Unreasonable Service Charges – Time for Reform

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. 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 concerning service charges. In the meantime, leaseholders face an uphill battle against managing agents and freeholders in respect of the excessive cost that are included in their service charge bills.

An application can be made to the First Tier Tribunal for a determination as to amount of service charges that is 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 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 legislation for leaseholders to write to freeholders and obtain a copy of the insurance policy, which freeholders must oblige within twenty one days, the Canary Wharf case demonstrates the complete lack of transparency with leaseholders concerning these commission payments. It is often difficult for leaseholders to prove that the commission payment had been the driving factor behind the decision to select a particular policy. Although the victory was significant for the leaseholders in that case, millions of other leaseholders may not be armed with the same level of capital and time, in litigating against unscrupulous managing agents.

Leaseholders may be better off preserving their energy and capital 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 leasehold scandals, and a general election scheduled to take place no later than January 2025, it is widely anticipated that the Kings’ Speech in November this year will set out its fresh legislative agenda in order to tackle the many ‘abuses’ arising out of the leasehold sector. Although Michael Gove no longer remains committed to dismantle the ‘old and feudal’ leasehold system, we wait with bated breath the extent of any reforms, particularly if the country turns red following the election.

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 the Landlord & Tenant team on 0207 079 4193 or via email leasehold@bishopandsewell.co.uk. You can visit the website at www.bishopandsewell.co.uk