The freehold of the property within which I am a long leaseholder, changed hands in Sept 2014; a new management company (owned by the freeholder) took over the management of the building. Although the management company manages various commercial properties, our building is the only one having long leaseholders. Accordingly, the management have failed to appreciate the different legal position of the leaseholders and requirements for managing such a property. Although a service charge demand was sent out in April covering the anticipated service charges for the period Jan-Dec 2015, I have refused to pay the invoice as the account to which monies should be credited is clearly a trading account for the management company. I have informed the management company of the requirement for leaseholders’ service charges and reserve funds to be held in trust, in accordance with Section 42 of the Landlord and Tenant Act 1987. The head of the management company say that he has been advised by his accountant that a ring-fenced account is not a requirement, and that the existing banking arrangements are satisfactory. Whilst I do not dispute the scale or composition of the service charge as invoiced, I am loathe to transfer any money into an unprotected trading account. What are my rights in this regard; can I withhold payment indefinitely until a suitable trust account is established?
Reply from Service Charge Dispute Guide
1. You are not legally entitled to withhold payment on the basis that your contributions to the reserve fund are not being held in a separate bank account.
2. The issue of what rules actually apply in respect of Service Charge trust funds under Section 42, 42A and 42B of the Landlord and Tenant Act 1987 is an area of much confusion for both Leaseholders and Landlords. The reason for the confusion is that since the 1987 Act was made there have been two further Acts of Parliament that have amended the original wording: Section 156 of the Commonhold and Leasehold Reform Act and Section 303 of the Housing and Regeneration Act 2008.
3. If you go to the legislation.gov.uk website the version of Sections 42, 42A and 42B of the 1987 Act it refers to form of wording introduced by Section 156 of the Commonhold and Leasehold Reform Act 2002. The problem with this is that Section 156 of the Commonhold and Leasehold Reform Act 2002 has not been brought into force except in so far as it permits Government to make regulations, which they have done only in respect of the types of financial institutions where designated accounts may be held.
4. Unfortunately for you and all other Leaseholders in England and Wales who believed themselves to have protection under the Version of the 1987 Act on the legislation.gov.uk website please be aware that certain sections are not currently in force as law and cannot be relied on as a basis for withholding Service Charge payments.
5. This will come as something of a shock to you and many of our readers. For this reason we would like to take the time to explain how we reached this conclusion, and where you can go to check for yourself on this issue. The coloured text in each of the following bullet points link to the legislation we are referring to:
- The original version of Section 42 of the Landlord and Tenant Act 1987contains no reference to any requirements around ‘designated accounts’ or penalties for a Landlord failing to abide by the provisions of Section 42. Indeed you will note that there is no Section 42A or 42B in the original version of the Act.
- Section 156 of the Commonhold and Leasehold Reform Act 2002proposed significant alterations to the 1987 Act with the introduction of Section 42A and 42B. It is this version which is currently quoted on the legislation.gov.uk website.
- Article 2(c) of The Commonhold and Leasehold Reform Act 2002 (Commencement No. 1, Savings and Transitional Provisions) (England) Order 2002 states that Section 156 shall come into force but only ‘in so far they confer powers to make regulations’. Our reading of this phrase is that only those part of Section 156 which give Government powers to make regulations are to be considered law. This does not appear to apply to the key parts of Section 42A (2) – such as the requirement to designate a specific account and hold only trust monies within it.
- The Government appears to made another attempt to resolve the issue of Service Charge trust funds by again amending the wording of Sections 42, 42A and 42B with new wording as described in Schedule 12 of the Housing and Regeneration Act 2008. Schedule 12 is in effect an attempt to rethink those parts of Section 156 of the Commonhold and Leasehold Reform Act 2002 which were never brought into force.
- In practice the issue was not resolved by Schedule 12 of the 2008 Act. Article 4 (6) of The Housing and Regeneration Act 2008 (Commencement No. 2 and Transitional, Saving and Transitory Provisions) Order 2008 states that the relevant sections of Schedule 12 shall only come into force for ‘the purpose of enabling the Secretary of State to make regulations’. To date, no such regulations have ever been made.
6. Our conclusion therefore has to be that Leaseholders have no greater protection under Law in respect of Service Charge trust funds than they were granted by the original wording of Section 42 of the Landlord and Tenant Act 1987. The Institute of Chartered Accountants of England and Wales (ICAEW) appears to have reached the same conclusion and this what they advise in Appendix A, paragraph 2 of their Technical Release (TECH 03/11) on Residential Service Charge Accounts. This document probably explains the advice provided by the accountant you mention in your message.
7. As a final and more positive note you might be interested to know that although the provisions of Section 42A and 42B do not appear to have come into law, many of the provisions have been adopted into the RICS Residential Management Service Charge Management Code (Paragraphs 4.5 to 4.9). For discussion of what this means in respect of resolving your dispute you may benefit from reading our article on Section 87 of the Leasehold Reform, Housing and Urban Development Act 1993.
Click on the link to read more Reader’s Questions and Answers on Trust and Reserve Funds