Strengthening leaseholder protections over fees, charges and services: consultation

Part 2: New additional service charge reforms

3. New proposed reforms of the major works regime

201. A lease will specify which areas of buildings the landlord and leaseholder are each responsible for maintaining. The landlord is normally responsible for maintaining, repairing and sometimes improving the structure of the building as well as common parts, such as roofs, stairways and structural walls, or assets such as lifts or a communal boiler. Some works to maintain, repair or replace these parts of the building may be planned, but others may be unexpected for example, due to emergency repairs.

202. Works are defined as ‘major works’ for the purpose of existing legislation if they cost more than £250 per leaseholder (known as ‘qualifying works’).  Existing rules concerning expenditure on major works are also commonly known as “Section 20”, in reference to that part of the 1985 Act and accompanying regulations. They were introduced to give leaseholders a say on works carried out on their building, who carries that work out, and advance notice on when they might take place (a detailed overview of the existing regime is provided in Annex H). For major works a landlord is required to carry out a two-stage consultation process with leaseholders before carrying out any works. Separately, there are similar processes in place if a landlord enters into a ‘Qualifying Long Term Agreement’, where a contract lasts more than 12 months and costs more than £100 per leaseholder. In some circumstances, only one stage of consultation is required.

203. It is good practice for landlords to as far as possible plan ahead for major works and seek to set monies aside in advance. For example, the lifespan of parts of the fabric of the building or assets may be anticipated. This is because one-off and unexpected bills for major works can be stressful and difficult to finance for many leaseholders, which can be several thousand pounds per leaseholder for a major repair or refurbishment programme. In spite of the existing Section 20 regime, many leaseholders also do not receive sufficient warning over the need for and timing of works. This gives them little opportunity to make arrangements to cover the often substantial sums required. Poor planning and communication about major works expenditure can also lead to an unfair lottery for leaseholders. For example, one leaseholder may live in a building for many years and in effect, not contribute to the replacement of a lift if they sell their flat before work is undertaken and there is no reserve fund setting aside money for this future expenditure. In contrast, the leaseholder that moves in may face a large bill for the works having only just moved in.  

204. The current arrangements for major works have come under criticism from both leaseholders and landlords, and for a number of reasons including:
     1. Proportionality – the consultation thresholds (£250 for qualifying works and £100 for Qualifying Long Term Agreements) have not changed for over 20 years, and so inflation has pulled relatively minor works and repairs into scope. The process itself takes at least three months which may be excessive for straightforward works;
     2. Asymmetry – leaseholders can find it difficult to engage with aspects of the consultation process, to make meaningful observations or actively participate in the process;
     3. Transparency – leaseholders do not receive sufficient warning of the works, nor a sense of the full costs of the work sufficiently early in the consultation process, leaving them with a sudden bill of thousands of pounds which they might struggle to pay; and
     4. Planned works – the Section 20 process seeks to consult leaseholders in anticipation of forthcoming major works, but in themselves do not require landlords to plan ahead. Leaseholders may only be given a number of months notice of a major bill, whereas the need for major works may well be known many years in advance.
205. The previous UK government asked Lord Best to lead an expert working group and report on regulation of managing agents, as well as make recommendations around the fees and charges that leaseholders face. The Regulation of Property Agents report concluded in 2019 and recommended a number of reforms around major works. These include that the UK government should consider:
     1. making use of a reserve fund mandatory in both new and existing leases;
     2. if reserve funds are introduced, how to ensure that it is effectively funded, such as being underpinned by a professionally certified asset management plan; and
     3. a wider review of the effectiveness of the consultation procedures.
206. We agree with Lord Best’s proposals, and this consultation seeks views on reforming the existing regime, so that it delivers for landlords, managing agents and leaseholders. The measures set out below should be seen as a total package but can be introduced individually.

3.1 Mandating reserve funds and planning for major works

i) Reserve funds

207. Reserve funds are funds collected over time to cover the costs of planned future large items of expenditure, such as the replacement of a lift or roof.

208. Some leases, particularly in newer properties, require reserve funds, with contributions to them forming part of the service charge demand, and monies are held in trust. Other leases permit a voluntary reserve fund, where landlords and leaseholders may agree to set one up. Many existing leases do not require a reserve fund at all.

209. Reserve funds have a number of benefits. They allow costs to be smoothed over time so that individual leaseholders may be asked to contribute a smaller sum each year for a number of years, rather than nothing at all followed by one very large bill. This also means that costs may be fairer as they are contributed to over time by the leaseholders that benefit from having or using the infrastructure or asset, rather than just the leaseholders that happen to be present when the cost is incurred. They also help reduce delays to necessary works caused by the inability of leaseholds to pay large sums at short notice. Reserve funds may also make properties more attractive to buyers, as they are an indication of the good management of a building and prospective buyers could even choose to buy one property over another where a block has a well-funded reserve fund compared to one without. Especially where reserve funds are maintained in tandem with transparent information on planned future maintenance (see ‘asset management plans’ below).

210. We recognise that contributing to a reserve fund will result in increased service charges. This may be difficult, especially for leaseholders struggling to pay for existing regular service charges. But those same leaseholders risk significantly greater financial difficulties when a large major works bill is required to be paid. Inability to pay a large bill could put a leaseholder’s ownership of their property at risk and may also negatively affect other leaseholders by delaying necessary works to take place. There are similarities with putting money aside for a pension. A key difference here though is that failure to financially plan ahead may not only negatively affect an individual leaseholder, but in a shared building, may also negatively affect fellow leaseholders in the building too. We believe that given the longer-term benefits and how it will help minimise risk of large one-off bills, we are minded to propose that use of reserve funds should be mandated. We are seeking views on this proposal as well as how it could be implemented to benefit both new and existing leases.

211. We think all new leases created for flats should have a reserve fund, and would like to encourage and make it easier for existing leaseholders to set up reserve funds too. The UK government wishes to make commonhold the default for new flats and will consult on banning the use of leasehold for new flats later this year. This consultation will consider the case for exemptions where use of leasehold may still be necessary as well as transitional arrangements in advance of a ban so that the pipeline of new much needed supply is not negatively affected. Therefore, either temporarily, in advance of a ban for new builds, or in the longer term for any necessary exemptions as well as for the existing leasehold stock, we believe that leaseholds should be provided on the best possible basis for homeowners. And reserve funds should be a key part of this improved offer for leaseholders.

212. While landlords and leaseholders can today agree to vary their leases, and could do so to create a reserve fund, the current law does not make this easy. Doing nothing will not result in an increase in the number of funds being created and saved into.

213. To increase provision of reserves in existing blocks, we propose to introduce both new primary and secondary legislation to:
     1. make it easier to vary a lease to set up a fund, using secondary legislation powers;
     2. allow for the establishment of a reserve fund, regardless of the terms in the lease, through primary legislation. Here, a criteria to allow a new reserve fund to be set up could be set out. This might include:
        1. Requiring regular landlord consultation of leaseholder appetite to create a reserve fund (e.g. proactively advertising the absence of a reserve funds and seeking views about setting one up as part of the new annual report);
        2. Setting a threshold of 50% support of all leaseholders who live in the block, above which landlords must formally ask leaseholders if they want a reserve fund;
        3. Setting out a time period by which all existing leaseholds without a reserve fund, save for any specified exemptions, should create one.
214. We think that the following principles should underpin greater use of reserve funds:
     1. Reserve funds should be held in trust and not be used for regular service charge expenditure;
     2. Reserve funds should be tied principally to long term maintenance plan for works in the building. This would ensure landlords and leaseholders are clear on why funds are needed and what they are expected to cover. We set out further details in paragraphs 216-226.
     3. Reserve fund contributions should be collected in the same proportions as existing service charges, and as part of the service charge demand.
     4. New reserve funds should, in most circumstances, be protected for a period to allow them to build up, recognising that there will still be situations when it is appropriate to draw on these funds sooner than expected; and
     5. Landlords should be transparent with leaseholders about the intended use of and contributions held in reserve funds. This could be done through the annual report and service charge accounts.
215. Use of reserve funds may not be feasible nor necessary in all circumstances. We are minded to exclude certain types of properties or landlords from a requirement to set up a reserve fund. These include:
     1. Local authorities (where they are the superior landlord or landlord with the repairing obligation on buildings), given challenges around the setting up of reserve funds within a Housing Revenue Account;
     2. Retirement homes where they are covered by fixed service charges so there is no need to create a separate reserve fund; and
     3. Small, leaseholder-run dwellings (e.g. four units or fewer) on the grounds of proportionality, though equally they should benefit from reforms to make setting up a reserve fund easier should they wish to voluntarily set one up.
216. Reserve funds should be for a specific purpose. Our preference is that they are used in tandem with an Asset Management Plan (AMP) or similar arrangements (sometimes referred to as Long-term Maintenance Plans, Life Cycle Assessments, Capital Expenditure Plans or, in Commonhold, Reserve Fund Studies).[22] These plans are used to assess the condition of a property, forecast future repairs and maintenance, and may project the costs of these works. They cover the refurbishment and replacement of specified items and works, seek to anticipate the length of time that passes before each repair or replacement is necessary, and the anticipated costs. There is well established practice where the lifespan or service requirements of infrastructure or assets may be estimated, based upon existing practice or manufacturers recommendations. The building itself will require inspection and periodic review to inform and where necessary update the plans.  

ii) Proposals for the use of AMPs and how they could be prepared  

217. AMPs should provide landlords and leaseholders with a long-term forward look of the scope and extent of major works required on a building over a specified period. Our view is that AMPs should cover, at the very least: 
     1. Any works required to meet health and safety and building safety requirements relating to the maintenance of buildings; 
     2. Any works required for the landlord to meet any other statutory obligation regarding the physical condition of the building; and 
     3. Any works required for the landlord to meet their maintenance and repair obligations under the terms of the lease.  
218. We think that it is important to set a framework around the preparation of AMPs to ensure that they are used effectively, and are proportionate so as to avoid excessive cost. We propose four principles to guide the use of AMPs:
     1. AMPs should be developed through a combination of surveys and desktop documents such as general building condition surveys, fire risk assessments or other desktop reports. They could be supplemented by reports on specific issues where appropriate, such as asbestos, lift maintenance, electrical safety, building safety cases, prepared periodically and in line with other statutory obligations. The age of the building also needs to be taken into account: e.g. new builds will need less information initially, and are likely to be covered by the developer’s warranty agreements;
     2. AMPs should cover a period of between 5 to 10 years ahead. Once produced, the plan should not require review or amendment for 5 years until the next review unless a significant issue is identified in the interim period;
     3. AMPs should also provide indicative costs. This means:
        1. Landlords should be clear about what costs cover, such as whether it is solely the costs of the works or other wider relevant costs, such as scaffolding, professional fees, project management fees or Value Added Tax.
        2. The AMP should, if possible, refer to documents that allow leaseholders to make their own assessment of costs increases if works are planned for later in the plan period;
        3. Landlords should be clear about whether they include industry standard contingency of 15% of the total costs, to account for any unexpected works that may arise, and to account for any shortfall in estimates and inflation; and
        4. AMPs should make it clear which works are or might be covered by a building warranty (which is especially relevant for a new building).
     4. AMPs should be signed off by a competent person, such as a chartered building surveyor, who is able to make an informed decision on works that may or may not be necessary.

iii) Scope of Asset Management Plans 

219. We want as many leaseholders as possible to benefit from greater upfront notice and information about major works to be carried out. For this reason, we propose that AMPs should be prepared and maintained for all new leases in flats, unless specifically exempted.

220. We consider that AMPs should be prepared for existing leasehold blocks. Where a landlord is already required to prepare an AMP our expectation is that they would review their existing arrangements, and refine, if necessary, to ensure the AMP complies with any new obligations.

221. We would welcome views on whether any landlords should be exempt from preparing an AMP. Given the close relationship and proposed link with reserve funds (as discussed at paragraphs 214 and 216 above) there are grounds to align the exemptions. We think AMPs should be prepared for all leasehold blocks, except for the following:
     1. Local authorities (where they are the superior landlord or landlord with the repairing obligation on buildings), as they already have separate arrangements in place;
     2. Retirement homes covered by fixed service charges, as leaseholder costs will not change; and
     3. Small, leaseholder-managed buildings (e.g. four units or fewer) on the grounds of proportionality.
222. We would welcome views on the scope of buildings or circumstances where proposals to require use of an AMP should be excluded, and why.  

iv) Communication of AMPs to leaseholders 

223. Leaseholders should be informed about the content of the AMP both at the outset and where it is subject to change. We propose that a copy of the AMP is made available on request and referred to in the proposed annual report. We would welcome views on how AMPs should be communicated and presented to leaseholders. We propose that leaseholders could either receive a copy of the AMP in the format and style of the surveyor’s choosing or a summary in a prescribed manner. We also propose that leaseholders should have the right to see the full plan as well as to receive copies of or inspect any document which makes up the AMP.