Part V of the Housing Act 1985 deals with the right to buy.
Once a tenant has established his/her right to buy, section 125 requires the local authority landlord to serve a notice on the tenant. Amongst other things, the notice must contain the provisions which the landlord considers should be included in the conveyance or grant.
If those provisions include an obligation to pay service charges, the notice must, amongst other things, include the information set out in section 125A. This information is effectively the landlord’s estimate of service charge costs likely to be incurred in the course of the “reference period”.
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The reference period must be identified in the s.125 notice. It is defined in s.125C.
The start date is a date:
- “Not more than six months” after the landlord gives its s.125 notice, and
- Which the landlord may reasonably specify as being a date by which the conveyance or grant will have taken place.
The end date is a date:
- Five years after the start date, or
- If the conveyance or grant is to be calculated by reference to a specified annual period (which, I suspect, will be most cases), the date at the end of the fifth annual period beginning after the start date.
In some cases therefore, if the lease is granted a matter of weeks after the end of the service charge year, the reference period may well last closer to six, than five, years.
For example: service charge year runs 01 April – 31 March. Lease granted 10 April 2011. The reference period end date will be 31 March 2017.
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In relation to the reference period, the landlord must supply, at current prices:
1) For all elements of the service charge except repairs where the tenant is buying a flat:
a) An estimate of the average amount of each head of charge, and
b) The total amount of those estimated amounts.
2) Where the tenant is buying a flat, estimates in respect of repairs: s.125A divides these between itemised and non-itemised works, and
3) A statement of the effect of:
a) paragraph 16B of Schedule 6, which restricts by reference to the estimates the amounts payable by the tenant, and
b) section 450A, which entitles the tenant to a loan in respect of certain service charges. In the interests of preventing this page growing to War and Peace dimensions, I leave discussion of that section for another day.
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This is the key paragraph which limits the tenant’s liability for service charges. To make life interesting (and, no doubt, to indulge the reader in a little neural knitting), this paragraph introduces the concept of the “initial period”. It is not the same as the reference period.
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This is simply defined as starting on the date of grant of the lease and ending five years later but:
- if service charges are payable for costs incurred in a period before the date of grant of the lease, the initial period begins with the beginning of that period;
- as with the reference period, if service charges are calculated by reference to an annual period, the initial period ends at the end of the fifth whole service charge year after the grant of the lease.
For example: the reference period may begin on 01 March 2013, but the lease actually be granted on 01 February 2013. The initial period will therefore expire on 31 January 2017, one month before the expiry of the reference period.
Equally, the beginning of the reference period may be 01 March 2013, but, due to difficulties in conveyancing, the lease may not be granted until 01 June 2013. The initial period will therefore expire three months after the reference period.
Effectively, the reference period is the landlord’s best guess at the date of grant of the lease: it cannot know for certain when the lease will be granted because it does not even know if the lease will be granted when the s.125 notice is prepared. The contents of the s.125 notice may in fact be so off-putting to a tenant exercising his/her right to buy that the whole transaction may collapse.
The initial period, by contrast, is a definite period, the beginning of which can be specifically identified by reference to the terms of the lease which has come into being.
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During the initial period, a right to buy tenant’s liability for repairs itemised in the landlord’s s.125 notice is limited as follows.
Repairs itemised in the s.125 notice: the tenant’s contribution is limited to the amount shown in the s.125 notice as his estimated contribution – plus an inflation allowance.
Repairs not itemised in the s.125 notice:
- for the period during which both initial and reference period coincide: the tenant cannot be asked to pay at a rate greater than the estimated annual average amount shown in the landlord’s estimates;
- for any parts of the initial period which do not coincide with the reference period: the tenant cannot be asked to pay at a rate greater than the average rate produced by averaging over the reference period all works for which estimates are contained in the notice.
The landlord is entitled to add an inflation allowance to both of these rates.