Flat Management Companies – what is the value of a Section 21 Accountant’s report?

Karen Bright is a Partner and Head of the Litigation and Dispute Resolution teams at Bishop & Sewell.

A Section 21 report under the provisions of Section 21 of the Landlord and Tenant Act 1985 is an interesting but possibly useless report of the interim service charge costs. However, it might be useful to tenants wishing to make an enquiry into a service charge budget, writes Karen Bright, Head of Litigation and Dispute Resolution, at solicitors Bishop & Sewell.

However, it does have a sting in the tail as failure to respond to a request for such a report is a criminal offence. So if you are ‘mining for information’ in relation to a difficult service charge budget this could well be useful.

In this third of three articles for Commercial News Media on residential flat management Karen discusses why a Section 21 report no longer has a place in our modern and professionally regulated property management sector.

Under section 21 (1) of the LTA 1985, a tenant (or recognised Tenants’ Association) can request a Landlord to provide a summary of service charge costs. Once the request is received the Landlord must provide the information within one month or within six months of the year end, whichever is later. Failure to meet these deadlines is a criminal offence.

Section 21 (5) requires the summary to distinguish between,

  1. Items/costs for which no payment has been demanded of the Landlord within the accounting period.
  2. Items/costs for which payment has been demanded by the Landlord but not paid in the period.
  3. Items paid in the period by the Landlord.

Section 21 (6) requires that if there are more than four dwellings then the summary must be certified by a qualified accountant who is also a Registered Auditor.

What is wrong with the Section 21 summary?

The analysis required under section 21 (5) is difficult for the accountant to prepare and almost incomprehensible for the poor lessee to understand. The only real way to present the information is in columnar format. I have included an extract of a Section 21 summary that attempts to meet the requirements of the legislation.

Extract from Section 21 Summary of Expenditure

    (A) (B) (C) (D) (E)
Item of expenditure Total (£) Costs accrued at start of year (£) Costs invoiced in prior year but not paid (£) Expenditure paid in year (£) Costs accrued at year end (£) Costs for invoices not received in year (£)
Management fees 4,171 4,171
Accountancy fees 650 (450) 600 500
Cleaning 6,200 (2,300) 6,000 2,500

Columns A and B are required to avoid double counting of expenditure from year to year.

The information presented fails at least two of the qualitative characteristics of valuable financial information in that it is not readily understandable and it does not allow any comparison either with prior year expenditure or budgeted expenditure.

The information provided by the summary is incomplete

There is no requirement to provide a balance sheet and although there is a provision under Section 21 (6) to account for accruals and creditors there is no provision for prepayments and so the outcome is a hybrid form of accounting, combining some aspects of accruals accounting and some aspects of cash accounting. In short, the report is conceptually flawed.

Section 21(6) requires the accountant’s certificate to be prepared by a Registered Auditor. This is confusing for the lessee because the work involved in preparing the certificate could not be further away from carrying out an “audit” in accordance with International Auditing Standards. There is no justification for a Registered Auditor preparing this report other than that the legislation says so.

No value?

I started this article by stating that the Section 21 summary and report has no value. However, the Section 21 report does have posterity value as it reminds us how far the property management sector has come since 1985. The 1985 legislation was designed to protect the lessee from the rogue landlord, who in those days was perceived to have all the power in the relationship between landlord and lessee. There is no question that the Section 21 legislation was well intentioned and designed to redress some of this imbalance. However, it no longer has a place in the modern and professionally regulated property management sector.

Karen Bright is a Partner and Head of the Litigation and Dispute Resolution teams at Bishop & Sewell. To find out more about our flat management company and service charge services please contact her on +44 (0)20 7079 4143 or email: [email protected]

About Bishop & Sewell LLP

Bishop & Sewell is a long-established, full service Central London law firm – with an international reach – specialising in Personal, Property and Commercial legal matters. To learn more, visit www.bishopandsewell.co.uk