Strengthening leaseholder protections over fees, charges and services: consultation

2.2 New standardised service charge demand form

37. A service charge demand is an invoice issued by a landlord or managing agent outlining how much an individual leaseholder must pay for their buildings management, maintenance and insurance. The services or works for which monies may be collected and the period of time each invoice covers will be determined by individual leases. Each leaseholder receives at least one such demand over a twelve-month period.

38. Currently, the law only requires that the service charge demand forms include the following information:
    1. the landlord’s name and address or, if the landlord is outside England and Wales, the demand must contain an address in England and Wales at which notices may be served on the landlord by the leaseholder;[9] and
    2. the Summary of Rights and Obligations.[10]
39. Beyond these requirements, the service charge demand must be provided in accordance with the lease, but otherwise landlords can determine the format and contents of the demands as they wish. The HCLG Select Committee’s 2019 report on Leasehold reform, and Lord Best’s Regulation of Property Agents report, both recommended standardising service charge demands to ensure consistency and help leaseholders understand costs better.

40. The Secretary of State and Welsh Ministers have powers in the 2024 Act to prescribe the format and content of service charge demand forms. This includes all demands for payment made throughout the 12 month accounting year, including any demand that accompanies the serving of the financial statement of accounts (and occurs where costs for the previous accounting period are more than anticipated in the estimated costs). The 2024 Act also repeals Section 21B of the 1985 Act, enabling us to update or replace the current Summary of Rights and Obligations. 

41. Our proposals to standardise the service charge demand form seek to set a minimum level, rather than limit the level of detail that must be provided. Landlords can choose to provide more detail if they wished. We would like to get views on the minimum level of information and detail at which it should be provided that leaseholders and landlords consider would be appropriate for the new standardised service charge demand form.

i) Proposed contents of the new service charge demand forms

a) The initial service charge demand form

42. Given the level of information proposed for inclusion in the annual report (see section 2.1), we propose that the initial service charge demand form (which is the first demand issued in the accounting year) should focus on the financial contribution that individual leaseholders must pay towards the management and maintenance of the building for that period, and include:
    1. Name and address of leaseholder, landlord and property for which service charges are payable. In cases where the party serving the demand is not the landlord, the landlord’s details should also be given where possible;
    2. The total amount payable for the period based on the budget;
    3. Payment details and deadline;
    4. Consequences of non-payment; and
    5. Annual Budget – details of planned expenditure on maintenance, insurance and management costs for the building.
43. Most leases will set out the time periods when a landlord may issue a service charge demand to their leaseholders. Some leaseholders may also receive interim demands, issued mid-year or at other intervals. We are minded that these should include the same information as initial demands except for details of the annual budget (on the grounds that it is not necessary to provide this information repeatedly). We would welcome views on this approach.

44. As part of proposing the detail of the service charge demand form, we have had regard to requirements for England which are set out in Section 113 of the Building Safety Act 2022. This has not yet been commenced, but will introduce a new requirement that, for buildings over 18 metres, a service charge is not deemed as being served until the landlord has provided relevant building safety information to the leaseholder.[11] This means that the information must be provided with the service charge demand. It is right that leaseholders in buildings over 18 metres receive this information, but we want to seek views on whether this information should be provided with every service charge demand or could be provided once as part of the new Annual Report.

45. A mock-up of the proposed service charge demand is at Annex B.

b) Details of the annual budget

46. The annual budget is a key component of any information provided to leaseholders. It is intended to clearly show an estimate of what the landlord intends to spend money on and recover through the service charge. In many blocks, all leaseholders will pay for exactly the same services. In others, costs vary depending on who has access to or uses specific facilities, like a car park or exclusive access to certain communal areas. In such cases, the budget may be divided into different parts or schedules to reflect this to make it easier for individual leaseholders to understand what they are expected to contribute.

47. Our preferred approach is to require the budget to be provided as part of the initial service charge demand form and, as part of the demand form it should cover the budget for both the previous and existing accounting period. We recognise that there is a risk that the budget for the accounting period might be an estimate, but we consider that even an estimate will give leaseholders a clear idea of where there are likely to be changes in expenditure. We do recognise though that there are also grounds to have the budget form part of the annual report, which would mean that landlords would have to submit a budget within a month from the end of the accounting period, regardless of the terms of individual lease. We are seeking views on when the budget should be provided.

48. We are also seeking your views on two options for the level of detail for which the annual budget should be broken down. Information is intended to provide leaseholders with a better understanding of what their service charge pays for, but we want your views on what level of information you think is sufficient and proportionate for leaseholders’ needs.

49. Annual budget Option 1: A simple breakdown under a limited number of standardised high-level headings for heads of costs as follows:
    1. Management fees
    2. Utilities
    3. Security costs
    4. Grounds maintenance
    5. Health and Safety Obligations
    6. General repairs and maintenance
    7. Building insurance costs 
    8. Professional fees
    9. Contribution to reserve fund
    10. On-site staff wages
50. This seeks to give a high level of detail, but without seeking to overload leaseholders with potentially too much information (noting they will also have wider rights to request further information should they wish, see section 2.4), nor increasing landlords costs too much. See Annex B for an illustrative example of Option 1.

51. Annual budget Option 2: Proposes a more detailed breakdown, which more closely follows the recommendation in Lord Best’s report on the Regulation of Property Agents, with subcategories under each heading. For example:
    1. Management fees - further broken down into, for example, concierge/reception, managing agent fee, stationery and postage, directors and officers insurance, etc..
    2. Utilities - further broken down into gas, electricity, water etc.
52. While this approach further increases transparency, it could raise costs for landlords which would likely be passed on to leaseholders, who may also find this level of detail overwhelming. See Annex B2 for an illustrative example of Option 2.

c) Reconciliation demand forms

53. Reconciliation demands are issued alongside a financial statement of accounts. These show whether there was an over or underspend in the previous accounting year. If costs were higher than expected, leaseholders will receive a further demand for payment. If costs were lower, leaseholders may get either a credit note for a refund, or a deduction carried forwards for their next service charge demand.

54. The 2024 Act gives the Secretary of State and Welsh Ministers powers to prescribe a specific format for reconciliation demands.[12] We propose that the reconciliation demand form should include a single demand and an explanation of the nature as well as amount of the over or underspend, and use of a table comparing the budget with actual costs incurred. It is proposed that landlords can decide how to explain any differences, but that it should be made clear to leaseholders the reason for the demand and to also empower leaseholders to ask the landlord for more detail if they wish. An example of the proposed new reconciliation demand form is at Annex B3.

ii) Exemptions for new service charge demand forms

55. Our starting point is that there should be no exemptions to providing the new service charge demand forms to leaseholders. The intention with the proposed approach is that these forms should provide a simple, accessible and cost-effective way of giving leaseholders clear information about their obligations. We would however, welcome views on whether there are any circumstances or justifications for any exemptions. We will also keep matters under review over time, should future grounds for any exemptions arise.  

iii) Manner of provision of service charge demand forms

56. Measures in the 2024 Act allow us to prescribe how service charge demands are provided to leaseholders. Currently, the method is determined by the lease, which may require demands to be sent by post or that the landlord must follow relevant notice provisions under Section 196 of the Law of Property Act 1925. The current requirements set minimum expectations on a landlord, while giving leaseholders flexibility to agree informally on a different means of receipt with landlords (e.g. use of email).

57. We are not minded to prescribe any new arrangements, as the current system allows helpful flexibility. We do however recognise the growing use of digital communication and benefits this may offer in terms of improving accessibility and reducing costs. This issue is considered further across the wider provision of information to leaseholders in section 3.6.

iv) Transition arrangements and costs for service charge demand forms and annual report

58. Landlords, managing agents and leaseholders will need to adapt to the new requirements for standardises service charge demand forms and the provision of an annual report. Landlords and managing agents may need to update IT systems, train staff, or adjust their processes to meet the new standards. That said, the new service charge demand forms will likely be similar to demands currently used by most landlords and should integrate into existing practice. Much of the information required for the annual report is also likely to be already readily available.  

59. The costs of these new arrangements were not costed as part of the Impact Assessment that accompanied the 2024 Act as further detail is required of the information requirements to make that assessment. This detail is set out in proposals in this consultation and we are seeking views on likely one-off costs for setup and familiarisation as well as ongoing provision. Once implemented, ongoing costs we expect should be limited.

60. We want to understand how these costs will affect businesses and whether and if so to what extent, they will be passed on to leaseholders through the service charge. We also recognise that, to prepare for the new arrangements, a transition period is likely to be needed, and which takes account of the service charge cycle. We want the transition period to be as short as feasible and would welcome views on informal suggestions from stakeholders we have received that a 12 month transitional period from the commencement of these regulations would be appropriate to prepare for the new requirements for demand forms and the annual report to take effect.