What Effect Will Proposed Legislation Changes Have on Service Charges?

Darren Bagnall of Flat Living Insurance looks at how the proposed changes in legislation will affect service charges.

In recent news appearances and his written response to the Financial Conduct Authority’s recent review into the multi-occupancy property insurance market in January 2023, The Secretary of State for Leveling Up, Housing and Communities, Michael Gove, has referred to many significant reforms that may be put into place by the end of the year regarding service charges.

Many of the proposed reforms, though lacking in detail at the moment, are set to have a huge impact on leaseholder’s service charge demands and the way they are served. Here we’ll be discussing a few of the key proposals and the effect they may have.

A Bit of Background

Mr Gove ordered an inquiry into the building’s insurance market in January 2022, following concern around unfair fees being charged to Leaseholders.

Concerns were further highlighted in March of 2022, when the First-tier Tribunal handed a forced commission disclosure order. The order required a broker to produce a spreadsheet of their broker fees and commissions that had been charged to Leaseholders of a property they had arranged cover for.

The evidence produced in the case led many MPs to call for Financial Conduct Authority regulation of commission structures.

In May 2022, the FCA announced that they would be collecting data on ‘fair value’ for leaseholders. It’s this review of the market that Mr Gove has now responded to in writing and across several interviews and speeches. Many of his responses allude to changes in the way service charges will be approached.

What Are Service Charges?

Service charges are payable by leaseholders on an annual basis to cover the landlord’s incurred costs for providing services and maintaining the common areas of the building.

When signing a lease, residents commit to paying a proportion of these running costs which will vary depending on the terms of the lease and the level of service or maintenance provided.

Service charges can be expensive and complicated, which mean they can be a real point of contention between landlords and their leaseholders. They are calculated based on several factors such as the size and quality of the building as well as the services provided under the lease, but a typical service charge may cover some or all of the following:

• General repairs, maintenance and cleaning of common areas
• Cleaning of communal windows
• External maintenance such as landscaping and painting
• Redecoration funds
• Lift maintenance and insurance
• Fire equipment maintenance
• Flats insurance
• Bank and accountancy charges

Changes to Insurance Commission Transparency

Flats insurance makes up a large percentage of most leaseholder’s service charges, something they have absolutely no control over under current legislation.

The choice of insurer and policy is often entirely up to the freeholder or managing agent, meaning that leaseholders have no control over quality or cost.

The FCA’s review into insurance commissions and their effect on Leaseholder’s service charges found that almost a third of the cost of insurance premiums could be made up of commission and fees and that service charge demands were not transparent enough for this to be easily spotted by Leaseholders.

In his letter to the FCA in response to their findings, Michael Gove stated the following:

“The report confirmed my concerns regarding large buildings insurance premium increases in multi-occupancy residential buildings, evidence of weak competition in the market and unacceptable issues faced by leaseholders around the transparency of their insurance costs.

I will take action to ban managing agents, landlords and freeholders from taking commissions and other payments when they take out buildings insurance, replacing such payments with more transparent fees. I will press insurance firms, managing agents, landlords and freeholders to change their practices as a matter of priority.

I will also arm leaseholders with more information to enable them to better scrutinise their insurance costs, while also ensuring that leaseholders are not subject to unjustified legal costs and that they can claim their legal costs back from their landlord.

These steps will ensure leaseholder insurance costs are fairer, more transparent and will rebalance the legal costs regime to give leaseholders greater confidence to challenge their costs, supporting fair value for the leaseholder. My officials will continue to update you as this work progresses.”

So, if these proposed changes come into effect:

• If a property managing agent, landlord or freeholder is choosing the insurance policy for a block will no longer be allowed to receive commission when taking out a policy. 
• Fees will have to be completely transparent, and leaseholders will be given more ability to double check the insurance costs they are facing.
• If leaseholders disagree with the policy chosen and they choose to take their landlord to court, they will also be protected from the legal fees if they win the case.

Purchasing Freehold to be Cheaper and Easier

In a TV interview on the 29^th of January 23, Mr Gove said himself that “if you buy a flat that flat should be yours” – a sentiment shared by leaseholders across the country. Under his new proposals, it would be far easier and financially achievable for millions of families in leasehold flats to buy their property outright before the next election.

The Government’s plans include scrapping leasehold laws that prevent some flat owners from buying their freehold as well as making it easier for leaseholders to come together and own their properties under a common ownership model.

Leaseholders would also be able to buy out the ground rent without extending their lease first, which currently adds another layer of expense and difficulty.

Owning the freehold means residents can avoid paying expensive ground rents and management fees- a welcome change, especially given the current cost-of-living crisis. It also means that leaseholders would have more control over their service charge budgets, potentially leading to a reduction in their costs.

Flat Living Insurance provides specialist insurance policies for blocks of flats and apartments. For more information or a quote, please contact a member of the Flat Living Insurance team on 0333 577 2044.