Strengthening leaseholder protections over fees, charges and services: consultation
Protecting leaseholders’ money
3.3 Protecting leaseholders’ money
- Landlords, and managing agents acting on their behalf, manage substantial sums on behalf of leaseholders including service charges to cover day-to-day maintenance activities, and also reserve funds for prospective works. These sums will likely grow as the level of service charge rises and more blocks introduce reserve funds.
- It is important that leaseholder funds are managed effectively and securely, and that landlords and managing agents are transparent in their dealings with leaseholders money. Existing legislation, set out under Section 42 of the Landlord and Tenant Act 1987 (“the 1987 Act”), requires all landlords (other than those exempt, e.g. a local authority) to hold all client money funds in trust, and at a financial institution authorised under the Financial Services and Markets Act 2000.
- The current approach seeks to ensure funds held may only be used for paying service charge expenses, and that they are treated separately from the landlord’s other assets. It also provides greater protection for leaseholders in the event of bankruptcy or disputes. It is a breach of trust to use service charge money for purposes other than those stated in the lease, and for example, to use service charge money from one block to pay the bills of another.
- Nevertheless, parties holding leaseholder money have considerable flexibility on how they manage the sums they receive. For example, they may set up a separate client account for each block of flats they manage, or they may create one universal account for all blocks. Members of professional bodies may also have other restrictions in place for their members.
- Through the new provisions on service charge demands and annual reports under the 2024 Act, landlords and managing agents will need to provide assurance to leaseholders that all client money funds are held in trust. Furthermore, if asked, landlords will be required to provide evidence that this is the case. This could be, for example, a letter from the financial institution which is holding funds to confirm that the money is being held on trust.
- We are keen to understand whether the current regulatory framework is sufficiently robust, or if there are areas where enhancements or alternative approaches are required. We are also interested in views in light of the proposals in this consultation for the much greater use of reserve funds, which will mean more leaseholder money being held by landlords.
- Section 42A of the 1987 Act, which was introduced by Section 156 of the Commonhold and Leasehold Reform Act 2002, is yet to be implemented. This would require landlords and managing agents to hold service charge funds from separate groups of service charge payer in designated separate accounts (subject to some limited exemptions such as local authority landlords). These accounts will be regarded as designated if the relevant UK financial institution has been notified in writing by the landlord that sums standing to the credit of the trust fund are to be held in it, no other funds are held in the account, and the account is of a description specified in regulations by the Secretary of State and Welsh Ministers.
- There are a number of reasons why these provisions have not yet been enacted, including concerns about the overall administrative cost and obligations facing landlords and managing agents, as well as concerns about their deliverability and impact on the UK financial sector to face in setting up potentially many thousands of new accounts within a short period of time. However, we would welcome views on whether you agree with the purpose of Section 42A is sound and, if we were minded to bring forward these provisions, what changes to the existing regime would be required to make it work effectively.
- We are also open to new proposals on how to ensure service charge monies are kept safe, especially those that are cost-effective, proportionate and effective to support those tasked with collecting and guarding service charge monies.