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Leaseholder and Tenant Service
Charges Conference
Plenary three: How to calculate and
apportion service charges effectively
Speaker:
David Hunter
Partner, Beevers and Struthers
Chair:
Steve Michaux
Group Director of Leasehold Services
A2 Dominion Housing Group
Beever and Struthers
How to calculate and apportion Service
Charges effectively
Presented by: David Hunter
03 December 2013
David Hunter
• Partner, Social Housing Team, Beever and Struthers.
• 32 years sector experience in Statutory Audit, Business
Assurance, Governance, Risk Management and Financial
Consultancy.
• 10 years as LSVT Board member at Wulvern Housing from
Shadow Board.
• Board member of commercial subsidiary Wulvern Platform.
Fixed and Variable Service Charges:
Definitions
• A fixed service charge is where the landlord estimates the
cost of providing services to a property at the beginning of
each financial year. The tenant pays the service charge
throughout the year and at no point will there be additional
amounts to pay or refunds due back.
o
The usual method with tenants.
• Variable service charges occur where the landlord sets an
estimated charge at the beginning of the financial year, and
then produces a final account once the year is complete.
The final account compares the actual costs in delivering
services to a property against the estimate that was set,
and may result in a credit back or an additional amount due
from the resident.
o
The usual method with leaseholders.
Fixed and Variable Service Charges:
Best Practice
“The decision between a fixed and variable service charge
regime is one for each housing association to make, and often
will be finely balanced. A variable regime means much more
stringent procedures but in exchange it guarantees that the
landlord… can recover every penny spent on services.
Generally, the larger the service charge in relation to the net
rent, and the likelier it is to vary unpredictably from year to
year, the stronger the case for a variable charge. However, in
general needs housing, where service charges are relatively
low and reasonably stable, a regime of fixed charges may well
be adequate.”
National Housing Federation – Service Charges – A Guide
for Housing Associations
Perspective: Fixed Service Charges
• Historical
For rental properties, losses could be offset:
o
Revenue Deficit Grant
o
Hostel Deficit Grant
o
Grant Redemption Fund
o
Rent Surplus Fund
• More Recently
Service Charge Deficits from rental properties
o
2010 / 11
£22.1m for the Top 60 RPs
Revenue / Capital?
• Revenue Service Costs
o
Day to day running costs
o
Repairs only for Leaseholders
o
Charged to Leaseholders and Tenants
o
Charges must reflect actual costs and be reasonable
o
Consultation and Section 20 notices
o
Demands for payment within eighteen months
• Capital Service Costs
o
Components and Fabric of the building
o
Charged to Leaseholders only
o
Charges must reflect actual costs and be reasonable
o
Consultation and Section 20 notices
o
Demands for payment within eighteen months
Calculation of Service Charges
• Leaseholder Service Charges must be provided
for in the lease
o
Include capital and revenue items
• Right to Buy – restricted to Section 125 Notice
• Tenant service charges must be provided in the tenancy
agreement and include revenue items only
• Need to decide what services to charge for
o
For example, Lifts?
• Calculation should include the direct costs and indirect
costs of the service
A practical response
• Keep it Simple
• Tenants want to know how much they are paying and what
they are paying for
• Administering variable charges could cost substantially
more than fixed charges
• Where Fixed charges are made tenants should still be
given information about the services provided and their
costs
Dealing with Big Ticket Items and more
Complex Services
• Staffing Costs (wardens, managers, caretakers &
concierges) – Full salary plus on-cost less a percentage for
general housing management
o
Caretakers – apportion between estates and then between general
management and service activities
o
London Rent Assessment Committee decided in 1967 that an
appropriate appropriation to service charges is 15%
• Heating and Lighting Communal areas
o
One option to apportion the total electric bill between flats and
communal areas based on floorspace and recover the communal
element as a service charge
Dealing with Big Ticket Items and more
Complex Services (continued)
• Cleaning communal areas
o
May be done by caretaker, warden, cleaner or contractor
o
Need to apportion the cleaners’ wages between communal areas
and other work and add appropriate on-costs
• Major component replacement
o
Consultation
o
Lease / restrictive covenants
• Solar Panels
o
Capital
o
Re-charge of electricity
Variable Service Charges for tenants: Does
CLARA apply?
• CLARA = Commonhold & Leasehold Reform Act 2002. This
amended provisions for variable service charges under the
1985 & 1987 Landlord & Tenant Acts
• Section 152 outlines the information that must be provided
to tenants and allows for tenants to withhold service
charges if inadequate information is provided (however this
has yet to be enacted)
• Section 153 provides for an accompanying notice.
• Section 154 entitles a tenant to inspect documents
Large Open Spaces and Policies on Recharging through Service Charges
• Costs vary greatly
o
Work carried out by contractors, staff or residents
o
Sometimes a need to include maintenance & depreciation of plant
o
Non-recurring costs such as tree surgery
• Example: a Local Authority divided the borough into three
zones and calculated a service charge for grounds
maintenance in each zone per bed space
o
Not ideal – a more specific method could have been better
Apportionment Techniques
• At what level should costs be collected?
o
Block
o
Estate
o
Scheme
o
District
• How to apportion costs to dwellings?
o
Units
o
Bedrooms
o
Bed spaces
• Is there an intermediate stage of apportionment?
o
For example using floorspace to apportion total costs between
schemes
Calculation of Administration Fees
• Administration fees can be based on:
o
Actual costs

o
The cost of the staff employed in administering service charges
plus appropriate oncosts
Estimated costs

An on-cost on the cost of the other service charges

10% - consistent with advice of the rent officer who also says

15% is acceptable for housing associations
• Difficulty in identifying actual costs is recognised:
o
“Payment of a management charge based on a percentage of
costs is not intrinsically unreasonable, having regard both to the
position of the purchaser and of the vendors.” – Mahase v London
Borough of Camden 1996
Good Practice Service: Audit Commission
•
Provides comprehensive information to all service users that clearly
describes the organisation’s rent and service charge setting policy,
and how rents and service charges are calculated and collected.
•
Delivers accurate and timely information about rent and service
charge accounts to service users, for example quarterly rent and
service charge statements.
•
Minimises and prevents arrears by ensuring that new rent accounts
are always set up, and means of payment supplied to new tenants,
before tenancies commence.
•
Ensures that accounting systems are well integrated with housing
management and benefit systems. As a result the organisation can
clearly identify arrears due to housing benefit claims or payment in
credit or arrears.
•
Separately records and accounts for rent arrears, court costs,
rechargeable repairs and other debts
Accounting Requirements
“The accounting records are the responsibility of the
landlord… The records need to be sufficient to show all
transactions involving service charges monies and to enable
the person preparing the information to be satisfied that the
information complies with the legislation. The accounting
records would be expected to contain:
•
Details of all sums of money received and expended by the
landlord… and the matters to which the receipts and expenditure
relate.
•
Documents such as invoices to support all the figures entered in the
accounts.
•
Details of longer term contracts and income and expenditure in
relation to these contracts.”
•
Draft guidance on the accountants’ report on service charges
Leasehold Valuation: Tribunal Decisions
• Service Charges quashed where:
o
Leaseholder not properly consulted

Westminster £2million
• Work not necessary
o
Islington – roofs to flats - £200,000
• Work poor
• Costs excessive
Conclusions
• Decide what to charge for based on statute, case law and
the provisions of leases and tenancy agreements
o
Decide between fixed and variable charges
• Identify all appropriate costs
• Apportion costs between schemes and tenants based on
the best available information
• Ensure charges represent Value for Money
• Keep it Simple
• Consult and provide complete information
Thank you for attending. Any Questions or Comments?
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