On 6 September 2022, Baroness Scott (parliamentary under secretary of state at the Department for Levelling Up, Housing and Communities) reiterated: “The government are committed to creating a fair and just housing system that works for everyone. This includes our reforms to improve fairness and transparency in the leasehold home ownership market.”
This was in response to a question from Lord Kennedy, to which he added: “My Lords, I have one final thing for the minister to take back to the new secretary of state. There are a couple of really good private members’ bills on these issues, including the Leasehold Reform (Reasonableness of Service Charges) Bill and the Leasehold Reform (Disclosure and Insurance Commissions) Bill.” The latter was introduced by Lord Kennedy on 14 July 2022, and the former was introduced by Baroness Kennedy on 13 July 2022. In addition to these, there is a further private members’ bill in the Lords – the Leasehold Reform (Tribunal Judgments and Legal Costs) Bill – introduced by Baroness Heyman on 8 September 2022.
The bills claim to address “limited rights”, “an imbalance of power” and “significant gaps in current landlord and tenant law”. If enacted, they would significantly increase the rights of leaseholders to challenge service charge payments and in turn place greater risks and burdens on landlords.
Leasehold Reform (Disclosure and Insurance Commissions) Bill
This bill proposes three amendments to the Landlord and Tenant Act 1985.
- Amendment 1: “amend section 19… to prevent landlords and managing agents who do not comply with their duties from recovering service charges, unless they have a good excuse for non-compliance”.
The amendment would mean that costs will not be reasonable, and therefore unrecoverable, where the landlord fails “without reasonable excuse” to comply fully with its prescribed duties under section 21, section 22 or section 30A and Schedule 1 to the 1985 Act.
The explanatory notes explain that leaseholders “currently have only limited rights to receive information about service charges and insurance commissions”. Under sections 21-22 of the 1985 Act, leaseholders have the right to request the landlord supplies a summary of service charge costs and facilities to inspect the accounts, receipts and other documents and take copies. The onus is on leaseholders to seek out information and serve notice on the landlord. Section 30A of the 1985 Act gives effect to paragraphs 2 and 3 of Schedule 1, which gives leaseholders the right to give notice requiring the landlord to provide a summary of the insurance cover and to inspect the policy. The sanction for failure by a landlord to comply, without reasonable excuse, is a fine for committing a criminal offence. Leaseholders are not entitled to a mandatory injunction to require the landlord to comply (Di Marco v Morshead Mansions Ltd [2014] EWCA Civ 96; [2014] 2 EGLR 31).
The bill would give far greater leverage to leaseholders where landlords are slow or reluctant to comply with their obligations.
- Amendment 2: “commence section 21A…, insofar as it is not already in force, to permit leaseholders to withhold their service charges if a landlord does not provide a summary of accounts by six months after the financial year end.”
The explanatory notes complain that an “imbalance of power disincentivises landlords and managing agents to comply with the law”. If fully implemented, section 21A of the 1985 Act would give leaseholders a qualified statutory right to withhold service charge if the landlord has failed to comply with its obligations. The bill would also need to implement the changes to section 21 of the 1985 Act to oblige landlords to supply a regular summary of account to all leaseholders.
- Amendment 3: “amend Schedule 1 to the Landlord and Tenant Act 1985 to require landlords to disclose all insurance commissions (however described), including commissions paid on policies in the six years before the bill becomes law.”
The explanatory notes explain that “often the insurance includes commission paid by the insurer to the landlord, managing agent or third-party investors in the building. Leaseholders have no or limited rights to know the amounts paid. These commissions typically range between 10% and 40% of the cost of the underlying insurance, sometimes more.” Best practice (though not binding) under the RICS Service Charge Residential Management Code is to disclose to leaseholders annually “insurance fees (including commissions)… in relation to the service charge” and they should “reflect the level of work carried out”. While the bill does not appear to go as far as curtailing the ability to retain insurance commissions, the bill would make disclosure a statutory requirement and provide leaseholders with greater transparency on this often opaque issue. Challenges are perhaps an inevitable consequence.
Insurance commissions are also the subject of a recent report by the Financial Conduct Authority on the multi-occupancy residential buildings insurance market. The report, dated 21 September 2022, said some commissions “are an area of significant concern” and hints at ensuring that “remuneration all parties receive is fair relative to the benefits their work provides”. It acknowledges the “level or even existence” of commission is generally not made clear and the amounts are “even less likely to be known”. This gives further weight to the issue and parliament may be persuaded to intervene.
Leasehold Reform (Reasonableness of Service Charges) Bill
This bill is said to address “two significant gaps in current landlord and tenant law”.
- Gap 1: “The first relates to fixed service charges being immune from challenge for reasonableness.”
By amending section 18 of the 1985 Act, the bill seeks to make “charges that vary by fixed amounts, by an index, by a percentage or by a period of time, or by any combination of those factors”, subject to an assessment for reasonableness. Currently, it is only a service charge which “varies or may vary according to the relevant costs” which falls within the grasp of the reasonableness tests under section 19 of the 1985 Act. This issue was considered by the Supreme Court in Arnold v Britton [2015] UKSC 36; [2015] EGLR 53 where the fixed amount payable by leaseholders substantially exceeded the landlord’s costs. Ultimately the Supreme Court followed the wording of the lease and emphasised the limits of their power to rewrite the contract to avoid what is, with hindsight, an unfair result for leaseholders. It is therefore a choice for parliament as to whether they decide to intervene to correct this perceived unfairness.
- Gap 2: “The second relates to charges being made in excess of the cost of providing goods and services, often by companies associated with landlords and managing agents.”
The bill amends section 19 of the 1985 Act in order to “limit service charges to the amount actually incurred” and to reverse the burden of proof “so that it is for the landlord making the charge to show that it is reasonable”. The complaint is that “these charges are often concealed by using companies associated with the landlord or managing agent to provide the services. This makes it hard to tell what has actually been done.” In practice this may cause difficulties for landlords when apportioning salaries in house and where works or services are carried out across a number of items of expenditure.
The bill makes similar changes in relation to administration charges by amending provisions of the Commonhold and Leasehold Reform Act 2002. The explanatory notes complain that: “Landlords and managing agents also make fixed or variable administration charges for the giving of information and consent under the terms of the lease… These charges often involve the landlord sending out a standard form licence (permission) without significant effort.”
These aspects of the bill may impose a greater burden and associated costs on landlords, which could ultimately be passed on to leaseholders.
Leasehold Reform (Tribunal Judgments and Legal Costs) Bill
This bill is said to address “three issues” in landlord and tenant law:
- Issue 1: Limit the right of landlords to recover legal costs in excess of a prescribed scale.
Subject to the terms of the lease, the court or tribunal has wide discretion, on an application by a leaseholder under section 20C of the 1985 Act, to direct that any costs incurred by the landlord in the proceedings cannot be recovered as service charge in the future. As such, costs do not go unchecked, and regard is had to what is just and reasonable. Service charge disputes can be complex and time-consuming and if fixed costs were to be introduced, landlords may be left exposed to a greater shortfall.
- Issue 2: Make costs orders against the landlord binding on all leaseholders: “This would prevent an unsuccessful landlord from recovering any of its costs from any tenant.”
An application under section 20C of the 1985 Act can be made regardless of whether the leaseholder is a party to the proceedings. The question of extending a costs order to all leaseholders was considered by Martin Rodger QC (now KC) in Re SCMLLA (Freehold) Ltd’s appeal [2014] UKUT 58 (LC); [2014] PLSCS 83, in which he decided there was no jurisdiction to make an order in favour of multiple leaseholders. To benefit from a costs order, leaseholders need to give their consent to the section 20C application.
He pointed to the risk of unfairness and potentially serious financial consequences, particularly where the landlords’ only asset is the freehold of the property.
- Issue 3: Make judgments against the landlord binding in relation to all leaseholders: “This would prevent a landlord from recovering any service charge found to be unreasonable from any tenant.”
The jurisdiction of the tribunal is only in respect of the parties to the proceedings. This is sensible as the issues both legally and factually may be different, especially where not all leaseholders have the same lease terms.
The government has reiterated its commitment to leasehold reform to improve the position of leaseholders. We have seen part one of this process in the form of the Leasehold Reform (Ground Rent) Act 2022, which came into force on 30 June 2022, ending ground rents for most long residential leases. Part two, being wider reforms to enfranchisement, right to manage and commonhold may be introduced in the 2023-24 parliamentary session.
Against this backdrop, it will be interesting to see if and how the bills progress through parliament. Will this be part three?
Sarah Campey is a senior associate & Pierre Smith is an associate at Pinsent Masons LLP
