New service charge rules for landlords and management companies
The Leasehold and Freehold Reform Act 2024 is set to bring about significant changes to service charge management.
The Act aims to increase transparency of service charges for leaseholders and it will increase the leaseholder’s right to information in order to make charges easier to challenge. The provisions are not yet in force, but we expect them to be in place in 2027, meaning that landlords and management companies should start preparing for the upcoming changes.
In this article, we cover the key changes and outline the steps landlords and management companies should take to ensure they are prepared.
Need advice on service charge management or service charge recovery? Please contact Lindsey Reid-Cook who will be happy to advise.
Key points to know about the new rules for service charges
- Landlords and management companies will need to use standardised service charge demand forms and issue annual reports on what service charges have been incurred.
- Fixed service charges will be brought within the regulations that currently apply to variable service charges only.
- Any permitted insurance fees charged by landlords will have to be fair and proportionate.
- Leaseholders will have improved rights to obtain information and supporting documents in relation to service charges and how such charges are calculated.
- Leaseholders will no longer be expected to pay the freeholder’s legal costs when challenging service charges as standard. Landlords and management companies will generally require a court or tribunal order before legal costs can be recovered through the service charge.
- Landlords and management companies could be forced to pay damages of up to £5,000 per affected tenant if they fail to provide legally compliant service charge demands and annual reports.
Standardising service charge demands and accounts
Service charge demands will need to be issued in a standard form covering information such as an estimate of costs incurred, how much the leaseholder will be expected to contribute and when payment will be expected.
A service charge budget will need to be issued for on account service charges, whether or not this is required by the terms of the lease.
Landlords and management companies will also need to provide leaseholders with an annual service charge report and an annual written account, stating what service charges have arisen that the leaseholder is required to pay for the relevant year and what specific costs make up these charges. This statement must be prepared by a qualified accountant and the landlord or management company must provide the accountant with proof of their costs, such as receipts.
Making service charges more transparent
Leaseholders will have enhanced rights to request information from the landlord or management company about their service charges. Landlords and management companies will be required to provide the requested information, even where it must be obtained from a third party.
Where a service charge includes an amount payable for insurance, the landlord will need to inform the leaseholder of the exact amount of the insurance premium. This allows the tenant to check whether the amount being charged for insurance is reasonable.
Risks for landlords
If a landlord or management company fails to demand service charges or provide annual accounts in line with the new requirements, the leaseholder will have the right to apply to the first-tier property tribunal. The tribunal may order that the service charges are not recoverable. The tribunal could also order the landlord to comply with the requirement and may also order them to pay damages of up to £5,000 to the leaseholder
If a landlord has multiple leaseholders affected by the same issue, they could potentially face several tribunal claims, which may result in service charges being withheld or remaining unpaid. The costs of any damages awarded to leaseholders could also quickly become substantial.
Because leaseholders will no longer be automatically expected to cover a freeholder’s legal costs when raising a dispute, this may increase the number of claims landlords face.
How landlords can prepare for changes to service charge rules
Although the exact implementation date for the new rules is not yet known, they are expected to come into force next year, so time could quickly run out to get things in order.
Landlords and management companies should seek expert legal support to ensure they are ready to comply as soon as the new requirements take effect. This can reduce the risk of disputes with leaseholders, helping to avoid legal costs and potential liability for damages.
How Longmores can help landlords with service charges
At Longmores, we regularly advise landlords and management companies on a wide range of property law matters, including service charge management and recovery. We can help you get in place a compliant mechanism for calculating service charges and ensure you meet all other legal requirements. If a leaseholder is disputing their service charges, we can act on your behalf to recover any outstanding sums.
For expert advice on managing service charges, please contact Lindsey Reid-Cook who will be happy to advise.
Please note, the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
