Capping variable service charges

Calls for capping variable service charges for residential property in England are covering a much broader range of circumstances than their proponents appear to intend. In some contexts it could lead to serious problems and injustice, and pro-landlord activists on Twitter are starting to weaponise the issue.

What I'll set out here is the following:

• what are variable service charges?
• what sorts of landlords and tenants might be involved in paying and receiving them?
• what are the alternatives to variable service charges?
• what would be the consequences of capping variable service charges?

Variable service charges

Where service charges are variable, there are statutory rights:

• to inspect accounts
• to inspect supporting invoices
• to challenge charges as being unreasonable or unreasonably incurred

Unfortunately, these statutory rights don't really work in practice.

Variable service charges are regulated by the Landlord & Tenant Act 1985, which defines them as the charges payable payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management. They have to vary according to the actual costs of providing the services in question.

The alternative situation is that the service charges are fixed. This means that the landlord is taking on the commercial risk, by estimating in advance how much the costs will be, and profiting or losing on the deal, and that the statutory rights above don't apply. After all, what does it matter that the landlord cannot produce an invoice showing how much was paid for a service if the price paid for that service is not being passed on to the tenant?

What sorts of landlords and tenants might be involved in paying and receiving service charges?

There's a wide variety of possible situations.

The situation that proponents of service charge caps actually have in mind is where the tenants have only one landlord above them, and that landlord has adequate capital reserves and no ability to confiscate capital invested by the tenants. This would be the case with many social housing leases where the landlord is one of the big housing associations. It's a very common situation.

But there is *no* pattern of landlord-tenant arrangements which is representative of the generality.

Here are some other possible situations, all of which are widespread:

• there is a chain of landlords; e.g., the immediate landlord of the tenants has a head lease from the freeholder who owns the building or site
• the freeholder landlord of a block of flats has a financial obligation to a rentcharge owner who uses the money to pay for estate-wide services
• the landlord is a shared-freehold company comprising only some of the tenants
• the landlord is a shared-freehold company comprising *all* the tenants
• the "landlord" for the purposes of the service charge legislation is actually a management company to whom the freeholder has irrevocably assigned the right to collect the service charges
• the "landlord" charging the service charges is a Right To Manage company set up by the tenants

In many of those cases, the landlord entity might be thinly capitalised: having basically zero assets and deeply vulnerable to disruptions in its income.

Often there will also be questions of who genuinely controls entities that purport to comprise the tenants.

Alternatives to service charges

Some landlords will have additional or alternative mechanisms for collecting money from tenants where service charges are capped, withheld or unavailable:

• charges based on company membership
• estate rentcharges
• commonhold assessments

It follows that in some cases, a service charge cap will have no effect at all, unless accompanied by anti-avoidance mechanisms which may end up having severe consequences outside the landlord-tenant context.

What would be the consequences of capping variable service charges?

The main one would simply be that necessary services weren't delivered where the money could not be raised. That includes cleaning and gardening, but also urgent building safety work, fire safety expenses and so on.

To the extent that thin-capitalised mutual entities hold power away from landowners only insofar as they remain solvent, defunding them will likely transfer more power and money to those landowners.

The thing is: the variable service charges are not in themselves some profit-making mechanism: they simply pass through the cost of the services provided to those who received them. Capping the price that can be paid for such services just results in those services no being delivered.

Post scriptum

I'm a bit conflicted by this issue. I've written this article to try to put my thoughts together on the issue.

The Social Housing Action Campaign (SHAC) supports service charge caps; Free Leaseholders on the other hand uncharacteristically sides with the Labour government's housing minister on the issue. SHAC's formal statement about this is restricted to landlords which are housing associations (regardless of whether the HA itself has a superior landlord).

Disclosure: I am on SHAC's committee but also aligned with the Free Leaseholders campaign.