December 6, 2021

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Fixing England’s home service charge scandal

Property law updates

Making sure that property charges worth billions of pounds are fair and above board is not something that should be left to volunteers. Yet the inadequate regulation of service charges means that an “armchair army” of angry flat dwellers are often the only antidote to the epidemic of overcharging and errors revealed by an FT investigation. Root-and-branch reform of the contracts is required, providing residents with transparency and a much more effective way to get restitution than taking matters into their own hands.

Planned changes to leasehold contracts, an originally feudal form of property ownership in English and Welsh law, has mostly focused on ground rents — the annual fee that freeholders, who legally own the property, can levy on their leaseholders, the tenants. This is understandable. One-sided contracts have led some leaseholders to face ground rents that swiftly increase, absorbing much of their income while simultaneously leaving them trapped in unsellable homes; few want a house that comes with sky-high rents alongside.

The widespread problems with service charges — the fees paid by residents to property managers for services ranging from cleaning to Christmas lights — urgently need addressing too. Those who pay them, including leaseholders alongside some freeholders and council tenants, have struggled to obtain explanations for sudden increases in cleaning costs and have been forced to enter into protracted and costly battles to get their money back; many of the few who have managed to navigate the system have existing backgrounds in law or accounting. While expanding the scope of the legislation, currently making its slow way through parliament, will take more time it is vital to get it right.

One of the fundamental problems is that leaseholders in English law are in an uncomfortable halfway position between homeowners and tenants. As the contracts grant long-term extendable leases, often for more than a century, they offer a similar degree of security and means to accumulate wealth as other forms of property ownership. However, the leaseholders have the legal standing of tenants and so have no contractual relationship with the property manager, beyond a duty to pay the bills. Existing methods for replacing managers are time-consuming and difficult, especially for those living in large blocks of flats.

Eventually, leasehold contracts should be abolished or phased out altogether. To protect other service charge payers the bills should be audited by an independent third party. This may add costs for residents but will guard against exploitation. Additionally there should be a duty on managers to ensure transparency. Residents should be able to request detailed bills.

These changes will mean little without effective enforcement. Residents have challenged the charges in court, sometimes acting as their own lawyers, and often won, but the cost makes this impossible for many — including those on low incomes living in council-owned flats. One of several existing regulators should be given the role of investigating disputes.

The Conservatives pitch themselves as the defenders of those who have worked hard to get on to the property ladder. To make that meaningful for leaseholders they need to devote parliamentary time to this, and related other issues — such as the cost of ensuring new-build flats meet building safety regulations. Without such moves many may start asking whether the party is truly on the side of property owners or, as many suspect, property developers. 

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