INNISFREE HOUSING ASSOCIATION

BOARDBRIEFING NOVEMBER 2013

SERVICE CHARGES

INTRODUCTION

  1. This briefing updates members aboutservice charges and our current performance on service charge collection.

BACKGROUND

The law

  1. The Landlord and Tenant Act 1985 sets out the basic ground rules for service charges, defining what is considered a service charge and setting out requirements for reasonableness.
  1. The Act defines a service charge as ‘an amount payable by a tenant of a dwelling as part of or in addition to the rent which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord’s costs of management; and the whole or part of which varies or may vary according to the relevant costs.’
  1. If you are a tenant you may pay a service charge to your landlord. This may be one of two charges - a ‘fixed’ service charge which is fixed by the landlord according to the landlord’s own estimates and costs or a ‘variable’ service charge; this a charge that the landlord can alterdepending on costs incurred, but it must give you notice of the variation. Your tenancy agreement should specify what if any service charge you must pay.
  1. Innisfree operate a fixed service charge policy. This means we fix the charge according to our own estimates and costs. If our estimate proves to be too low, we have to fund the deficit. If our estimate is too high,we keep any surplus.
  1. Offering fixed service charges as opposed to variable service charges is more straightforward, as they have a low administrative burden and are generally used, especially for general needs housing, where service charges are relatively low and reasonably stable.

Performance

  1. Using our management accounts the graph below shows the income, costs and the surplus deficit position for service charge performance over the last 4 years. With income in the £250,000/£300,000 region, service charges account for roughly 7-8% of turnover.

  1. The figures in the graph above are sourced from the management accounts, but this understates the actual service charge costs compared to the sum of the individual service charge costs on a scheme-by-scheme basis.
  1. This is because, for presentation in the management accounts, some of the costs related to service charges sit in other areas. For example, the costs of salaries relating to the time allocated as the management cost of handling service charges sits in the salaries budget, rather than as a cost line here. Another example like this would be the cost of depreciation of assets which are service chargeable.
  1. Looking at the above graph we appear to be reasonably balanced but if we factor in other service charge costs such as the management costs mentioned above, the results look less balanced as shown in the graph below:

(NOTE: the £50,000 charge from Shian HA for Philip Lane while we worked on the process of buying the properties significantly distorts the 2012/13 figures.)

  1. There are two main reasons for the current deficits: annual increases not following the actual increase in costs on schemes; disputes on consortium schemes, where other large landlords are trying to charge what appear to be unreasonably high charges.

Annual increases

  1. The annual increase process has not determined the actual increase required per scheme. Innisfree have observed the spirit of old TSA guidelines that limited any increase in service charges to that of the rent increases. If for example the rent increase process resulting in an increase of 5% then Innisfree would limit any increase in service charges to 5% even if the costs had increased by 10%.
  1. The result of this is that some charges are not currently collecting the amount of the costs incurred on the scheme. For example, at Hirst Crescent (8 units), residents currently pay £7.42 per week in service charges but in order to cover the actual costs incurred, this charge should be £10.36 per week.
  1. As any new residents move into the scheme, we do set the service charges they pay at the actual level rather than the historic lower level. An approach to move towards recovering the full cost of recovery is mentioned later in this briefing note.

Consortium schemes

  1. The particular problem schemes are those managed by Network HA and include Airco Close, Pound Lane, Westfield Close and Paul Daisley Court.
  1. These schemes have been a source of conflict and issue for a number of years. We feel the quality of the services provided was poor and the cost was too high. Also, invoicing was sporadic and often of poor quality which again affected our ability to set reasonable service charges for our residents.
  1. For last year these schemes have shown the largest deficits, but this is complicated by prior year corrections and adjustments.
  1. In addition, the high costs being passed on by Network have already included their management fee of 15%. Innifree’s practise has been not to make any additional charge to our residents to reflect the cost we incur in handling ( and challenging/ querying) the charges. It is the common practise of other landlords in these circumstances to charge a reduced management fee ( say 5% to 7.5%) on top of the consortium charge.
  1. The table below shows the effect of service provision by a consortium lead:

£100 spend on cleaning by a consortium partner at one of our schemes:-
The consortium charge to Innisfree would be as follows
Cleaning£100
Management fee from provider£15
Total Charge to Innisfree£115
Charge to Resident £115
Contribution to Innisfree costs£0
£100 spend on cleaning at one of our own managed schemes-
Cleaning£100
Total Charge to Innisfree£100
Innisfree would then add a £15(15% of £100) management fee to cover costs in relation to providing the service.
Charge to Resident £115
Which is split as £100 for direct cost of cleaning and £15 for Innisfree as a management fee.
  1. For the resident, the result is the same as they are charged £115. For Innisfree the difference is £15 per £100 of spend. Given that £70,000 was put through the accounts in relation to consortium spend last year, the management fee costs being lost to the consortium lead partner is of the order of £10,000.
  1. The situation with Network is now stabilising as we have taken control of a number of the services they previously provided such as internal cleaning.
  1. We have recently achieved a settlement with Network in relation to Airco Close where they were demanding £38,000 for two years of outstanding service charge fees. After a lengthy process of challenging their charges and allocations we secured a £10,000 credit. This left 2012/13 balanced which is the first time this has happened for a number of years
  1. We still have on going disputes with Network with regards the other three schemes. We will not be paying anything until we are fully satisfied what we are been charged for is correct however, we expect that this will still take some time and it will mean that the service charge position will remain unclear until the final settlement is reached.

Details of a high cost scheme

  1. In 2012/13 one scheme stood out for generating a deficit and this was Pound Lane/Unity Close (30 units). This scheme generated a deficit of £22,760. The issues primarily are that we disagree with the charges proposed by Network but to be prudent we are accruing their costs (we are putting the money aside in case we do have to pay them), but when we settle we expect a number of credit notes.
  1. In the Pound Lane case we currently charge an average of £12.58 per week for communal electricity, grounds maintenance, internal cleaning, rubbish clearance and pest control which is a fairly standard amount for these types of services. If we fully passed on Network’s full charge plus the costs we incur we would have had to charge residents double at nearly £23.40 per week in 2012/13.
  1. The biggest issue is with cleaning which we transferred across to our own contractors in 2012. Before this Network were trying to charge up to £16k (though in more recent invoicing that has fallen to nearer £9k) a year plus a 15% management fee. With our own contractors we would be looking to have the cleaning done for a few thousand pounds a year.
  1. As we resolve the issues, residents may not see a marked reduction in their charges, as we have been holding these down during the dispute period. However, for Innisfree, we will move to a position where our income matches our costs.
  1. During the period of this continued dispute it does not seem advisable to consider changing our system of service charges from the fixed arrangements we have now.

MOVING FORWARD

  1. The priority moving forward is to ensure we pass on costs where appropriate without burdening residents with large service charge increases.

Agreeing maximum levels for increasing service charges

  1. A simple solution while the current rent structure is in place is to increase service charges by no more than RPI+0.5% per week. This fits in firmly with the spirit of rent increases.

Increase for existing residents / Weekly increase / % increase / Increase for new residents / Weekly Increase / % increase
Current Service Charge / £7.42 / - / £10.36 / -
Year 1 increase / £8.61 / £1.19 / 16.0% / £10.62 / £0.26 / 2.5%
Year 2 Increase / £9.82 / £1.22 / 14.1% / £10.88 / £0.27 / 2.5%
Year 3 increase / £11.06 / £1.25 / 12.7% / £11.15 / £0.27 / 2.5%
Year 4 increase / £11.44 / £0.38 / 3.3% / £11.44 / £0.28 / 2.5%
  1. However this doesn’t deal with the need to catch up on historic undercharging, so there may be a need to consider an additional increase of say +£1 where there was an undercollection. This would provide a “damping” of the increases.
  1. If we take the Hirst Crescent example earlier where existing residents are charged £7.42 and new residents £10.36 we can see the impact of this change. If we had the revised formula above in place (assuming costs increased uniformly by 2.5%) the £10.36 residents would receive a new charge of £10.62. The residents on the £7.42 level would receive a charge of £8.60 per week. It would take four years to achieve parity between the two levels of charge.
  1. Appendix 1 lists the current average service charge for each scheme by week. The average charge is £14.26 per week. As can be seen this is distorted by the higher charges for our supported/sheltered schemes. Due to their nature we have to provide a greater level of services and hence the higher cost. The most expensive scheme as would be expected is Clochar Court. We recently had a number of discussions with Brent about our service charge level for the scheme following the supported people changes and they were satisfied with what we are charging. The next most expensive schemes are the Network consortium schemes. The supported schemes and the Network schemes account for just over 50% of our turnover.

CONCLUSION

  1. Service charges are often not an easy topic to deal with. If we exclude the consortium schemes, Innisfree do not have a serious problem with service charge deficits but it is clear action needs to be taken because of some historic issues.
  1. As well as the continued approach to challenging the charges passed on by the consortium lead partners, we should be treating the value for money of service charges as a priority for our residents.
  1. This will lead to examination of our procurement arrangements as well as the management of service contracts.

APPENDICES

Appendix 1Current average service charge per week.