Strengthening leaseholder protections over fees, charges and services: consultation

2.8. New standardised service charge accounts

124. Financial statements of accounts (“Service charge accounts”) are typically prepared and issued annually to leaseholders by landlords or managing agents to show the income and expenditure for maintaining the block(s) over a 12-month period.

125. Timely and accurate service charge accounts help leaseholders hold landlords accountable for how their money is spent. There is currently no standard approach to preparing accounts. Leases can require landlords to provide leaseholders with full audits, summaries or statements of accounts. If the lease does not specify the format of accounts, guidance from The Royal Institution of Chartered Surveyors is to use the Institute of Chartered Accountants for England and Wales’ “Technical release: Residential Service Charge Accounts” (TECH 03/11).

126. Current legislation and most leases also do not specify a timeline for producing and issuing service charge accounts to leaseholders following year end. There may be a date set out in the leases or a statement such as that the information should be produced ‘as soon as practical’. However, landlords and managing agents need to be aware of Section 20B of the 1985 Act which sets limits on the recovery of expenditure on services incurred more than 18 months before the relevant costs are demanded from the lessees.

127. Currently leaseholders can request a summary of costs from their landlord if they have failed to provide the required information or if the leaseholder is not satisfied with it. The summary must be provided within one month of the request or within six months after the accounting year ends (whichever is later). For blocks of four or more units, the summary must be certified by a qualified accountant.

128. The current arrangements do not provide adequate statutory protection for leaseholders since there is very little consequence if landlords fail to provide accounts in a timely manner or provide inadequate accounts.

129. To address this, measures in the 2024 Act imply into leases a requirement for landlords who charge variable service charges and manage blocks of four or more dwellings to provide a written statement of accounts within six months of the end of the accounting period. These provisions do not override requirements, for example, where a lease requires a statutory audit or other more stringent requirements.

130. The Secretary of State and Welsh Ministers have flexibility on how the new measures should be implemented, including:
     1. the information that must be included as part of service charge accounts;
     2. the standards which must be met when checking the accuracy of the accounts;
     3. a standard statement accountants must use to verify their work; and
     4. defining who may be classified as a qualified accountant for the purposes of preparing a report.
131. In addition, the Secretary of State and Welsh Ministers are able to apply different provisions in different circumstances, which allows them to take account of different landlords. This gives flexibility to implement a cost-effective but proportionate system that gives leaseholders assurance that their service charge accounts are fit for purpose.

i) Form and contents of a written statement of accounts

132. ICAEW guidance note TECH 3/11 recommends accounts should follow accruals-based accounting and include minimum information to provide a more detailed overview of the service charge accounts for the relevant accounting period. Drawing on this and other good practice guidance, we propose that all service charge accounts should include:
     1. a balance sheet showing assets and liabilities of the block. This should set expenditure against the planned service charge budget for the block;
     2. income and expenditure reports with explanatory notes using headings consistent with the annual report;
     3. statements for sinking/reserve funds statements (where applicable); and
     4. a statement of service charge collection deficits to understand the level of loss of revenue caused by non-payment of service charges.
133. The guidance suggests that landlords and managing agents of complex buildings should ensure that service charge accounts reflect multiple service schedules, where applicable, by providing distinct balance sheets for each schedule.

134. We have reflected these principles in a mock-up of the proposed new service charge account financial statement at Annex F.

ii) Financial Reporting Standards

135. It is important that leaseholders have assurance that the accounts they receive are accurate. Measures in the 2024 Act require that landlords prepare a written report on the financial statement of accounts, and gives power to the Secretary of State and Welsh Ministers to set the financial standards that such reports must meet. The following standards are already employed by accountants:
     1. International Standard on Related Services (ISRS) 4400 (Revised), Agreed-Upon Procedures Engagements, which result in a report of purely factual findings relating to tests carried out. Reporting to third parties, factual procedures (sample tests of particular balances, for example) are agreed on between the business and its chartered accountant. The accountant then carries out those procedures and reports the results, so that the business and its stakeholders can make use of them;
     2. International Standard on Review Engagements (ISRE) 2400 (Revised) Engagements to Review Historical Financial Statements which requires an accountant to make enquiries of management, and others, and to carry out analytical procedures to gain a degree of assurance that the statements comply with the chosen financial reporting framework and give a true and fair view. Compliance with this standard may require that landlords comply with specific methods of auditing accounts; and
     3. Various standards set out by International Standards on Auditing (ISA). ISAs require the auditor to achieve a much higher level of assurance compared to other standards. The most common standard used for service charge accounts is International Standard on Auditing (ISA) 800 Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.
136. We propose that adherence to ISRS 4400 would be appropriate for most leasehold blocks. However, we welcome views on whether additional standards might be applicable and under what circumstances they should be considered. In particular, views on whether ISRE 2400 should be applied and, if so, to what size or type of building.  

iii) Written statement of declaration

136. It is essential that all financial information is reviewed by a qualified person to ensure that it accurately reflects its intended representation.

138. Under the measures introduced in the 2024 Act, the written report regarding the statement of accounts must include a statement from the accountant, in a prescribed form and manner, confirming that the report faithfully represents its intended representation. The aim is to offer leaseholders a clear and concise summary, demonstrating that the accountant has adhered to the required procedures. We propose a straightforward statement containing the following:
     1. Details of the block(s) for which accounts are being prepared and the accounting period covered;
     2. Details of the accountant preparing the report; and
     3. A series of declarations, for example:
        1. Confirmation that work has been carried out using a specified financial standard;
        2. The report is a faithful representation of what it purports to represent; and
        3. There are no serious misgivings.
139. A proposed draft statement of declaration is at Annex G, on which views are sought.

iv) People eligible to prepare the written report

140. Existing legislation states that, where a summary of costs is required, this summary must be certified by a statutory auditor (as defined in Part 42 of the Companies Act 2006). This requirement does not apply to some types of landlord, including local authorities.

141. In the 2024 Act, provisions allow the Secretary of State and Welsh Ministers to expand the pool of suitably qualified professionals who can prepare the written report to help deliver the likely increase in the number of reports required.

142. We are minded to extend those eligible to prepare a written report to those who belong to a relevant accredited membership body. We propose that the accountants must belong to either: the Association of Chartered Certified Accountants; or the Institute of Chartered Accountants in England and Wales. The benefit of extending eligible practitioners to accredited bodies is that it gives leaseholders a guarantee of professionalism but also another body to whom they can complain if things go wrong. We would welcome views on this approach.