Disputes over service charges arising from issues ranging from maintenance and repairs to cleaning and building insurance are very common, and when your lessee or tenant makes a request for a summary of service costs via a Section 21 report then you can be fairly certain communications have broken down between you & your lessee.
What is a Section 21 report?
Under section 21(1) of the Landlord and Tenant Act 1985, a tenant (or recognised Tenants’ Association) can request a landlord to provide a summary of service charge costs. Once the request is received the landlord must provide the information within one month or within six months or the year end, whichever is later. Failure to meet these deadlines is a criminal offence.
Once a lessee or tenant has received the summary they then have a right to inspect all of the relevant documents relating to the service charge for up to six months following its receipt. Facilities for inspecting these documents should be provided within one month of your request and should be available for two months.
Originally aimed at helping to protect tenants from rogue landlords, it is argued that the information presented in a Section 21 summary is unlikely to enlighten anyone, as it is difficult to understand and makes no comparison between either prior year expenditure or budgeted expenditure.
Currently Section 21(5) requires the report summary to distinguish between,
- Items/costs for which no payment has been demanded of the Landlord within the accounting period
- Items/costs for which payment has been demanded by the Landlord but not paid in the period
- Items paid in the period by the Landlord.
Section 21(6) states that if there are more than four dwellings then the summary must be certified by a qualified accountant who is also a Registered Auditor. The use of the term auditor is unhelpful in this case as it can be confusing to a lessee or tenant, as the preparation of an accountants certificate for this report is in no way comparable to the level of scrutiny required for a financial inspection audit.
Not surprisingly then, this has led to debate within the property management sector that the reporting demanded by this section of legislation is now outdated and unhelpful and has been superseded by best practice guidance in the form of Tech 03/11 from The Institute of Chartered Accountants in England and Wales.
Members of the Royal Institute of Chartered Surveyors (RICS) or of the Association of Residential Managing Agents (ARMA) are required to adhere to this guidance anyway, though breaches of it are not currently classed as a criminal offence.
The following is a summary of the best practice in this guidance. For more details see our resources section where there is a complete copy of the technical release.
- If the lease/tenancy agreement sets out the way in which service charges are to be accounted for, who shall certify or approve the accounts, the costs that can be recovered and the periods of time for which accounts should be prepared, then the requirements of the lease must be followed.
- Service charge monies paid by lessees are trust monies and should be held in ring fenced designated bank accounts (s42, Landlord and Tenant Act 1987).
- A landlord or managing agent need not have a separate bank account for each property/scheme unless the lease requires one. But the funds for each property or scheme must be separately identifiable as it is a breach of trust to use service charge monies from one property/scheme to pay the bills of another or of the landlord.
- All lessees paying variable service charges should receive an annual service charge statement from their landlord or residents’ management company (RMC) (including right to manage companies (RTMCo)) within six months of the end of the accounting year.
- The annual statement should include an income and expenditure account and a balance sheet and be prepared on an accruals basis. This guidance includes an illustrative example of a service charge statement (Section 2).
- All annual statements of account should be subject to an examination by an independent accountant before issue to lessees (Section 3).
- This Technical Release provides guidance on the two alternative types of examination that may be undertaken by the independent accountant depending upon the terms of the lease. The type of engagement, which should be agreed between the accountant and the client landlord, RMC or their agent, will depend on the terms of the lease and should be proportionate to the size and nature of the property/scheme.
- If the service charge statement is prepared on behalf of an RMC or RTMCo then it should be a separate statement to the annual accounts for the company required to be filed at Companies House.
Morton Baxter are specialists in residential management accountancy and can assist you with all aspects of your financial reporting. Our experienced team will ensure your accounts are filed correctly, on time and meet best practice guidelines. Find out more about how we can help by calling 01565 655331.