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 Re-

charging 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

The cost of the staff employed in administering service charges

plus appropriate oncosts

o 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?

Your opinion is valuable to

us so please don’t forget to complete your feedback form

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