Superchargers

My old chemistry teacher Geoffrey “Solomon” Beaumont used to tell his pupils that everything worth knowing is difficult to understand. He was always careful to point out that not everything that is difficult to understand is worth knowing.

You will have to decide into which of the two categories the following falls.

Way back in 2015, the Welsh Government introduced new arrangements for council house rents and service charges such as grass cutting, warden service, communal areas, etcetera.

Basically, service charges are levied for those activities which are not common to all properties. So, warden services to sheltered accommodation would attract a service charge, as would grass-cutting, but general repairs, to which all tenants are equally entitled, would not.

Up to 2015, service charges had been pooled i.e. they were all lumped together and charged to individual tenants as a proportion of their rents whether or not they benefitted from the particular service.

There was an element of unfairness in all this because tenants with no grass in front of their houses were paying for grass cutting and all tenants were making a contribution to estate wardens even though only sheltered accommodation enjoyed that particular service.

So the Welsh Government decreed that these “pooled” service charges would be disaggregated from “rents” – that is, they would be “de-pooled” and reallocated to those tenants who benefitted.

As the report to Pembrokeshire County Council’s cabinet on 1 December 2014 explained:

“The introduction of service charges by the de-pooling of relevant costs from rents (emphasis added) will also be a requirement following the enactment of the Housing (Wales) Act 2014 (Part 4). For 2015/16, only charges relating to the warden service with be introduced. Further work will be undertaken to consult/negotiate with tenants regarding other premises costs before additional service charges are introduced on or before April 2017.”

As the report says, the first stage involved the de-pooling of the warden service.

My argument from the outset has been that what tenants call their “rent” is actually made up of two components: the base rent and the service charge.

It is clear that rents and service charges are separate entities because they comprise two distinct income streams in the council’s Housing Revenue accounts (see table below).

This distinction between base rent and service charges is further evidenced by S111 Housing (Wales) Act 2014, which gives Welsh Ministers powers to set:

(b) Rent for such accommodation

(c) service charges for such accommodation

So clearly rent and service charges are treated as distinct elements of the actual “rent” paid.

It must be so, otherwise there would be no possibility of “de-pooling of relevant costs from rents” [Chief Finance Officer’s report to Cabinet 1 December 2014 above]

Therefore it seems to follow that:

Actual rent paid = Base rent + service charges.

Because it was easy to identify both the costs, and the tenants who benefitted, the first charges to be de-pooled were wardens’ salaries.

According to the council, the amount raised directly from tenants by this particular de-pooling exercise was equivalent to 22p per week for every council property.

The following year communal areas in sheltered accommodation were de-pooled – another 77p, or, as near as makes no difference, £1.00 per week in all.

Clearly, as those costs were already included in the pooled charges some adjustment should have been made to avoid double charging in contravention of the requirement in the Landlord and Tenant Act 1985 that service charges should reflect only costs that are “reasonably incurred”.

Obviously, even in the rarefied world of local government, the same charges cannot be reasonably incurred twice.

The guidance issued by Welsh Government explained how this adjustment should be made:

“10. Where rent pooling currently applies and tenants do not receive, or are not eligible to receive, services, it will be for each social landlord to determine whether the weekly rent for those tenants should be reduced or held on a marked time basis.”

So, the tenant of a three-bed family home that does not benefit from either warden services, or the communal areas such as common rooms in older persons’ accommodation, should either have their rent reduced by an amount equal to the cost of these services, or have their rent held on “a marked time basis”.

The concept of marking time will be familiar to anyone with a military background, but in this context it usually refers to a situation where someone has been moved from a higher paid to a lower paid post within an organisation.

Usually, they will retain their previous higher salary but it will “mark time” until their new lower salary catches up at which point they will receive pay rises along with everyone else.

So if the actual rent of £100 was made up of base rent of £99 + £1 pooled charges for services to which the tenant was not entitled, the choice would be to reduce the weekly rent to £99 and add any future increases to that, or maintain the rent at £100 until such time as the increases on top of the £99 base rent took you beyond the £100, at which point the usual increases would be applied.

As stated earlier, the council calculates that the cost of warden and other services now charged directly to all tenants in older persons accommodation is the equivalent of about £1.00 per week when distributed across the whole estate.

This is made up of some 22p for warden services in 2015 and another 77p in respect to the 2016 rent settlement when communal areas were de-pooled.

With respect to the 77p charge, the council relies on the following resolution of the council on 10 March 2016:

“That the base rent of individual properties remains the same and there is no corresponding reduction in rents as a result of the de-pooling exercise”.

In an email to members of the audit committee, where I had raised this topic, Mr Jeremy Saunders of the council’s statutory auditor, Audit Wales, explains it thus:

“Looking at it from one angle you could say that the service charges element was not removed from all tenants rents before applying the de-pooled service charges to those tenants in receipt of the services.

However, the Council’s report in 2016 set out that the service charges element  [emphasis added] included as part of rent for the prior year for all tenants would not be deducted from all rents for the coming year but would be absorbed in all base rents going forward.

In my view the report could have been a little more explicit in this matter although it did set out what the effect on rents would have been if a decrease had been applied to base rents equivalent to the prior year’s service charges before applying the increase.

As such I do not believe that tenants are paying twice for annual service charges.

I do not comment on the lawfulness or fairness of the decision taken.”

What Mr Saunders is claiming, I think, is that, as the 77p downward adjustment necessary to compensate for the imposition of full charges for services to elderly persons accommodation (de-pooling) was “absorbed in all base rents…”, it was no longer a service charge and the allegation that tenants were paying twice for service charges wouldn’t stand.

I’m not sure that the words in the resolution of 10 March 2016 can bear the weight of the meaning attached to them by Mr Saunders, but even if I’m wrong about that there are other matters that need to be taken into account.

Firstly, cabinet considered three options for the discretionary rent increase: £1.00, £1.50 and £2.00. However, as 77p was already “absorbed into an increase” in rent, cabinet was in effect considering rate rises of £1.77, £2.27 and £2.77 – the last two being above the £2.00 limit set by Welsh Government and, therefore, unlawful.

Second, the council’s letter to tenants should have made it clear that rents were being raised by RPI + 1.5% + £1.00 + £0.77p and that service charges were being adjusted accordingly.

Third, there was an earlier de-pooling exercise in 2015 when no such words as those relied upon by Mr Saunders were used. So, in that case, the tenants were, even on Mr Saunders’ interpretation of the rules, paying twice.

And fourth, as these formerly pooled service charges had now morphed into rent, the total under the heading “Charges for services and facilities” should have remained fairly constant.

However, the figures in the bar chart below show a clear increase in 2015/16 and 2016/17 when the de-pooling exercise took place, which, as there had been no increase in the type or quantity of services provided, can only be explained by tenants paying twice:

That takes us back to the Welsh Government guidance which required that either the £1 was deducted from rents before any future increases were imposed, or that the rent “marked time” until the £1 was overtaken by future increases.

So, the rent increase for 2016/17 should have been RPI + 1.5% + 23p [£1 – 77p] and, as all subsequent rent increases have this 77p baked in, all subsequent years’ rents were too high by a similar amount.

Following a referral from the audit committee, full council took the unusual step of setting up a working group to look into this matter.

We have had three de-pooling working group meetings so far and nobody has yet come up with any reason why my analysis is flawed.

Council officers insist that the authority has done nothing wrong, but that is an assertion, not an argument. The strongest argument put forward so far is that working out how much tenants have been overcharged and repaying the money will be a massive task.

It is interesting that the Tory on the working group, Mark Carter, emailed before our last meeting to ask me what I was trying to achieve:

“So my mind is clear perhaps you can clarify as to what your ultimate goal is, ie are you looking for an acknowledgement there was a mistake or are you aiming for individual repayments to tenants to be made.”

I emailed back:

“Are you able to explain why you think it matters?”

To which he replied:

“I am unclear as to what this working groups ultimate aim is, so I am asking you to clarify. We have received information but I cannot recall any proposal being made and surely you must have an idea as to what you want”

What I want doesn’t come into it. If the council has “made a mistake” and overcharged its tenants then it has no option but to reimburse them.