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Improving improvements

A recent Leasehold Valuation Tribunal case has highlighted the huge potential costs to councils which don’t consult properly and fail to plan the maintenance of their leaseheld housing stock for the long term. PSE discusses the implications with James Butler, director of Landmark Leasehold Advisory Services, who also explains the problems that Decent Homes Initiative funding can have for councils.

Local authorities who act as landlords to leaseholders in blocks of flats or apartments need to be very careful with the renovations and refurbishments they make and the money charged to the residents.

A Leasehold Valuation Tribunal (LVT) into a dispute involving Westminster City Council and 35 leasehold residents cut a service charge demand from the council that varied between £50,000 and £90,000 per flat to just £250 each.

The original repair works to the building, Emanuel House in Rochester Row, during 2010 and 2011 was estimated to be around £2.2m, but by the time work had finished, the costs had escalated to around £3.6m. But residents were never properly consulted on the works that were to take place and the potential financial consequences for them.

‘Incredibly common’

James Butler, director of Landmark Leasehold Advisory Services, which won the dispute on behalf of the residents, spoke to PSE to discuss what other local authorities landlords need to be doing to avoid such outcomes, and how many other such refurbishment projects could see residents landed with huge bills.

He said: “I think it’s incredibly common. We watch the local authorities very closely for their cyclical works schedule that they publish, normally every six years, and they are ordinarily in public access from their internet site.

“Now, I will admit it’s actually quite easy to find these types of disputes and actually grade them as to the likelihood of success before we even do any work on them, because councils are very open about what they are spending their money on. Further to that, there are freedom of information requests which leaseholders frequently have undertaken and they have got a wealth of information on their case already.

“We are currently looking at only the 32 London boroughs, and four of the Home Counties, and we have information that there are approximately between 100 and 150 qualifying major works projects which are open for our scrutiny in each of those boroughs in the last six years. And of course, if you were to divide that by six, you’re probably looking at about 25 to 30 major works projects in any one borough, in any one financial year, and that’s going to continue to go on and on and on, especially with such schemes as the Decent Homes Initiative.”

Meaningful consultation

In the Westminster case, Butler said: “The real crux of the matter was that the leaseholders, as they always do, brought a very emotive and angry approach. The landlord had done nothing to the building for 30 years, they had let it degrade fully, provided very little in the way of any meaningful consultation with the leaseholders – and then told them they had to pay between £35,000 and £50,000 each.

“As the case developed, that anger was compounded when it became apparent on the submission of the draft final accounts into the LVT by the landlord into the final bundle, that the costs of those works, analysed by our surveying expert, and against both the contractors’ sums and the quantity surveyor’s sums, had risen to approximately £3.5m due to contract overruns and poor budgeting.”

This increase brought the cost per leaseholder up to £50,000-£90,000 each. This sum was to have been means-tested: if residents provided evidence of financial hardship, the sum could be repaid over two years, later extended to four years.

Butler said: “But otherwise, if you didn’t meet the financial hardship criteria, then you had to pay, full stop, on submission of the final invoice.”

Sinking feeling

He explained: “The council’s policies have changed over the years, and their priorities have shifted. In 2006, when everything started to bite, the council’s commercial property teams had contracted significantly; I think they had shed about 22 staff. And the ability for them to really engage with the leaseholders and deliver anything seems to have been put on hold to a large extent, until finally the property was transferred across to CityWest Homes in 2010/2011.”

He said there had never been a sinking fund for major works, and that a lease document from the early 1980s “clearly specified” that the property’s ventilation was already on its last legs.

He said: “The council knew of errors going back into the early 80s and the argument really is, whilst those sinking funds is not something that they could force through the leases, they could reasonably have sought a variation, knowing that the large amount of expenditure was due to be undertaken at some stage.

“Just because there isn’t a sinking fund, doesn’t mean you can’t seek to put one in place and reasonably plan the future management of the property.”

Lessons to be learned

Westminster City Council made application to the Leasehold Valuation Tribunal on 13 September 2010 to prove publically that the costs it sought to impose through its service charge were fair, reasonable and ultimately recoverable from the leaseholders of Emanuel House, but on 22 February 2012, the tribunal returned its decision to reduce leaseholders’ liability to £250 per title.

Butler had plenty of advice for local authority landlords who want to avoid similar rulings against them at LVTs.

He said: “There are three key aspects here. Firstly, long-term management. If you can identify that a property has had a history of what could be reasonably called neglectful management, or less than 100% management, then you need to look very carefully at how you implement and phase works going forwards.

“Further to that, you want to be very careful during the consultation stages. There is a very strong case, called Garside, which says you shouldn’t really be looking to lump a massive financial expenditure in one financial year when that cost could be legitimately spread over many other years.

“In real teams, people do not have tens of thousands of pounds sat around, especially at the moment. Most people have their money committed, or over-committed, to other things.

“It’s interesting that one of the first things that local authorities always say is ‘you have a responsibility to contribute to major works, and therefore you should be saving up for this over the years’: that residents should be looking after the property and contributing.

“The reality is, the property changes hands. This is the perfect argument for every single property to have a sinking fund, because you don’t buy a property knowing that in two years time you’re going to have to spend £20,000 on major works. If in fact we had a culture where when you purchased a leasehold property, the sinking fund itself had a value, transferable value- based on the level of risk, then actually that would be very healthy for getting rid of this type of problem.”

Decent homes?

Butler continued: “Finally, my absolute key piece of advice to local authority landlords is that the Decent Homes Initiatives flies in the face of every single leasehold lease we have ever seen. Essentially, the Decent Homes Initiative is designed to improve tenanted council properties. But it’s not just kitchens, not just the warmth and the insulation of these properties, it’s also the amenities surrounding them and the structure of the building and so on.

“So what happens is that local authorities will look at a building and then – regrettably for them they have a very difficult balancing act to perform – they are expected to comply with European standards of bringing property up to scratch and central government have provided this central bidding pot, as it were, from which any local authority can seek money to improve the property in line with the Decent Homes Initiative standards.

“Of course, if you’re bidding for money from a central pot, there really is no financial consideration for you. If you’re simply going to be given money by central government, or wherever it comes from, you are bidding for that money on the basis of your tenanted properties.

“Let’s say, for argument’s sake, you have a block with 50 flats in it; 25 are sold off on long leases and 25 are retained by you as social housing or secure housing stock.

“Then, based on the Decent Home Initiatives scheme, you employ professionals as a local authority landlord and decide there is £1m worth of works that need doing to meet the criteria of the Decent Homes Initiative. “Then you go to the Decent Homes central pot and you ask for your £500,000 for your social housing stock contribution. You might make a few other concessions and you might bid for that, but you’re not going to ‘on charge’ the leaseholders. But otherwise, you are therefore bidding from external funding sources for your contribution to these works.

“There are many, many problems with this. For argument’s sake, there is nothing to stop you paving the pavements with gold and covering the roof with copper: it’s not your money, you don’t have to account for that. The problem is that many leases do not allow improvement. If you replace a lift in the building, for example, with a new lift with increased capacity or a longer running life, and you try to sell it to leaseholders on the basis that the old lift was going to need replacing at some point, you’re going to have a rough time when you’re met in the courts by companies such as ours. We are going to say that such things are improvements, as is the replacement of water tanks, the alteration of flat roofs with new roofing systems, insulation, and so on.”

Attractive but problematic

He continued: “These Decent Homes pots are incredibly attractive to local authorities because they basically help to improve their housing stock. And of course, if the local authorities were to lay their cards on the table, there is a large element of profit in there as well, because any local authority would ordinarily charge a management fee for any major works project. So arguably, the bigger that project is, the more money you’re going to get. So let’s say, there’s a 10% fee, and the average is between 11% and 15%, that you’re bidding for from the central government pot. If you cut that in half, on that scenario of 50 flat buildings, 25 of which you own, you’re actually probably going to make about 5% of what you’re bidding from central government, as profit. And that of course is something we would attack very fervently.

“So I think the real key is long term maintenance, and working with the leaseholders to phase works over time. Consult properly and then don’t be coerced by central government into spending money from the central pots, because we will be coming after you for the difference.”

As PSE went to press, there had been no appeal by Westminster City Council against the LVT ruling.

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