Notting Hill Genesis (NHG) (202304630)

REPORT

COMPLAINT 202304630

Notting Hill Genesis (NHG)

26 June 2024

Our approach

The Housing Ombudsman’s approach to investigating and determining complaints is to decide what is fair in all the circumstances of the case. This is set out in the Housing Act 1996 and the Housing Ombudsman Scheme (the Scheme). The Ombudsman considers the evidence and looks to see if there has been any ‘maladministration’, for example whether the landlord has failed to keep to the law, followed proper procedure, followed good practice or behaved in a reasonable and competent manner.

Both the resident and the landlord have submitted information to the Ombudsman and this has been carefully considered. Their accounts of what has happened are summarised below. This report is not an exhaustive description of all the events that have occurred in relation to this case, but an outline of the key issues as a background to the investigation’s findings.

The complaint

The complaint is about the landlord’s response to the resident’s concerns about the level of her contribution to the reserve fund element of the service charge and the amount of compensation offered by the landlord.

Background

The resident is the leaseholder of a second floor flat within a block on the landlord’s estate.
Under the terms of the lease, the resident has an obligation to contribute to service charges. The detailed provisions of the service charge are specified in clause 7 of the lease.
Broadly, the service charge includes the costs reasonably incurred by the landlord in connection with the repair, management, maintenance and provision of services for the building in which the resident’s property is situated and the common parts.
The amount of the service charge provision is made up of two sums; a sum estimated in respect of costs likely to be incurred within the account year; and an appropriate amount as a reserve towards costs arising after the account year (which shall be referred to in this investigation report as “the reserve”). The lease contemplates that the reserve will be in respect of costs likely to arise either only once during the unexpired term of the lease or at intervals of more than a year.
The lease does not specify how the reserve is to be calculated save that this should be in such manner as to ensure, as far as is reasonably foreseeable, that the service provision shall not fluctuate unduly from year to year.
The landlord’s account year runs from 1 April to 31 March. The landlord has explained that when setting the service charge budget, it is based on the last available accounts and advice received from its internal departments. Estimated budgets are sent out to leaseholders for observations at the end of the calendar year and responses provided by the landlord a month later.
Prior to raising the subject complaint with the landlord, the resident had expressed concerns for some time as to the amount of the service charge and the yearly increases in it, notwithstanding that the services provided remained the same. The landlord has produced to this Service extensive correspondence between it and the resident dating back to 30 July 2019 regarding proposed increases in the service charge for the 2020/2021 and subsequent account years. Various of these communications were made to the landlord by the resident on behalf of other leaseholders within her block as well as herself.
A set of the accounts for this period has not been provided to this Service. However, it is understood from the landlord’s complaint responses that the reserve fund element of the annual service charge and the total of the service charge amounts (of which the resident paid a proportion) in the account years up to the time of the resident’s formal complaint are as follows:

	Reserve fund	Total service charges
2018/19	£4,200	£73,184
2019/20	£5,000	£83,286
2020/21	£7,000	£97,430
2021/22	£7,000	£107,624
2022/23	£7,000	£114,624 (approx.)

It is noted from this that there was a year on year increase in the total service charge and the reserve fund element of it.
It is beyond the scope of this investigation to consider the entire history of the correspondence between the landlord and the resident. By way of background and context, a main point of concern for the resident, as later expressed in her complaint, was whether the work which the landlord was budgeting for was necessary and/or appropriately supported by evidence. She raised particular objection to the steep increases in leaseholders’ contributions to the reserve fund which had occurred since 2018, for which there was a lack of supporting evidence to justify the amount, and whether there was the possibility that the works being budgeted for might never be carried out.
In its responses, the landlord explained its concern to build up an appropriate reserve to protect residents against a large deficit when cyclical works were carried out.
The landlord explained in this correspondence that when calculating the reserve fund contribution, it relied on a 30 year cost plan for future cyclical works which had been estimated by its surveyor in 2015. In an early email to the resident dated 16 August 2019, the landlord stated that based on this estimate, for 2020, it would need around £160,000 to cover the costs of works to the two blocks in the estate (including that in which the resident’s property was situated) plus a contribution into any estate works that would be required. It shared what it described as a top line breakdown of this figure with the resident. It explained that it was a long way off the £160,000 anticipated amount and that currently residents were paying a £625 reserve fund contribution against a £1,000 industry standard. It advised that it was likely that the contribution would increase again for 2020/21. It assured the resident that prior to any works being carried out it would do a ground level survey (“GLS”) in which it would discuss with the residents what works were required and on the basis of which it would produce a final schedule for consultation.
In later communications between the resident and landlord, the landlord reiterated its concern that the reserve fund was underfunded against the estimate. On this basis, the landlord declined the resident’s requests that it lower the contribution to the reserve fund.
From around October 2022, the resident made payment of the service charge under protest.
As at 31 October 2022, being the last substantive correspondence from the landlord prior to the resident bringing her formal complaint, the landlord noted that there was an estimated requirement of £151,076 for the next cyclical works based on its surveyor’s costings and a shortfall of £67,789 against that amount.
On 13 December 2022, the resident submitted a formal complaint:
1. She referred to the many discussions which had taken place back and forth over the past few years, going over the same issues which did not seem to get resolved.
2. The resident noted from recent correspondence that a GLS carried out in 2020 had revealed that the windows did not need to be replaced but rather repaired/made good. She queried why these works had not been carried out. She noted that the cost of the works had increased with the excuse that it had been 2 years since the last survey and the extent of the repairs needed to be evaluated once more. She stated that if the repairs were never done they would get more and more expensive year after year.
3. To put matters right, the resident wanted:
  1. only the necessary works, backed by a GLS, to be completed at a reasonable cost and without delay to avoid a further hike in costs;
  2. the contribution to the reserve fund, and hence the monthly service charge, to be reduced back to the amount it had been a few years previously as soon as sufficient funds for the necessary works had been gathered.
Shortly after the resident had lodged her complaint, she submitted feedback to the landlord on the service charge estimate then being proposed for the 2023/24 account year. In an email dated 30 December 2022, she raised a number of queries including that charges for audit and day to day repairs had been mentioned 3 times in different sections of the estimate; and as to the percentage share allocated to her property. She requested that the landlord review its evidence to determine a fair proposal.
The landlord responded to the feedback. It is not clear what date this occurred save that it was a date prior to its stage 1 response. The landlord conceded that the apportionment had been set incorrectly in the budget and that the audit fee had been charged 3 times and should only have been charged once. Several further errors were also identified by the landlord, including that the reserve fund contribution had wrongly been charged twice.
The landlord’s stage 1 response was issued on 18 January 2023 after a 2-week extension of time:
1. With regard to the resident’s request that only necessary works be carried out to the building as soon as possible, it explained that a GLS was usually carried out before the planned maintenance works. Covid-19 had pushed back the landlord’s cyclical maintenance programme. The landlord was now catching up with schemes that were due in 2020/21. It reassured the resident that it would only carry out works which were necessary and that it would consult her and all the other leaseholders before it started any.
2. With regard to the resident’s request that the reserve fund element of the service charge be reduced, it explained the purpose of the reserve fund was to avoid making extra charges when major works were carried out. By distributing costs across a number of years, it hoped to help leaseholders budget more accurately.
3. When setting the budget for the resident’s scheme, the landlord used the last available actual figures. The intention was that the budget which had been set would be much closer to the actual cost of providing services, which should mean that there would be much less likelihood of there being a deficit at the end of the financial year.
4. The landlord recognised that increased costs were never welcome but it felt it was better for leaseholders to be able to the spread service charge budget over 12 months, rather than having to pay all at once if there was a service charge deficit.
5. It noted the resident had said that the current and proposed reserve fund element of the service charge was not reasonable. It stated its position was that that the reserve fund was currently not enough to cover the cost of the future cyclical works. For this reason, the landlord had taken the decision to increase it. It would continue with the reserve fund at its current level.
6. It signposted the resident to the First Tier Tribunal if she wished to challenge service charges, including the reserve fund element.
7. It apologised that the cyclical works had not progressed as fast as it expected but this was due to circumstances beyond its control.
The resident requested escalation of her complaint on 7 February 2023. She complained among other things that the landlord had increased the service charge based on a scope of works put together some years previously and with no GLS to prove whether it was all necessary. She noted that there had been a nearly 100% increase in service charges overall over the last few years with no change in terms of service provision.
The landlord notified the resident on 21 February 2023 that a GLS had been carried out the day before, including for her block. It stated that the costings would be provided to the resident in about a month.
In communications between 9 and 12 March 2023, the landlord clarified with the resident the scope of the complaint at stage 2.
The landlord provided the resident with the revised service charge estimate for 2023/24 by email on 23 March 2023 and by post. The landlord noted from it that the reserve fund element had not been lowered although this should have happened and stated that it would find out more information.
Following an agreed extension, on 30 March 2023, the landlord issued a detailed stage 2 response:
1. With regard to the increase in reserve fund contribution:
  1. The landlord noted that the resident felt that the response she had received was generic and not specific to her particular block.
  2. It reviewed the contributions for prior years. It explained that it was considered good management to build a healthy reserve fund and to avoid any deficits post major or cyclical works. Had cyclical works been carried out in 2020-2021 when initially scheduled, it stated there was a possibility that the resident’s account would have been in deficit upon completion.
  3. It explained that a large factor in the cost was whether windows would be replaced and it could see why there had been an increase in the reserve to avoid a large deficit.
  4. The landlord had made enquiries of its new build team of a typical amount per leaseholder for a reserve fund and, taking this into consideration, felt that a justified reserve fund contribution was £5,000.
  5. The reduction of the reserve fund from £7,000 to £5,000 had not pulled through to the 2023/24 budget which would be amended.
  6. It accepted that more detailed clarification had been required. Due to the error in serving an incorrect budget for 2023/24 and communication not being as clear as it could have been over the past few years, it offered the resident £125 compensation for the stress, time and inconvenience.
2. With regard to the resident’s lack of involvement in the process of the GLS carried out in 2020 and lack of action since it was carried out:
  1. The landlord accepted that there had been a breakdown in communication in that the resident’s block was not invited to attend at the time of the GLS being scheduled in 2020.
  2. The landlord proposed that another GLS be scheduled to allow everyone the opportunity to be involved and rectify the miscommunication. If that was not possible, the resident was encouraged to submit observations in the related section 20 consultation.
  3. The landlord offered an apology and £50 compensation for the breakdown in communication.
3. It responded to the resident’s queries regarding large increases in particular items of cleaning and gardening costs:
  1. It noted apparent errors in both the 2022/23 and 2023/24 budgets for these items which the landlord would follow up.
  2. It offered an apology and £50 compensation for these errors in the budgets and confusion caused.
4. With regard to the 2023/24 budget, the landlord noted that this contained an error in that it included a surplus reserve fund contribution of £14,000 which would need to be removed. The resident was advised that she could choose to withhold the service charge until the new charge was confirmed.
5. It explained that it was in the process of improving its systems for the service charge which would hopefully reduce potential errors in the future.
On 6 April 2023, the resident accepted the landlord’s offered compensation of £50 for the breakdown in communication regarding the GLS and £50 for the errors in the gardening and cleaning elements of the budgets for 2022/23 and 2023/24.
However, the resident felt that to be adequately and fairly compensated in respect of the reserve fund aspect of the complaint, she would need to be refunded the amount she had been overcharged for the 3 account years 2020/21, 2021/22 and 2022/23, being her proportion of the difference between the £7,000 charged and the £5,000 at which the reserve contribution was set for 2023/24. She calculated this amount to be £250 per account year plus compensation for stress and inconvenience.
On 28 April 2023, the landlord responded to the resident’s feedback on the complaint outcome. It explained it needed to keep within its compensation policy but agreed to increase the compensation offered to £375 for this element of the complaint. It explained it was unable to refund the resident the additional amount paid toward the reserve fund as that would be used when the cyclical works were completed and billed. The resident’s contributions to the reserve fund would benefit her by reducing any potential deficit.
On 8 May 2023, the resident referred her complaint to this Service. The outcome sought by the resident was compensation for the full amount by which she had been overcharged during the 3-year period. At the time of the referral, the resident was also awaiting confirmation of the amended 2023/24 service charge budget, the dates of the proposed GLS and dates of the cyclical works.
The landlord has since confirmed to this Service that all the amendments to the 2023/24 service charge have been made and notified to leaseholders. The resident has recently informed this Service that since she first referred the complaint, there have been developments in terms of the works. She requested that the focus of this investigation should be on the contribution to the reserve fund, the fact that she was overcharged for years and that the compensation offered by the landlord was not sufficient to cover the amount that she has been overcharged.

Assessment and findings

As is clear from the above, there were several different strands to the resident’s complaint, some of which were resolved during, and some after, the landlord’s internal complaints procedure.
The outstanding part of the resident’s complaint which she has asked this Service to investigate is in regard to her contribution to the reserve fund. The resident believes that she has been overcharged for the 3 account years 2020/21, 2021/22 and 2022/23 and that she should be compensated for this in an equivalent amount to the overcharge.
It is not within the Ombudsman’s remit to determine whether the amount of the service charge, including the reserve fund element of it, was appropriate (or an overcharge, as described by the resident). This is because under paragraph 42(d) of the Housing Ombudsman Scheme, the Ombudsman may not consider complaints which, in our opinion, concern the level of rent or service charge or the amount of the rent or service charge increase. These are matters for the First Tier Tribunal.
For the same reason, the resident’s request that she be compensated for being overcharged for the 2020/21 to 2022/23 account years is outside the Ombudsman’s jurisdiction to determine. This is because compensation ordered on that basis would necessarily require a determination that the reserve should have been set in a different amount to that at which it was actually set for those account years.
The amounts paid by the resident towards the reserve are held in trust for her benefit. There is no clause in the lease allowing a refund of those monies and it is not in the jurisdiction of the Ombudsman to direct one. That is again a matter for the First Tier Tribunal.
The Ombudsman can consider whether there have been service failures by the landlord in respect of its response to the resident’s concerns about the level of her contribution to the reserve fund and the amount of compensation offered by it. This is addressed below.
Under the landlord’s service charge policy, it is committed to providing clear and accurate service charge budgets for residents, with details of how the charges are calculated and what services they represent.
With regard to the reserve fund element of the service charges, the policy makes clear that the purpose of the reserve fund is to ensure that all residents, irrespective of when they moved into their property, share the financial cost of major works and to avoid payment of large one-off sums when major works are required. Neither the lease nor the landlord’s policy is specific as to how the reserve fund contribution should be calculated.
At an early stage in the resident’s communications, the landlord explained in an email of 16 August 2019 that when setting the reserve fund contribution, it relied on a 30 year cost plan for future cyclical works estimated by its surveyor in 2015 (see paragraph 13 above).
It was reasonable for the landlord to refer to, and rely on, the estimate of its professional advisers in this way and to base its calculation of the reserve fund contributions on those costings. It was also appropriate, and in line with its policy, for the landlord to increase the reserve fund contribution in subsequent account years where it considered that there might otherwise be a shortfall in the reserve for forthcoming works, based on these costings.
The landlord shared this information with the resident, which was in line with its policy. In doing so, the landlord conceded that the estimate was ‘top line’. It explained that prior to any works being carried out, it would do a GLS to establish the scope of the works required. This reassurance was subsequently reiterated, including in the stage 1 response of 18 January 2023.
In the stage 2 response of 30 March 2023, the landlord stated that it had reviewed the reserve fund element of the service charge and revised it lower for the 2023/24 account year. It was appropriate for the landlord to review the amount of the reserve at this juncture, taking into account feedback from its new build team as to typical amounts per leaseholder as well as the prevailing economic climate. When doing so, the landlord was careful to state that it could see why there had been increases in the reserve in prior years to avoid a deficit to residents. It also stated that if cyclical works had been carried out when initially scheduled in 2020/21, there was a possibility that the resident’s account would have been in deficit.
Overall, the landlord acted reasonably, and in line with its policy, in responding to the resident’s concerns regarding the reserve fund element of the budget and explaining how it had approached the resident’s contribution. It appropriately signposted the leaseholder to the First Tier Tribunal in the event that she wished to challenge the service charges, both in the stage 1 response and on previous occasions.
The landlord felt that its communications with the resident were not as clear as they could have been, for which it offered compensation.
There were admitted service failures by the landlord in respect of the accuracy of the proposed budget for 2023/24. The resident drew errors in the budget to the attention of the landlord when giving feedback on the proposals on 30 December 2022. While these and other errors were appropriately acknowledged by the landlord, the promised corrections were not all amended as they should have been in the revised 2023/24 budget. This meant that the estimate continued to contain a higher than necessary amount for the reserve. The landlord recognised this when circulating the revised figures to the resident on 23 March 2023 and confirmed in the stage 2 response on 30 March 2023 that the reserve fund amount required correction. It is understood that the revised corrected figures were produced to the resident on 21 June 2023.
In short, the admitted failings of the landlord for which it offered compensation were in respect of inaccuracies in the 2023/24 budget estimate, which it failed fully to correct between 30 December 2022 and 21 June 2023, and in its communications with the resident regarding the reserve fund contribution, which it felt were not as clear as they could have been.
The resident was caused detriment in that she was put to inconvenience, time and trouble in corresponding with the landlord on these matters. The resident was entitled to, and did, withhold service charge payment in respect of the 2023/24 account year pending correction of the errors in the budget, meaning that she did not also suffer financial loss in paying an inflated service charge contribution for that account year.
In the stage 2 response, the landlord offered the resident compensation of £125 for its failings. The sum offered was in line with compensation awards under the landlord’s compensation and goodwill policy for medium impact service failures, being those where the service has markedly failed to meet service standards and this failure has caused inconvenience and distress that has not been manageable for the resident.
The landlord rightly took into account, and explained to the resident, that its compensation offer was not based on a refund of amounts she had paid into the reserve fund as these would remain in the fund to be used for the resident’s benefit in future works.
While the Ombudsman would have found that the £125 sum offered to the resident at stage 2 of the complaint process was reasonable redress, as the landlord subsequently offered a higher amount of compensation of £375 in order to resolve this aspect of the complaint, this Service expects compensation in that amount to be reoffered to the resident by the landlord.
For completeness, it should be noted that in its stage 2 response, the landlord admitted and offered compensation in respect of the failings described in paragraph 26 above which the resident accepted in resolution of those aspects of the complaint. This investigation has assumed that that compensation will be paid, if it has not been already.

Determination

In accordance with paragraph 53(b) of the Housing Ombudsman Scheme, the landlord has made an offer of reasonable redress prior to investigation. In the Ombudsman’s opinion, this satisfactorily resolves the resident’s complaint in respect of the landlord’s response to her concerns about the level of her contribution to the reserve fund and the amount of compensation offered by it.

Recommendations

If it has not done so already, the landlord should pay the resident the £100 offered to her in its stage 2 response for its failures as set out in paragraph 26 above and should re-offer the compensation of £375 in respect of the subject complaint.