leaseholder and tenant service charges conference

Leaseholder and Tenant

Service Charges Conference

B3: How to calculate and apportion

service charges effectively

Speaker: Adrian Waite

Managing Director AWICS

Chair: John Bryant

Policy Leader National Housing Federation

AWICS Independence…..

Integrity.….Value

How to calculate and

apportion service

charges effectively

A presentation for the National Housing Federation Wednesday 4th September 2013


Integrity.….Value

Adrian Waite

Managing Director of AWICS Ltd

– Provides management consultancy and

training services principally to social

housing organisations

– Recently advised Northampton BC and

Oldham BC / Housing 21 on introducing

service charges

Chair of Impact Housing Association

– Former board member of Calico Housing

Association


Integrity.….Value

Introduction

Revenue Service Costs

– Charged to Leaseholders and Tenants

– Charges must reflect actual costs and be

reasonable

Capital Service Costs

– Charged to Leaseholders only

– Charges must reflect actual costs and be

reasonable

– Consultation and Section 20 notices

– Demands for payment within eighteen months


Integrity.….Value

Calculation of Service

Charges

Leaseholder Service Charges must be

provided for in the lease

– Include capital and revenue items

Tenant service charges must be provided for

in the tenancy agreement and include

revenue items only

Need to decide what services to charge for

– For example, Lifts?

Calculation should include the direct costs

and indirect costs of the service


Integrity.….Value

Calculation of Administration Fees

Administration fees can be based on:

– Actual costs

• The cost of the staff employed in administering service charges

plus appropriate oncosts

• For example, Northampton Borough Council

– Estimated costs

• An on-cost on the cost of the other service charges

• For example, Oldham Borough Council / Housing 21 chose

10% - consistent with advice of the rent officer who also says

15% is acceptable for housing associations

Difficulty in identifying actual costs is recognised:

– “Payment of a management charge based on a percentage

of costs is not intrinsically unreasonable, having regard both

to the position of the purchaser and of the vendors.” –

Mahase v London Borough of Camden 1996


Integrity.….Value

Fixed and Variable Service

Charges: Definitions

A fixed service charge is where the landlord estimates the

cost of providing services to a property at the beginning of

each financial year. The tenant pays the service charge

throughout the year and at no point will there be additional

amounts to pay or refunds due back.

– The usual method with tenants.

Variable service charges occur where the landlord sets an

estimated charge at the beginning of the financial year, and

then produces a final account once the year is complete. The

final account compares the actual costs in delivering services

to a property against the estimate that was set, and may result

in a credit back or an additional amount due from the resident.

– The usual method with leaseholders.


Integrity.….Value

Fixed and Variable Service

Charges: Best Practice “The decision between a fixed and variable service charge

regime is one for each housing association to make, and often

will be finely balanced. A variable regime means much more

stringent procedures but in exchange it guarantees that the

landlord… can recover every penny spent on services.

Generally, the larger the service charge in relation to the net rent,

and the likelier it is to vary unpredictably from year to year, the

stronger the case for a variable charge. However, in general

needs housing, where service charges are relatively low and

reasonably stable, a regime of fixed charges may well be

adequate.”

National Housing Federation – Service Charges – A Guide for

Housing Associations


Integrity.….Value

A practical response:

Impact Housing Association Keep it Simple

Tenants want to know how much they

are paying and what they are paying for

Administering variable charges would

cost £40,000 a year more than fixed

charges

Fixed charges are made but tenants are

given information about the services

provided and their costs


Integrity.….Value

Dealing with Big Ticket Items

and more Complex Services

Staffing Costs (wardens, managers, caretakers & concierges) –

Full salary plus on-cost less a percentage for general housing

management

– Caretakers – apportion between estates and then between general

management and service activities

– London Rent Assessment Committee decided in 1967 that an

appropriate appropriation to service charges is 15%

Heating & Lighting Communal areas

– One option to apportion the total electric bill between flats and

communal areas based on floorspace and recover the communal

element as a service charge

Cleaning communal areas

– May be done by caretaker, warden, cleaner or contractor

– Need to apportion the cleaners’ wages between communal areas

and other work and add appropriate on-costs


Integrity.….Value

Variable Service Charges for

tenants: Does CLARA apply?

CLARA = Commonhold & Leasehold Reform Act 2002. This amended provisions for variable service charges under the 1985 & 1987 Landlord & Tenant Acts

Section 152 outlines the information that must be provided to tenants and allows for tenants to withhold service charges if inadequate information is provided (however this has yet to be enacted)

Section 153 provides for an accompanying notice

Section 154 entitles a tenant to inspect documents


Integrity.….Value

Large Open Spaces and Policies on

Re-charging through Service Charges

Costs vary greatly – Work carried out by contractors, staff or residents

– Sometimes a need to include maintenance & depreciation of plant

– Non-recurring costs such as tree surgery

– Lack of information to calculate apportionments

Northampton Borough Council divided the borough into three zones and calculated a service charge for grounds maintenance in each zone per bed space – Not ideal – a more specific method could have

been better


Integrity.….Value

Apportionment Techniques

At what level should costs be collected?

– Block

– Estate

– Scheme

– District

How to apportion costs to dwellings?

– Units

– Bedrooms

– Bed spaces

Is there an intermediate stage of apportionment?

– For example using floorspace to apportion total costs

between schemes


Integrity.….Value

Example: Oldham Borough

Council and Housing 21 PFI Partnership with 1,400 homes including nineteen sheltered

schemes with 600 homes

Service Charges have never been unpooled but now there are financial

pressures and a wish to fund new services and development

Fixed Service charges to be based on estimated operational costs in

communal areas covering: – Refurbishment Life Cycle

– Life cycle contingencies

– Office running costs

– Other costs

– Cyclical maintenance

– Responsive Maintenance

– Cleaning costs

– Gardening costs – grounds

– Contingency (5% of all costs excluding life cycle)

– Administration (10%)

Service Charges to be phased in over five years for existing tenants

and introduced in full for new tenants


Integrity.….Value

Consultation with tenants

and leaseholders Bush HA – Consultation meetings based on

estimates and details. Value for Money assessed

based on residents’ views before and after works

done.

Raglan HA – Consult local forums on works as part of

consultation on wider issues and then report to

board.

Restormel Housing Trust – assesses value for money

through service reviews, residents’ groups and

general consultation.

William Sutton Trust – used MORI to assess

residents’ views of value for money of service

charges


Integrity.….Value

Good Practice: Audit Commission Provides comprehensive information to all service users that

clearly describes the organisation’s rent and service charge

setting policy, and how rents and service charges are calculated

and collected.

Delivers accurate and timely information about rent and service

charge accounts to service users, for example quarterly rent and

service charge statements.

Minimises and prevents arrears by ensuring that new rent

accounts are always set up, and means of payment supplied to

new tenants, before tenancies commence.

Ensures that accounting systems are well integrated with

housing management and benefit systems. As a result the

organisation can clearly identify arrears due to housing benefit

claims or payment in credit or arrears.

Separately records and accounts for rent arrears, court costs,

rechargeable repairs and other debts


Integrity.….Value

Accounting Requirements

“The accounting records are the responsibility of the landlord… The

records need to be sufficient to show all transactions involving

service charges monies and to enable the person preparing the

information to be satisfied that the information complies with the

legislation. The accounting records would be expected to contain:

Details of all sums of money received and expended by the

landlord… and the matters to which the receipts and

expenditure relate.

Documents such as invoices to support all the figures entered in

the accounts.

Details of longer term contracts and income and expenditure in

relation to these contracts.”

Draft guidance on the accountants’ report on service charges


Integrity.….Value

Leasehold Valuation

Tribunal Decisions

Service Charges quashed where:

– Leaseholders not properly consulted

• Westminster £2million

– Work not necessary

• Islington – roofs to flats - £200,000

– Work poor

– Costs excessive


Integrity.….Value

Conclusions

Decide what to charge for based on statute,

case law and the provisions of leases and

tenancy agreements

– Decide between fixed and variable charges

Identify all appropriate costs

Apportion costs between schemes and

tenants based on the best available

information

Ensure charges represent Value for Money

Keep it Simple

Consult and provide complete information


Integrity.….Value

National Housing Federation

How to calculate and

apportion service charges

effectively

The End –

Any Questions or Comments?

Adrian Waite (Independent Consultancy Services) Limited,

Room 3, Shire Hall, The Sands,

Appleby in Westmorland,

Cumbria. CA16 6XN.

Tel: 017683-52165 or 07502-142658.

E-mail: [email protected]

Website: www.awics.co.uk

Twitter: @AdrianWaite

mailto:[email protected]

http://www.awics.co.uk/