
By Dominic Pearson
Dominic Pearson is a solicitor who until May worked as an associate at Allen & Overy, one of the UK’s largest law firms. For many years, he volunteered his time as a pro-bono advisor at Lambeth Law Centre where he advised local residents on landlord and tenant matters. He is currently on sabbatical pursuing a master of laws degree at the University of California, Berkeley.
‘Second class’ rights for leaseholders of local authority freeholders?
As a leasehold owner of a local authority (LA), some leasehold rights which would otherwise be available to you are unavailable. Why?
Many affected leasehold owners are not aware of this. As a result, the law appears to expect a higher standard from private freeholders than from LA freeholders.
But it is not all bad news: because as your freeholder is a public body, you do have other limited remedies which other leaseholders do not
Back in 2009, when I owned a small one bedroom leasehold flat in Lambeth, at that time blissfully unaware of the woes many leasehold owners face, I received through the post the service charge bill for the upcoming financial year. My freeholder was Lambeth council. As I opened the mail and looked at the total estimate, I was staggered by what I saw.
The estimate was more than double the cost of previous years. Could I challenge this in some way? How did they arrive at such a figure? No explanation was given with the bill. Had any other leasehold owners noticed this astronomic hike in service charges?
Outraged, I set out to find what rights were available to me so that I could get answers from my freeholder to these questions. It was a process that ultimately left me exasperated without any satisfactory results.
The experience also led me to discover that leasehold owners of local authority freeholders have to live with reduced set of rights. Most leasehold owners didn’t seem to know this.
Right to receive a summary of accounts (the “section 21” request)
This right is found in section 21 of the Landlord and Tenant Act 1985 and obliges the freeholder, on written request by the leasehold owner, to provide a summary of the costs incurred in connection with the services recovered through your service charge.
Once you obtain this summary, you become entitled under section 22 of the same Act to make a more detailed inspection of the accounts, receipts and other documents supporting the summary.
This was the right I looked to first after the shock of my service charge bill had sunk in.
First off, it doesn’t help that the current version of section 21 you see when you log on to legislation.gov.uk is not in force (in any useful way, anyway). The older version which remains in force is harder to track down.
The government at the time felt so strongly about leasehold owners having this right that they made it a criminal offence for your freeholder to fail to comply within the specified period … except if your freeholder is a local authority, in which case there is currently no sanction in the Act for non-compliance.
So what happens, as happened to me, if your local authority freeholder ignores your section 21 request, or responds to it but does not supply the information it is meant to supply?
Your solicitor, if you have one, may advise you that you could have a civil remedy against the council for breach of statutory duty, but that route is not only time consuming and costly, but it may be fruitless: damages are not the remedy you want because you haven’t really suffered a tangible loss.
Instead, you want some way to compel the local authority to provide with the summary. The threat to the freeholder and its directors of being personally criminalised is usually enough to ensure that you get your summary. But as a leasehold owner of a local authority flat you are denied that disincentive.
Why are local authorities exempt from the criminal sanctions for non-compliance? It is because that same local authority is charged with the job of prosecuting private freeholders who break this same law.
You can see the government’s logic: you cannot go about prosecuting yourself, can you?
But that thought process appears to have stopped there as the legislation does not provide any alternative redress for leasehold owners of a local authority freeholder who lose out.
In practice this apparent oversight can lead to outright hypocrisy on the part of the local authority: enforcing breaches of the law against private freeholders through criminal sanctions while being allowed to break the same law itself with criminal impunity.
Right to be consulted for big items of expenditure
As a leasehold owner, you have the right to be consulted in respect of certain works or service agreements relating to your building that the freeholder proposes to enter into, and which it seeks to recover from you through your service charge (such as maintenance contracts and insurance policies).
If it does not follow the consultation procedure laid out by law, then the freeholder may only recover a limited sum from you and not the full cost which would otherwise be recoverable.
Under usual circumstances, the affected leasehold owners are entitled to nominate an alternative contractor to carry out the works or perform the service and, if more than one leasehold owner nominates the same contractor, the freeholder is then obliged to obtain an estimate from the contractor which received the most nominations and present it alongside any other estimates he obtains.
However, if your freeholder is a local authority and the contract it proposes exceeds a particular amount (and it usually will), leasehold owners are not entitled by law to make any nominations and may only make “observations” which the local authority must have “regard to”, but need not otherwise act on.
In practice, this means the local authority need only make a dismissive comment in writing to the concerned leasehold owners so, again, LA leasehold owners are short-changed.
The reason the government did not require local authorities to follow the same process as private freeholders when drafting this law is because local authorities are bound by public procurement rules.
Such rules are not compatible with allowing leasehold owners to nominate their own contractor but the rules should, in theory, provide an adequate check and balance in respect of any contracts it enters into.
However, the theory often does not translate into practice.
How much confidence do you have in your council getting value for money or not getting ripped off by a private contractor?
This sort of thing gets enough bad press when it is taxpayers’ money at stake. But imagine yourself being made personally liable under a contract with a private contractor your council negotiates on your behalf, on which you have virtually no say.
Would you be happy?
Another concern is that, whether or not your council gets value for money, are you receiving the full benefit of any of these contracts?
Supposing the council gets a reverse commission, or “kick-back”.
For example, the costs of repairing the roof of your building may be presented to leasehold owners as costing £2,000 each (which could be true at the time), but the council then later receives £200 of that money back because of a volume discount.
Has this been passed onto you or are you, the leaseholder, unknowingly plugging holes in the council’s balance sheet and paying more than the cost of the service?
Alas, if section 21 requests go substantively unanswered with apparent impunity, you have no way of finding out the answer to any of these questions.
Right for you and your fellow leaseholders to manage the upkeep of the building yourselves
When freeholders exhaust the patience of leasehold owners either by their neglect or sharp practices, the nuclear weapon in the arsenal of leaseholders’ rights is the right to take control of the management of the building themselves (the “right to manage”) or, even more drastic (but also more expensive), compel the freeholder to sell them the freehold of the building (the “right to enfranchise”).
In each case, this allows leasehold owners to manage their own affairs free of third party control in order to make sure the building is looked after in their own best interests.
Leasehold owners in a building owned by a local authority freeholder are, under the relevant legislation, excluded from being able to exercise the “right to manage”. Why?
The reason seems to be again compliance with complex public procurement rules.
The whole aim of the “right to manage” is to put management beyond the control of the freeholder. But in this scenario the local authority remains the legal owner of the building and so all management, even if in the hands of the leaseholders, is still undertaken on behalf of the freeholder and in its name.
Compliance with the public procurement rules by the local authority would be impossible because management decisions are now beyond the its control.
While the relevant “right to enfranchise” legislation does not deny outright such right to leaseholders of a local authority, it is in practice often impossible to exercise.
This is because in order to qualify for the right, at least two thirds of the flats in the building must be owned by private leasehold owners and not let to council tenants.
This is rarely the case because most buildings owned by a local authority tend to be a mix of leasehold owners and tenants.
In addition, because the right to enfranchise requires the purchase of the freehold at a fair price, the costs involved mean that the “right to enfranchise” is financially out of reach in circumstances where the leasehold owners believe the building is being mismanaged.
Special or additional rights available only to leaseholders of a LA freeholder
It is not all bad news. As a leaseholder of a local authority freeholder, there are certain forms of comfort, redress and remedies available to you not available to other leasehold owners.
It is often easier to get answers from the local authority by writing a formal complaint via the council’s formal complaint procedure and escalate that complaint to the Local Government Ombudsman or Housing Ombudsman level.
Local authorities hate this, because the number of escalated complaints it receives affects its sacred “star rating” and a low-star rating generates bad press and puts them under pressure to improve their services from central government.
However, this route may not be completely effective. For example, you may be offered a discount off your service charge but still be denied a summary of the accounts.
Another means of getting answers is to submit a freedom of information (FoI) request. However, while these requests often do get some answers, the answers are not usually of a specific enough nature to be useful.
One other big advantage to having a local authority freeholder is that you know they have deep pockets, which means that if you do have to go to court or a tribunal and you win, they have the funds to pay up any damages owed to you.
The same cannot be said about many private freeholders whose corporate structure often means that profits are siphoned off out of reach through service fees to management or offshore parent companies.
So, do these plus points make up for the rights you have lost by being a leaseholder of a local authority?
Probably not, but they are useful nonetheless.
One difference government can make very easily to all of this is to finish enacting the new section 21 and other enhanced provisions (originally introduced by legislation in 2002 but not yet fully in force) which will, for example, allow leasehold owners to withhold payment of service charges where the freeholder has not supplied a summary of the service charge account.
This will help in levelling the playing field for leasehold owners, particularly those with local authority freeholders, by introducing an immediately accessible form a redress against any freeholder in breach of these provisions.
A very well written article, and an enjoyable read. I particularly enjoyed the section regarding the finishing of the section 21 as this is news to me and I have learnt something new from it. Thank you Dominic
Except that the amendments to Section 21 enacted (but not commenced) in 2003 have already been repealed and replaced with the ability for the Secretary of State to introduce different provision for different cases or for different purposes. The whole reason for this repeal and amendment was to enable the Secretary of State to make lesser provision for local authority landlords!!
The reason why leaseholders do not have the right to nominate a contractor where public procurement applies is that any contractor can submit their own bid i.e. there is no need to nominate to the landlord. Where ANY nominations are made the landlord is obliged to ‘seek a price’ (typically from one nominated contractor) not, as stated, “to obtain” one.
It is true that the version of s.21 (which was never substantively in force) introduced by the Commonhold and Leasehold Reform Act 2002 have already been repealed by the Housing and Regeneration Act 2008. However, the 2002 Act set in motion a series of reforms. The version introduced by the 2008 Act (which is the version you will see when you go to s.21 on legislation.gov.uk) is only in force for the purposes of the SoS making subordinate legislation under it.
It may well be true that the motivation for the later change by the 2008 Act was to allow for different rules to apply through the use of enabling subordinate legislation. Personally, I do not know. Currently, however, leaseholders have to wade through a confusing (and often apparently conflicting) set of versions of s.21 and associated commencement orders in order to make sense of their rights currently are.
As to the The Service Charges (Consultation Requirements) (England) Regulations 2003 (which set out the consultation requirements), the words ” the landlord shall try to obtain an estimate” are used in those regulations in the relevant schedules. it is possible that the version on legislation.gov.uk is out of date and if they are I apologise.
While you are right to say that under EU procurement rules any contractor may submit a bid, this is often a hollow right in the eyes of a leaseholder in a 10 apartment building: many contractors will simply not have the resourses to respond to the LA’s RFP nor will many be of a large enough size to even contemplate responding. This is the point I am making when I say the theory does not translate into practice: councils are huge organisations who buy in bulk, which mean that their contracts run in millions of pounds by value. Unlike a small private freeholder who may get the local J. Bloggs Builders Ltd to fix the roof, LA leaseholders will be lumbered with Corporate Profit plc who looks after all of the council’s 1000 building stock.
Judging by the recent UT and LVT(FTT) decisions I am convinced that “words have been had in ears” after the decision in Brent, as local authorites seem to be getting a pass on what seems extraordinary to the lay person and on disproptionate costs. Very much a second class. Ownership and provision have to be seperated from regulation to make headway in so many areas. The abuses in LA service charges pale in comparison to those of the usual suspects here on LKP 🙂
Right to Manage also requires a minimum of 2/3rds of flats to be let to qualifying tenants i.e. long leaseholders – exactly the same threshold as for enfranchisement which you state is ‘often impossible to exercise’.
It does require 2/3rds, that is correct, but the point is that (even if this were exercisable by LA leaseholders – and I note your comment below – see my response) this condition is much more unlikely to be met, because there is a strong possibility that the residential premises will be mixed long leaseholders and council tenants where there is a local authority freeholder. Add that fact to the cost of acquiring the freeholder under the RTE and it often will seem to leaseholders to be impossible.
Tenants of local authorities are not excluded from the right to manage. They have had the right to manage since 1993 and there was therefore no reason to re-grant the right within the Commonhold and Leasehold Reform Act 2002.
There is a right to a management audit under the Leasehold Reform, Housing and Urban Development Act 1993 (applicable to all freeholders), but that is not the same as the “right to manage” under the 2002 Act, as it is a right for an audit only, not a right to transfer the management functions to a RTM company controlled by the leaseholders.
The LA may also “agree” to a “management agreement” under the Housing Act 1985, but there is no right as such for tenants or leaseholders to insist on this.
Could you direct me to the right you are referring to?
ADDENDUM TO THE ABOVE: please ignore the statement relating to “management agreements” which are, I realise, part and parcel of the same legislation governing tenant management organisations (TMOs), which is what I think you may be referring to.
These are not quite the same thing as RTM companies and, in my opinion, are rarely useful to private leaseholders.
A single TMO, unlike an RTM:
(a) must include at least – I believe – 25 council tenants (whose interests may not be aligned with those of leaseholders because, for example, they have no ownership interest in their property) and not much use if you are in a building comprising 5 council tenants and 5 leaseholders;
(b) can span a huge area of many houses (and can even include in a single organisation representing 2500 properties including both houses and apartment block buildings), whereas a RTM company is usually only concerned with the management of a single apartment building by its qualifying leaseholders without intereference from the freeholder;
(c) has a different type of (and more restrictive) organisational structure than an RTM need have; and
(d) is not free from outside meddling of government and is subject to the scrutiny of an “assessor” approved by government.
So, not really the same thing nor what I believe private leaseholders are really looking for.
Dominic I have to respectfully correct you. There is a clear, and long established, right to manage for LA and RSL/HA leaseholders and tenants under TMOs where some or all duties can be taken over ( although the process is overly complex) . Moreover while it might be expensive, if you lose, the Court can and do order compliance, not simply damages, with S21 and s22 rights. I have helped several TRAs do just that. The problem very often is that the accounting for these buildings is still rigidly institutional with say one bill for a service for the entire portfolio, they use old or incorrect apportionments and is often not easily interogated to provide reports on a particular block or area. In one case an ALMO was told start over and buy your own software despite having taken on it’s own owner’s portfolio! The defence was that they only apportion the cost if they are forced to.
Fully agree that a court can order compliance and as you say sometimes does, but it doesn’t have to unless case law or statute mandates that it must.
But in the case of section 21 detemination the landlord must and a lessee can enforce the court decision. The Act only exempts them from the penalties under the Act. Experience shows that due to the admin and apportionment of those costs, the value of the certficate is often questionable!
I have posted some time ago the Section 21 wording in force but as it links to an external site LKP deleted it 🙂 I am sure that they can give you my email address and I will let you link to it.
Not sure that is the case. We do not censor capriciously.
Please do post the link. It would be useful.
You can add to this that they are exempt from the QLTA requirements when appointing an ALMO and when appointing consultants such as building services and technical services such as building surveying, design etc.
When that adds up to 20% on top of the cost of the works, far in excess of the average costs in the private sector, it adds salt to the wounds.
Useful additional observations, thank you.
1. I have challenged Camden Council about their service charges for the last 7 years. I am claiming a refund because they did not comply with Goddard v Francis. They seem to be incapable of producing the right paperwork to show they served S20 Notices. But are saying they will sue for the money due to be paid in advance for his years service charge apportionment. I need legal help, please. cengland464@talktalk.net
2. Camden Council leases have a use which limits the management charge to 10%. The Council has applied to the LVT for dispensation to raise this limit to a reasonable sum. Again I need legal help, please. cengland464@talktalk.net