residents request additional information, such as invoices, it expects landlords to comply with sections 21, 22 and 23 of the 1985 Act.” In one case the Ombudsman provided me, it ordered the landlord to clarify with the resident what documents she was seeking and went as far as even requesting the landlord to submit its own s22 request to the superior landlord to obtain information on behalf of the resident. The Ombudsman ordered compensation to be paid to the resident of £200 specifically for delays in handling her request.

This demonstrates the need for service charges to have a clear audit trail. It should be easy to retrieve documents and even for a block which has 4 or more units. This is because service charges have to be audited by an external accounting firm. Service charges cannot just be based on ledgers and transactions.

Inspections and Evidence to Justify Service Charges

For one past employer my Homeownership Officer was carrying out inspections of blocks. I followed these up where there were problem issues or complaints, by carrying out formal surveys. We were successful in ensuring there was evidence to support the service charges. If a service was not provided, then we made the relevant adjustments to the service charges. I took photos and got away from just presenting numbers whereby the surveys accompanied the charges.

When linked to what my colleague and I did, I am pleased to see that the Ombudsman recognises the need for evidence when there are disputes relating to services. The Ombudsman states “where residents raise concerns about the standard of service, it will be the landlord to demonstrate the service is chargeable under the lease or tenancy, that it has been provided and the standard was of satisfactory quality.” My colleague and I provided feedback to relevant parties such as contractors so that the level of service was improved.

Contractual Agreement

This is an area which I cannot understand why some landlords do not get right. At another employer, I had intensive disputes over the service charges. For a few years before my time the arrears had reached £1.7m. In just over a year, I managed to reduce the rent and service charge arrears by £800k. I achieved this because when residents queried the charges, I had researched and collated the relevant documents which did support the service charges that were required to be paid.

I had also built up excellent relationships with the customer service team in which I used to speak to everyday to keep them updated with what demands for payment I had sent and what the advisors should say to the residents. Where it got complex for my advisor colleagues, I stepped in and dealt with the issues.

The Ombudsman outlines a case whereby a landlord stipulated conditions for a refund where the resident should not have been charged. This was because the agreement did not show that the resident should have been charged but the landlord still charged it.

What concerned me having read the case in detail was that this landlord had even got legal advice to not provide the refund unless the tenant agreed going forward that they would pay for the service. The landlord did not provide the legal advice information it received to the Ombudsman based on legal privilege.

To be blunt this is an embarrassment to the housing industry. No-one should have to pay for something unless the agreement says so. But to make things worse the resident would not get their refund unless they agreed to a variation; this is not reasonable practice. I am disappointed in the legal advice that was provided here which appears that the landlord went along with.

Section 20 Consultation

A landlord may wish to carry out significant repairs and/or improvements if the lease allows for this. This is known as qualifying works and section 20 consultation should be followed under the qualifying works procedure. This is when a resident would have to pay £250 or more towards the costs.

With the other consultation which is known as long term agreements, this is when a landlord intends to enter a contract with a wholly independent contractor/organisation which will last more than 12 months and requires a contribution of £100 or more towards the costs.

For most organisations I worked for, I always made sure that information was accurate such as correctly apportioning the major works costs and providing guidance notes as well as a FAQ section. From what I saw with some landlords before my time with them was they were just keen to send out the final invoice. The changes I implemented were to provide a pack which again went away in just providing numbers.

My approach was to avoid what the Ombudsman highlights within its insight report where one landlord was not consistent with its final account and actual costs. The landlord also failed to provide information about the s20 notice and bill. The landlord should have reviewed the differences and provided clarification on the matter.

This is disappointing because what the landlord could have done if it had received observations from the leaseholders is refer to them and build on the answers previously provided. For example for one landlord, I made sure there was good record keeping with the observations that were made and referred to them when queries arose after the final charges pack had been sent.

Everything could be justified whilst reminding the leaseholders in the observations they raised and confirming that we had listened to any concerns. This was even when sinking funds were involved.

Other Issues

Service charges are important to get right and not just from a customer perspective but also financially. The revenue shown in the landlord’s financial statements must be accurate as this affects accounting ratios such as interest cover. The Ombudsman has contributed well to help achieve this.

The Ombudsman has confirmed what it expects landlords to do where residents request additional information and to comply with legislation. Whether this will include other provisions within the RICS Service Charge code could be interesting to see what the Ombudsman may do if a landlord fails to comply.

For instance under the RICS code, it states that the requisite number of leaseholders have the right to have an audit carried out which relates to the management of the property. The purpose would be to ascertain whether the landlord’s obligations are being discharged in an efficient and effective manner. The audit must be carried out by a qualified accountant or qualified surveyor.

One further issue is when a contractor has been switched by the landlord unreasonably. I have seen a case where the First Tier Tribunal (Property Chamber) found it unreasonable for a freeholder to switch insurance providers and then expected the leaseholders to pay towards the cancellation fee and a higher premium.

Although the Ombudsman states its jurisdiction does not cover insurance and reasonableness of a charge, this could be something the Ombudsman may probe to the landlord as a pre-action to ask why it did the contractor switch.

Overall service charges requires multiskilled staff that have a range of skills covering accounting, surveying, legal awareness, being organised and having excellent customer service.