Strengthening leaseholder protections over fees, charges and services: consultation

1. Introduction

1. It is vitally important that buildings are effectively insured, maintained and managed so they are appropriately looked after and are safe to live in for the benefit of those that live there and so that homes retain their value.

2. These activities of course cost money. But those who pay fees and charges and receive associated services, should have confidence that they know what they are paying for, that these costs represent value for money, and the services they expect are indeed provided and to a reasonable standard. And where disputes arise, they should not be deterred from challenging costs for fear of incurring even more expense through unfair litigation charges.

3. Most charges that leaseholders pay form part of their ‘service charges’. These are financial contributions requested by a landlord (or managing agent acting on the landlord’s behalf) for the costs of the day-to-day management and maintenance of leasehold properties. They cover expenditure such as general maintenance and repairs, building insurance, utility costs and cleaning or upkeep of grounds or communal areas, as well as contributions to major works, such as repairing a roof or replacing a lift. They may also include the costs of management services provided by a landlord or managing agent and contributions to a reserve fund.

4. Individual leases set out details of what landlords can and cannot charge for, the share each leaseholder is required to make, and the frequency of how often service charge demands are issued (the bills they must pay). Many leases also require the landlord to produce an end of year report, including a summary of year end accounts together with a brief explanation of expenditure over the past year. There are also a number of existing statutory rights and protections for leaseholders concerning the charges they pay and services they receive. These include:
   1. That variable service charges must be reasonably incurred and, where they relate to work or services, the work or services must be of a reasonable standard;
   2. The reasonableness of these costs may be challenged through the First-tier Tribunal in England or Leasehold Valuation Tribunal in Wales (“the appropriate tribunal”);[1]
   3. Demands for service charges must be in writing and must contain the landlord’s name and address (unless the service charge is paid direct to a management company);[2]
   4. With any service charge demand, landlords must provide a statutory Summary of Rights and Obligations, which briefly sets out a leaseholder’s rights and obligations when paying a variable service charge. Failure to provide this means that the service charge is not deemed payable until it is provided;
   5. A legal right to ask the landlord for a summary of costs relating to their service charges for the last accounting year, within a specified time period. Leaseholders may request a written summary of costs for the past 12 months. The landlord is required to provide a report within one month of the request or within six months of the year end, whichever is later;
   6. The right to inspect documents relating to the service charges within six months of receiving the summary of costs (such as invoices and receipts). Failure to do so can result in a summary offence against the landlord and a fine of up to £2,500;
   7. A legal right to ask to inspect the buildings insurance policy and any associated documents, and to request a written summary of the insurance; and
   8. Landlords and managing agents must hold variable service charge monies on trust.
5. Where leaseholders either have or do not have the information they need, disputes may need to escalate to the appropriate property tribunal or court. Here, there is also power imbalance between landlords and leaseholders with regards to litigation costs. These can deter leaseholders from disputing charges they consider unreasonable. Currently, most leases have a contractual term allowing the landlord to recover litigation costs from leaseholders, for costs incurred by the landlord if there is a legal dispute between landlord and leaseholder. Leaseholders can apply to limit their liability for their landlord’s litigation costs, but the onus is on them to do so. Furthermore, leaseholders currently do not have a contractual right to recover their litigation costs from their landlords.

6. These existing transparency requirements and protections for leaseholders are limited and it has been clear for some time that they do not go far enough. Enquiries about service charges represent the single biggest issue leaseholders seek help with from the Leasehold Advisory Service (LEASE), representing over 12,000 enquiries over the last 12 months, and over 90,000 service charge searches on its website. In 2023/24, service charge enquiries alone made up over a quarter of enquiries to LEASE in England. It is clear that for many leaseholders, they do not understand what they are paying for, are often not assured that costs are reasonable, and also lack confidence in disputing charges.

7. Concerns about transparency and accountability of fees and charges have become ever more pressing alongside cost of living pressures over recent years. The level of service charges has, for many, increased significantly. These charges represent a major financial outlay for many leaseholders, alongside other living costs, so it is important that they have the assurance that they are not being asked for more money than is necessary to manage their buildings, and that buildings are well managed and maintained. Leaseholders also need fair access to redress for when things go wrong.

8. Many landlords, or managing agents acting on their behalf, provide a good service and are responsive to the needs of their leaseholders. However, where things do go wrong, we have heard from leaseholders and from landlords and managing agents themselves that the existing statutory provisions are not fit for purpose. Some of the main complaints include:
   1. Leaseholders are not provided with sufficient information or with sufficient detail to understand the charges they are asked to pay;
   2. Information presented to leaseholders can be hard to understand or hard to compare between different years or between different properties;
   3. Leaseholders are not provided with sufficient information about the physical condition of their building;
   4. Leaseholders are often unable to access relevant information to understand what major works are needed and how costs for them are calculated;
   5. The costs to leaseholders of acquiring information to help make a decision on whether to challenge fees and charges can be expensive and time consuming;
   6. Landlords may be able to charge their litigation costs back to the leaseholder through the service charge, regardless of the outcome of a dispute.
9. The UK and Welsh governments are committed to strengthening protections over the fees and charges leaseholders pay and services they receive. That is why we are implementing measures in the Leasehold and Freehold Reform Act 2024 (“the 2024 Act”). But also to go further to provide greater protections over major works costs and to regulate the managing agent sector, which provides the building management services on which many leaseholders rely.

10. These reforms sit alongside our wider package of leasehold and commonhold reform, so that in future leaseholders will more easily be able to take control of their buildings themselves by exercising their Right to Manage; enfranchising (buying their freehold); or converting to commonhold. Outside of this consultation the UK government is also committed to bringing forwards further new reforms to make life better for existing leaseholders. This includes removing the draconian and disproportionate threat of forfeiture and tacking unregulated and unaffordable ground rents.

11. The UK government also want new flats to be sold as commonhold so that homeowners can benefit from full freehold ownership from the outset. On 3 March, the UK government published the Commonhold White Paper as the first step towards that ambition. While more and more leaseholders exercise new rights to take greater control over their homes and as we transition to greater use of commonhold, existing leaseholders will not be left behind.

1.1 Implementing the Leasehold and Freehold Reform Act 2024

12. Part 4 of the 2024 Act contains a number of reforms to improve the statutory protections for leaseholders and help them challenge the charges and services they consider unreasonable. These measures focus on making more, and better accessible, information available to them and to ensure that where disputes arise, leaseholders are not liable to pay for unjustified litigation costs. These include:
    1. Standardising the information landlords will be required to provide leaseholders, by introducing a new standardised service charge demand form and annual report;  
    2. Requiring landlords to provide leaseholders with greater certainty of cost and timing of any future demand for payment which is expected more than 18 months after the cost was incurred;
    3. Expanding the amount of information on request that landlords must provide to leaseholders;
    4. Introducing an administration charge schedule, which sets out the minimum level of information that landlords must provide leaseholders about administration fees;
    5. Requiring landlords to proactively disclose to leaseholders details of the building insurance policy that was purchased;
    6. Ensuring most service charge accounts be provided within six months of the end of the previous service charge accounting period, regardless of the lease terms; and
    7. Requiring landlords to apply to the relevant court or tribunal for approval to pass their litigation costs onto leaseholders (i.e. the landlord’s right to recover litigation costs is no longer automatic) and giving leaseholders the right to apply to claim their litigation costs from their landlord.
13. Once implemented these reforms will improve transparency so leaseholders have a better understanding of the charges they are asked to pay, can better understand how their building is managed and hold their landlords to account, and have greater confidence that should a dispute escalate to the appropriate tribunal or courts, the awarding of litigation costs will be fair.

14. Through improved transparency and removing barriers to challenge, we also expect to limit opportunities for abuse or poor practices in the first place.

15. In addition to implementing these measures in the 2024 Act, we want to provide a comprehensive set of reforms around the charges that leaseholders pay and services they receive. Key gaps in protections for leaseholders will remain. That is why we propose further reforms. Firstly, to address the stress and harm that may be caused by large and unexpected bills for major works. And secondly, to improve the standards of managing agents, who for many leaseholders, provide the management and services on which they rely and pay for, but are not directly appointed by or accountable to them.

1.2 Proposed new reforms, including for ‘major’ works and managing agents

16. There are frequent headlines of leaseholders suddenly facing bills for thousands of pounds, seemingly out of nowhere. While buildings will from time to time need significant repairs to its fabric, such as a roof repair, or replacement of expensive assets, like a lift, it is not right that poor planning and communication should lead to leaseholders having to suddenly find huge amounts of money to pay for major works. Behind the headlines there are countless instances of the existing major works regime failing leaseholders but also failing landlords. Be it adding bureaucracy to unnecessarily delay even relatively minor repairs or standing in the way of them shopping around to get the best deal or tariff from an energy company.  

17. The major works process, set out in “Section 20” of the Landlord and Tenant Act 1985 (“the 1985 Act”) and accompanying regulations, was introduced to provide leaseholders with the right to influence one-off bills. The existing regulatory framework, including the thresholds for consultation, has remained unchanged for over 20 years and is no longer fit for purpose. We set out proposals to improve the process to ensure it meets the needs of leaseholders while also seeking to avoid unwieldy or unhelpful burdens on landlords.

18. As the UK government set out last year, we also intend to act to protect leaseholders from abuse and poor service at the hands of unscrupulous managing agents. We committed to strengthen regulation of managing agents to drive up the standard of their service. As a minimum, this should include mandatory professional qualifications which set a new basic standard that managing agents will be required to meet. Managing agents play a crucial role in managing and maintaining buildings and freehold estates on behalf of the landlord and estate manager. Managing a building has become more complex in recent years, as landlords have greater legal obligations. This is confounded by the current system where anyone can practise as an agent. There is no current requirement on agents to be qualified.

19. The importance of having a suitable and competent person to manage shared buildings will also increase as the UK and Welsh governments move towards a future where more and more homeowners of shared buildings have control over how their building is run and will need to rely on the support that managing agents can provide. In all settings, homeowners should expect that where a managing agent is employed by them or on their behalf, that they are operating to an effective and appropriate standard as a matter of course.

20. There are a number of other matters regarding leaseholder charges and protection of their money, where we would welcome further thoughts on whether existing arrangements remain sufficient or whether further changes are required. These include protections for those paying fixed service charges and whether all service charge monies held by landlords or managing agents on leaseholders behalf are sufficiently protected. We are also seeking views about whether changes are required to improve the current right for leaseholders to apply to the appropriate tribunal to appoint a manager in cases where there is significant management failure by either the landlord or managing agents acting on their behalf. We also want views on the opportunities and benefits of greater provision of information through digital means. We are interested in exploring how digital and electronic communication can improve access to information and the efficiencies that could be realised as well as ensuring there are safeguards so that all leaseholders can access the information to which they are entitled.

21. We want your views on each of these proposals to improve the leaseholder experience, and to ensure that the package as a whole works for leaseholders, landlords and managing agents alike.