The Service Charge: Understanding the What, Why, and How.

As a UK housing association tenant, one of the additional costs that we have to factor into our budget is service charges. These charges are essential for maintaining and providing services for our properties, including communal areas, cleaning, and repairs. However, service charges can also create tension between tenants and housing associations.

In this blog post, we will delve into the issue of service charges from a housing association tenant's perspective. We will explore ways in which housing associations can reduce costs, examine the impact of service charge increases on tenants, and discuss why tenants may feel they are not receiving value for money.

We will also provide guidance on what tenants can do if they believe they have been overcharged by their housing association. Given the current 'cost of living crisis,' it is more important than ever for housing associations to keep service charges reasonable, transparent, and justifiable to avoid affecting tenants' quality of life and the landlord-tenant relationship.

What is a service charge?

Service charges refer to the payments made by leaseholders to their landlord, as per the contractual agreement stated in their lease, for the services the landlord is responsible for providing. The amount of service charges can vary each year depending on the costs incurred by the landlord, and they are usually divided among leaseholders based on the terms specified in their individual leases.

Some examples of services that may be covered by service charges include maintenance, repairs, and sometimes improvements to the exterior, structure, roofs, foundations, window frames, guttering, communal drains and pipes, common areas, building insurance, and management costs. It is essential to note that this list is not exhaustive, and leaseholders should always consult their lease for full details of the service charges payable.

The lease agreement typically specifies when service charges are due, which is usually once or twice a year, either at the start of the calendar or financial year (April - March), or on quarter days. In most modern leases, service charges can be paid in advance based on an estimate of costs for the upcoming year, before the landlord incurs the actual costs. However, some older leases may allow for recovery in arrears, meaning that the landlord must first incur the cost before charging the leaseholders.

Reserve Fund “Sinking Fund”

In cases where the lease allows for cost estimates, the landlord typically provides a statement of actual expenditure at the end of the year, which must be given to the leaseholder. Some leases may require that the statement be audited or certified by a professional accountant. If the statement shows that the landlord has spent more than estimated, the lease may allow for the recovery of the shortfall from the leaseholder via a "balancing charge." Conversely, if the landlord has spent less than estimated, the lease may provide for a credit for the overpayment to be carried forward to the next yearly payment or returned to the leaseholder, or transferred to a "reserve fund.”

A reserve fund, also known as a "sinking fund," is a sum of money set aside to cover the cost of future major works, such as repainting or redecorating the entire building, or replacing window frames. Some leases allow the landlord to request payment towards this fund through the service charge. The goal is to ensure that leaseholders do not have to pay a significant bill when the work becomes necessary. However, unless the leaseholder reaches an agreement with their buyer, they will not receive any portion of this contribution if they sell their property.

Some salient points for residents to consider

The Landlord and Tenant Act 1985, as amended, sets out the criteria for the recovery of a service charge by a landlord. The costs must be reasonably incurred, and the works carried out must be of a reasonable standard. A leaseholder can challenge the reasonableness of a service charge if it fails to meet these criteria by applying to the appropriate tribunal, such as the First-tier Tribunal (Property Chamber) in England or the Leasehold Valuation Tribunal in Wales. The tribunal has the power to determine whether the service charge is reasonable or payable.

When a landlord demands a service charge, the demand must include their name and address. An agent's name and address are not sufficient. The demand must also provide a "summary of leaseholders' rights and obligations," which includes information on a leaseholder's right to apply to the tribunal. If these requirements are not met, the leaseholder has a legal right not to pay until the demand is issued correctly.

The law requires that any service charge contributions are held on trust by the landlord for the leaseholders. This means that the money can be held in one or more accounts, such as a bank or building society, to be used for the purposes outlined in the lease. If the landlord becomes insolvent, this money is protected for the benefit of the leaseholders against any other creditors seeking payment.

Why it was inevitable that Service charge fees would increase

Cost of living crisis In short

In February 2023, the Consumer Price Index (CPI) showed a significant increase of 10.4% compared to the previous year. This rise is attributed to the escalating costs of consumer goods, resulting from both high demand and supply chain issues, particularly in the food sector, where prices reached a 45-year peak.

In addition to this, energy prices have been a significant contributor to inflation, with gas and electricity prices soaring by 129% and 67%, respectively, between February 2022 and February 2023, mainly due to the reduction in Russian supply following their invasion of Ukraine. To tackle the surging energy bills, the UK government implemented the Energy Price Guarantee (EPG), initially capping annual consumption at £2,500 for two years, which was later reduced to six months. In the Spring Budget 2023, the Chancellor announced an increase in the EPG to £3,000 for typical annual consumption, but this was subsequently postponed from April to July.

The conflict between Russia and Ukraine has also had a significant impact on global commodity prices, including agricultural products and metals, leading to higher food and materials prices in the UK.

Cost of living crisis In full:

DOWNLOAD LINK - Cost of living Crisis and the Social Housing Rents.

The UK government has implemented a policy to limit social housing rents in England to the Consumer Price Index (CPI) plus 1% for five years, beginning in 2020. However, in April 2022, most tenants experienced a rent increase of 4.1%, which was the largest rise in a decade. The National Housing Federation (NHF) has reported that overall construction costs' inflation accelerated to 9.6% in June 2022, with new housing costs rising even faster, and repair and maintenance prices surging in 2021 and 2022.

To address the rising costs, the government has opened a consultation on a new rent ceiling from April 1, 2023, to March 31, 2024. The new rent ceiling could potentially set an upper limit of 5%, 3%, 5%, or 7% on the maximum amount by which registered providers of social housing can increase rents in that year. The National Housing Federation (NHF) and Local Government Association (LGA) welcomed the opportunity to respond to the consultation. However, they also raised concerns about the potential impact on services if the funding gap is not addressed.

During the Autumn Statement 2022, the Chancellor announced that social housing rents in 2023 would increase by a maximum of 7%. This increase could provide some relief to registered providers of social housing, but it remains to be seen how it will affect tenants' ability to pay their rent.

DOWNLOAD LINK -  The impact of higher inflation on social renters

Has the Service Charge become the ‘secret charge’ aimed to recoup cost lost due to rent caps?

Given the current low level of trust, the additional service charge may be perceived as a hidden fee that can be squeezed out of residents. The housing association sector can inadvertently exacerbate this issue, risking a further loss of trust and transparency. Building and maintaining a strong relationship between tenants and UK housing associations relies on trust and transparency.

When tenants feel that their housing association is not prioritising their needs, or that there is a lack of transparency around spending, it can damage the relationship between the two parties. Therefore, it is essential for housing associations to consider the perceptions and concerns of their tenants when making decisions around spending and communication.

Tenants struggling to afford the service charge will likely fall into arrears, debt, and even face eviction, leading to a combative rather than supportive and collaborative relationship. Tenants may also lose faith in the housing association if they feel they are being charged unfairly or without justification, further damaging the relationship between landlord and tenant. Additionally, if tenants feel they are being charged unfairly, they may seek legal advice and take legal action against the housing association.

For tenants, the fact that they have been paying a service charge but not receiving value for the money spent has caused concern about the abilities of the provider. This concern may lead to reluctance to pay an increased fee year on year. If residents are charged a service charge for buildings that are not being adequately maintained, it has a significant impact on the relationship between tenants and UK housing associations. Therefore, it is crucial for housing associations to ensure that properties are correctly maintained, and services are provided to a high standard.

While landlords are compelled to increase service charges to cover operational expenses, there are ways to decrease cost escalation and the potential risks of legal challenges in the First-tier Tribunal. These measures can assist in navigating through difficult times.

What could be done? (In no order)

Housing associations can reduce energy costs significantly by installing solar panels or using wind turbines to generate electricity. It's important to ensure that doors, windows, immersions, and boilers are adequate for heating when building new homes, rather than going for the cheapest quote, which could lead to higher costs down the line.

Performing regular maintenance on properties can prevent costly repairs in the long run and help keep service charges down. It's important to be proactive rather than reactive, as by the time a problem is reported to the customer service team, it may already have caused significant damage.

This can strain the resources of the housing provider, including maintenance crews and replacement parts. Conducting risk assessments and health and safety checks can help prevent accidents and reduce insurance premiums, which can ultimately benefit both the housing provider and the tenants.

By implementing IoT and automating processes such as rent collection, maintenance scheduling, and inventory management, housing associations can significantly reduce the need for manual labor and cut costs. However, it's crucial to future-proof these new tools by anticipating potential integration with third-party databases resulting from mergers.

Employee residents with Smartphones who can be used to accurately report maintenance issues, providing location data, photos, and warning messages etc.. Additionally, landlords and tenants can easily share documents, procedures, and best practices through this technology, making it a valuable tool (figuratively and literally) in the palm of our hands. Furthermore, the collective data can be mined and sold, providing an additional revenue stream to both parties.

Outsourcing certain services such as cleaning, gardening, and maintenance can help reduce costs. Additionally, employing tenants from within the neighbourhood to help manage and maintain buildings can provide a presence within the community. Involving tenants in decision-making processes and encouraging them to promptly report maintenance issues can help prevent larger and costlier repairs.

Housing associations can save money by collectively purchasing goods and services, which can help to negotiate better prices. For instance, if a block of flats is using excessive energy due to outdated washing machines, why not consider bulk-buying forty new energy-efficient machines and creating a payment scheme for the residents? This approach ensures that residents have affordable, efficient washing machines that reduce energy bills, while putting the housing association at the forefront of tenant engagement, within the community, seeking solutions and providing support and guidance. With a competent purchasing department, the association could potentially make a profit on this idea and pass on the savings to residents. Furthermore, recycling the old machines can generate revenue from the sale of recycled materials and reduce waste disposal costs.

Housing associations can apply for government funding and grants to cover the cost of certain projects, such as energy efficiency upgrades and building maintenance. It is important to pitch innovative ideas and seek funding for them. I have provided you with some ideas off the top of my head, free of charge.

In conclusion

In recent years, tenants have become increasingly dissatisfied with the perceived misallocation of housing association funds. Spending money on award ceremonies or high executive salaries while neglecting the needs of tenants is seen as a waste and can create a lack of trust in the housing association. While some housing association executives deserve their high salaries, others do not. If complaints are being upheld by the Housing Ombudsman or regulatory judgments are being issued, it may be time for leadership changes and a review of executive salaries.

One solution may be to implement a bonus system for successfully achieving strategic goals that benefit the housing association and its residents. Demonstrating the value of a CEO's leadership can help align their salary with their contributions.

In today's economy, everyone is feeling the effects of a downturn, and housing providers need to bring value and sustainability to their tenants. Mishandling service charges can result in tenants protesting and even resorting to crime to provide for their families. It is crucial to prioritise the needs of tenants and ensure that funds are allocated appropriately to maintain properties and provide adequate services.

Resident must see a return for this money…