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There can be few more pointless, useless and misleading reports in property management than the section 21 report. This is a report demanded by a lessee under section 21, Landlord and Tenant Act 1985 (LTA). The report is fundamentally flawed and really should have no place in the modern world of property management.

What is a Section 21 report?

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 or the year end, whichever is later. Failure to meet these deadlines is a criminal offence.

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

Items/costs for which no payment has been demanded of the Landlord within the accounting period
Items/costs for which payment has been demanded by the Landlord but not paid in the period
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 summary of costs does not add value

The analysis required under section 21 (5) is difficult for the accountant to prepare and almost incomprehensible for the poor lessee. 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 below:

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.

Incomplete information

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 (5) 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!

Assurance

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.

At Haines Watts, our first reaction on receiving a request to prepare a section 21 report from an Agent is to see if the report can be avoided and to enquire if the lessee would accept a report prepared under TECH03/11 (best practice guidance for service charge accounts). The section 21 report is contrary to our belief that service charge accounts should provide valuable information to lessees and that our signature on the report gives confidence to all the parties interested in the report that the accounts have been checked by an independent qualified accountant.

No value?

I started this article by stating that the section 21 summary and report has no value. On reflection, this might be a bit harsh. There are two beneficial purposes of the report that spring to mind.

The end of the relationship between Agent and Lessee

If a Managing Agent receives a section 21 demand from a lessee and there are not extenuating circumstances (e.g. a handover situation or the demand is made by a maverick lessee) then it is a signal to the Agent that they have failed to effectively manage the relationship with lessees. If it gets to the stage of a section 21 demand issued in anger, then I suggest that the relationship with the lessee is effectively over. In these circumstances, it is in both parties’ interests to go their separate ways. Section 21 demands are relatively rare but when they do arise they are usually due to an internet trawl by a disgruntled lessee. The section 21 request is the last refuge of the desperate lessee.

Posterity value

The section 21 report should serve as a reminder as to how far the 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.

The future of Section 21 reports

So not all bad then. But if we want to dispense with the areas that are unclear and surplus to requirements but maintain the protection provided by section 21 LTA 1985 to lessees, then what can it be replaced with? One approach would be for new legislation to give lessees the statutory right to demand that a report is prepared under current best practice guidance (TECH03/11) and to make it a criminal offence for a landlord to fail to provide this report within the timescales detailed in the 1985 legislation.

However, even without changes in legislation, hopefully the time is not too far away when the service charge accountant can turn around to their fellow property professionals and ask, “Do you remember when we used to do section 21 reports? “

 

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