Energy and Climate Change Committee - Fuel Poverty in the private rented and off-grid sectorsWritten evidence submitted by the Federation of Private Residents Associations (FPRA)

The Federation of Private Residents Associations (FPRA) are members of the End Fuel Poverty Coalition and a non-political, not-for-profit advice, support and lobbying organisation for our members who include private residential leaseholders, tenants’ and residents’ associations and residential management companies as well as those companies where the leaseholders together own the freehold of their own residential block and we have long been concerned about the issue of energy efficiency for long- leaseholders living within blocks of flats, due to the complex nature of most leases.

For very good reasons most leases don’t allow for “improvements” to be carried out as part of the service charge but this means consensus for works to be done must be sought from residents and this can stall improvements before they have started. Research by our legal advisor Dr Nick Roberts, published last year in the New Law Journal, proposed a few simple changes to existing leasehold regulations which would go some way to removing particular barriers (a copy is available on request), one of the biggest barriers is the co-ordination of all the flats in a block to reach a common consensus and we consider one of the most difficult challenges in insulating blocks of flats, far more so than just funding.

The Attitude of Utility Companies to Resident Management Companies

The FPRA estimate that for about 60% of blocks of flats in England and Wales the effective landlord for supplies to common parts is a resident management company of which the vast majority are run by volunteer Directors often with little support from an experienced property manager advising them. Utility companies have taken in recent years a tougher and tougher stance with these companies. Under Landlord and tenant law landlords including resident management companies have to collect and spend service charges as trustees (S42 of 1987 L&T Act). The company acts as a trustee but the service charge monies do not belong to the company. This means that these companies generally have no assets and many file as dormant at Companies House.

In recent years utility companies have run credit checks on resident management companies and some have refused to supply all together again effectively stifling competition and any search for best value for long-leaseholders.

Others will only supply if large deposits are made; this is not practical for most of these companies as they do not hold any reserves (or the lease may not allow it). Others demand direct debit payments; a trustee or its managing agent cannot do this (again excluding leaseholders from many discount schemes available to other tenures).

For example it is against RICS Service Charge code of practice approved by Government to set up a direct debit on a client or trust account.

In the interest of providing effective competition for resident management companies all supplies of gas and electricity to common parts of blocks of flats should be made as residential supplies and not commercial as at present.

Other Forms of Tenure

Ofgem only refers to flats. OFGEM is missing other forms of tenure that also have communal supplies. There are many developments of freehold houses either solely of houses or mixed with flats on the same development. It is entirely possible, and with the current move to more shared equity and mixed development arrangements that those properties will pay an amenity charge for gas and electricity to some form of specialist company or landlord.

OFGEM needs to consider how freehold houses which are part of communal supplies can be brought within any change of licensing conditions.

The “Green Deal” would not on its own provide the much needed incentive for leaseholders to insulate their homes. To be cost-effective, such improvements which need to be carried out to a block as a whole would involve very complex arrangements and negotiations especially in mixed tenure developments and where there are a number of parties to the lease.

Many leases for instance are tripartite leases with a “Head” Freeholder and Residential Management Company with responsibility for the management (often run by volunteers), as well as leaseholders who vary from being reasonably well off occupiers to those in dire fuel poverty struggling to pay their bills. Who should fund works in such a situation?

Flat owners need help in making their blocks more energy efficient. But the Government’s Green Deal – designed to do just that—isn’t likely to work for flat owners without providing incentives.

As highlighted by the Arun District Council Energy Efficiency officer Jo Brooks recently in a recent thesis for an MSc Architecture: AEES Graduate School for the Environment in July 2011 presented to the DECC working group set up following the committee stage of the Energy Bill. (Full copy and recommendations from the thesis available on request).

It has been well researched and modelled that in medium to high rise buildings, the energy & carbon savings that could be seen in top floor flats are different to those on middle floors and significantly different to those on the ground floor within the same building, even when the same measures are offered. Therefore it would seem wrong to me to install a measure for the whole building and then, based on carbon savings, divide the cost up equally among the number of dwellings in the block, even if this lease allows this. But this is precisely the basis on which the government is trying to promote the Green Deal to flat owners.

Most blocks of flats in the private sector are co-owned and a number of parties are involved with each building including freeholder-landlords, leaseholder-landlords, leaseholder-owner-occupiers and short hold tenants, not to mention residential management companies and letting and managing agents too. In some circumstances the freeholder can even be a social landlord and the tenants private. Leases vary from flat to flat and block to block and the whole sector struggles from a lack of national regulation. The responsibilities of the various parties can also vary significantly, which makes improvements to these buildings very difficult to implement.

For all these reasons, the FPRA has been lobbying Government to treat blocks of flats/apartments in the private sector, especially those where works would need to be done to common parts, as a separate entity under the Green Deal so that these issues are correctly and fairly addressed:

1.Leaseholders of flats are used to sharing expenses equally through service charges and therefore any scheme that require a detailed cost benefit analysis, distinguishing flats with one or two external walls or on the ground or top floor are, in our view, doomed to failure. My view is that the key barrier to delivery of the Green Deal to blocks of flats and other multi-occupancy properties will be consent to the “Green Deal” charge from multiple bill payers (both lessees and sub-tenants).

2.We suggest that in order to deliver energy improvements to the structure and common parts of blocks of leasehold flats other funding programmes will be required such as the one in West Sussex in partnership with all the local authorities that has just come to an end due to the short term nature of the funding. (Details available on request).

  These issues may be particularly acute for measures such as cavity or solid wall insulation which may impact on multiple units within a building and may require a Green Deal charge to be attached to two or more individual meter.

  The most significant problems are likely to be those in multiple occupancy buildings were one or a minority of flat owners or tenants could prevent a Green Deal from going ahead on the block or row of properties, to the actual or perceived disadvantage of other occupants.

In the presentation to the Government working group we focused on potential barriers to the wider uptake of the Green Deal related to freeholder, leaseholder and bill payer consents and we would be happy to share that with the committee if that would helpful:

VAT on supplies to common parts.

Failure of utility companies to appreciate that resident management companies cannot be assessed like other commercial businesses. There is a lack of open competition for supplies to common parts and RMCos are being charged unreasonable tariffs.

Disconnection protocol for supplies to common parts. There have been cases where supplies have been disconnected when this means no fire alarm or emergency lighting in blocks.

We would also ask your Committee members to consider the supply of gas and electricity to the common parts of blocks of flats which will impact on the flat owners and tenants ability to keep up with rising fuel prices.

Some RMC or RTM Companies classified as “dormant” will not even be considered by Scottish and Southern or Eon for a quotation for supply.

EDF would only supply on a 14 day direct debit basis. There has been an increase in the requests for direct debits and security deposits. Not always possible for small Flat Management Companies who are non trading companies.

The problem of credit vetting has been an issue for some time with an increase in the suppliers’ credit procedures and the fact that service charges are no longer dealt with in the “company” accounts.

The suppliers carry out a credit check and ascertain the company is dormant. (Not uncommon for block of flats). The supplier then says they no longer wish to supply and are placing the block on “out of contract” rates until they transfer out or They will supply but the RMC will need a three month deposit and payment by direct debit. not always possible from a service charge account.

Suppliers often refuse to quote for this type of business because they cannot secure a good credit rating on the resident management company. Even if they have provided both company and service charge accounts that show a healthy reserve balance and a positive net worth, apparently not sufficient to overcome concerns over the credit worthiness of the RMC client.

The Contradiction between Licensing Conditions and VAT Regulations

The VAT regulations concerning the supply of gas and electricity to common supplies to blocks of flats by landlords have been clear for many years. But they conflict with licensing conditions and managing agents, resident management companies and other landlords have constant battles with utility companies who incorrectly class the supplies as commercial for VAT purposes.

Here are the key extracts from the VAT regulations available from HMRC:

The VAT Act 1994, Schedule 4, Paragraph 3 defines any supply of heat, power, refrigeration or ventilation as a supply of goods.

Supplies of fuel and power are subject to the standard rate of VAT unless there is a provision for a reduced rate for a qualifying use.

Qualifying use means:

“domestic use”; or

“charity non-business use”.

The legal provisions for the reduced rate are in the VAT Act 1994, Section 29A.

The following supplies are charged at the reduced rate:

fuel and power for domestic use.

The following are treated as domestic use if they are part of the same residential unit:

Subsidiary buildings situated a short distance away, such as a garage in a block located away from a house; and corridors, lifts, hallways and stairways in a residential unit.

Item 3.2 of Fuel and power leaflet produced by HMRC, which defines what is Domestic use.

“3.2.2 Other supplies that are for domestic use:

Supplies of fuel and power that exceed the de minimis limits are for domestic use only if they are for use in a dwelling or certain types of residential accommodation (excluding hospitals, prisons or similar institutions, hotels or inns or similar establishments). Examples are:

armed forces residential accommodation;

caravans;

children’s homes;

homes providing care for:

(a)the elderly or disabled;

(b)people with a past or present dependence on alcohol or drugs; or

(c)people with a past or present mental disorder;

houseboats;

houses, flats or other dwellings;

hospices;

institutions that are the sole or main residence of at least 90% of their residents;

monasteries, nunneries and similar religious communities;

school and university residential accommodation for students or pupils; and

self catering holiday accommodation.

The following are treated as part of the same residential unit:

buildings such as garages used with houses;

subsidiary buildings situated a short distance away, such as a garage in a block located away from a house; and

corridors, lifts, hallways and stairways in a residential unit.”

Item 5 of the same VAT Publication states:

5.Electricity

5.1What supplies are taxed at the reduced rate?

  Electricity supplied for a qualifying use (see Section 3) is subject to the reduced rate (as explained above).

5.2Supplies of small—de minimis—quantities

  Supplies of not more than an average rate of 33 kilowatt hours per day—1,000 kilowatt hours per month—of electricity to one customer at any one of the customer’s premises are subject to VAT at the reduced rate. This applies whether the bill is based on a meter reading—by either you or your customer—or on an estimate.

Item 2.2 of the Reliefs and special treatments for taxable supplies specifically relates to Carbon Change Levy but defers to the VAT guidance as a parent document.

There is a clear contradiction in the approach to common supplies to blocks of flats between VAT rules and the current interpretation of licence conditions of some, not all, utility companies. It would make sense to clarify the licence conditions such they are in accord with VAT rules. To do this the current proposal from Ofgem does not go far enough to provide the same competition for energy suppliers to long-leaseholders as it does for those living in a freehold premises which put simply means leaseholders are much more likely to pay more for energy supplies than those living in other tenure properties and it therefore follows are more likely to be in Fuel Poverty.

The Lack of a Disconnection Protocol for Blocks of Flats

The current confusion about supplies to common parts of flats means that protocols adopted to protect domestic customers from disconnection do not apply to blocks of flats. So because the landlord’s supply may be treated as a commercial supply it is possible for utility companies to disconnect supply to common parts or to communal heating systems without regard to protecting vulnerable customers and those in fuel poverty.

Even if the landlord’s supply is limited to light and power in communal areas there can be grave consequences of disconnection. Disconnection can lead to no fire alarm and emergency lighting, no lifts, no pumped water and sewerage in tower blocks.

To ensure that utility companies adopt sensible measures before disconnection to common parts of supplies of blocks of flats the licence conditions should be quite clear that all such supplies should be classed as residential.

The FPRA believe the Protocol should include:

Recognition that supplies to common parts to blocks of flats are “domestic” and retail supplies, not commercial.

Any paperwork regarding disconnection must be served on the correct party not a communal building. It is not good enough to address it to the block of flats where it will be left on the floor of the hallway.

If the block of flats is a new development the supplier should track down the responsible party. It will be the developer; if the developer is in receivership or administration it will be the insolvency practitioner.

The supplier should establish whether disconnection will affect any vulnerable persons living in the block.

The suppler should establish whether disconnection will prevent the supply of water and sewerage services to the block.

The suppler should establish whether disconnection will mean that the fire alarm, emergency lighting and smoke detection systems will cease to operate and so put the occupants’ lives at risk in case of fire.

The supplier should inform the local authority before any disconnection.

The supplier should inform the fire service before any disconnection.

We are currently waiting for a response from The Department of Energy and Climate Change on this point.

The Current Proposal to Alter Licence Conditions

1. It is not clear whether Ofgem are considering supplies of gas and electricity or just gas. Surely it is intended that any changes should apply to electricity supplies as well.

To not do so would seem strange and not be even handed to consumers as well as utilities.

2. Ofgem state that there must be a “legal entity acting on behalf of individual residents”. This seems to imply that the change would only apply to resident management companies. But some resident management companies do not have all residents as members of that company. Would these qualify?

Then what about the other blocks of flats which do not have a resident management company as the landlord. There may be an individual or a company that provides services.

Does that landlord act on behalf of individual residents?

Ofgem seem to imply there is a difference here which will produce different results in supply in adjacent blocks dependent on the history of those blocks.

These will produce even more confusion. In addition there are the general issues listed above to consider.

What if the resident management company delegates its functions to another legal entity (very common for most volunteer Directors to appoint a managing agent?
Would that qualify)?

3. Is a resident management company that is registered at Companies House supplying commercial services? Usually not as the lease will often be very specific about the remit:

What if the resident management company appoints a managing agent who calculates and charges for the supply of gas and charges an administration fee to the company for doing so? (Very common indeed and what would be a reasonable fee to charge?)

What about newer developments that use combined heat and power plants. Many of these schemes typically outsource the supply of light and power to others and there are also specialist companies that handle the complex billing processes involved. The current proposal from OFGEM would appear to discriminate against the use of CHP and other new ways to promote energy efficiency (surely this is in conflict with current Government policy?)

I apologise for the length of our submission but as you can see this is a very complex area with competing pieces of legislation that long-leaseholders and those that mange their properties have to consider.

We will of course be happy to provide further information or clarification to the committee and I am sure the technical team at the Association of Residential Managing Agents (ARMA) will be able to assist the committee too.

December 2012

Prepared 4th July 2012