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Section 125A (Right to Buy: Estimates about Service Charges)

Summary

1. This section sets out information which must be included in the Offer Notice which Landlords must send to applicants for the Right to Buy or Right to Acquire Schemes as part of the sales process.

2. An Offer Notice (or ‘Section 125 Notice’ as it is formally known) is sent out after a Landlord has agreed that a tenant is eligible for the Right to Buy to Right to Acquire. The Offer Notice will include the price for which the property is offered for sale, and the amount of discount which the tenant is eligible to receive.

3. Along with the price, the law says that applicants must also receive other information about the property. Section 125A says that information should be given about two things:

i. The estimated amount of the Annual Service Charge

ii. The estimated Amount of Repair works

4. These estimates will cover a period of 5 years (sometimes more) known as the Reference Period. See our article on Section 125C of the Housing Act 1985 for more information about the Reference Period.

Estimated Amount of the Annual Service Charge

1. Leaseholders normally receive two types of Service Charge bills: one for frequently occurring costs such as cleaning and grounds maintenance; and another for costs which occur less frequently, such as major repairs. The Annual Service Charge means those frequently occurring costs.

2. What this section requires a Landlord to do is to estimate the average yearly amount of the Annual Service Charge and state this in the Offer Notice. The Estimate must include both the total amount, and a breakdown by component charges (such as cleaning or grounds maintenance) with an amount for each type of charge.

3. The Estimate must also include the Landlord’s management fees and any VAT payable by the Landlord. NB: Local authorities won’t charge leaseholders VAT although Housing Associations can.

4. The figures stated should be what the Landlord estimates the individual leaseholder will required to pay, not simply the cost for the whole building.

Estimate Amount of Repair Works

1. This section states that a Landlord must estimate what Repair Works will be carried out. The Offer Notice must include both a total estimated cost for aggregate value of the predicted repair works (this means the costs of all repairs added together) and a breakdown by type of repair with its cost.

2. The estimates must include any management fees, surveyor’s costs, VAT or other costs which the Landlord intends to recharge to the Leaseholder, and must state the amount payable by the individual Leaseholder and not simply the cost which is attributed to a building or estate as a whole.

What does this mean for Leaseholders?

1. This is important to Leaseholders who have purchased through the Right to Buy or Right to Acquire because the amount they can be charged for these two types of Service Charge is restricted in relation the amounts quoted in the Estimates in the Offer Notice.

2. This restriction is limited to a specific period of time known as the ‘Initial Period’. The initial period means the first five years of the Lease unless:

i. The lease specifies that service charges are payable in respect of a specific annual period. If so then the initial period is 5 years from the start of the first service charge year.

ii. The lease specifies that a Leaseholder will be liable for a period prior to the grant of the lease, in which case the 5 years commences from the start of that period.

How the restriction on charging works during the initial period

1. During the initial period landlords are entitled to charge leaseholders for costs not referred in the estimate, but only up to the estimated annual average amount shown in the estimates.

2. Where the initial period and the reference period do not coincide, for costs incurred during the initial period but not inside the reference period, the amount which can be charged is limited to the average rate produced by averaging over the reference period all works for which estimates are contained in the notice.

3. Where costs are incurred during both the initial period and the reference period, and those costs are identified in the section 125A estimate, the amount which can be charged is limited to the relevant amount plus a small uplift to take account of price inflation. The formula for calculating the uplift is given the relevant regulations.

Relevant Case Law

Hyams and Anderson v Wilfred East Housing Co-operative Ltd [2007] 3 EG 126

LB Southwark v Ms Bee A Smith [2012] UKUT 295 (LC)

Click on the link to read more about The Housing Act 1985