You are considering doing a Lease extension or collective enfranchisement. But what happens to the service charge disputes if any.
What are service charges?
These are charges payable by the leaseholder to the landlord for services the landlord is obliged to carry out under the terms of the lease. They can be different amounts on a year to year basis depending on the cost the landlord incurs. These are sent by way of demands on a year to year basis but can be disputed.
What are the examples of service charges?
These include maintenance, wear and tear and repair and sometimes improvements of properties. Yet improvements are rare. They deal with the main structure, roof, foundations, window frames, guttering, communal drains, pipes, common areas and also the insurance of the building together with the cost of the management on a day to day basis. Whilst this is not an exhaustive list its laid out within the contents of the leaseholders lease itself.
When are they payable?
The lease will always lay out exactly when the service charges are due. It is often payable either yearly quarterly or twice yearly but does depend on the lease itself. The quarter days are December, March, June and September. Most modern leases now allow for service charges to be payable in advance. With the landlord incurring any costs and based on estimates which we will come on to later. Some older leases do ask that they’re paid in arrears but these are unusual.
Estimated costs and final accounts. As mentioned above the lease may state that the landlord estimates what he is going to spend in the coming year and bases the service charge on that estimate. This is known as good management. If this is the case, most notices need the landlord to produce an end of year statement of account. Of what he has actually spent and supply this to the leaseholder. Sometimes the lease requires that this accounts audited or certified by an accountant or other professional.
If the end of year accounts show that the landlord has spent more than anticipated. The lease would allow him to recover the shortfall via a balancing charge. If he has spent less than the estimated they may state that a credit for the overpayment will be carried forward to a leaseholder for the next year. They may transfer this into a reserve fund.
What are reserve funds?
These are sinking funds some leases allow for the landlord to get a contribution towards this via the service charge. The purpose is to build up a fund to pay for future large scale works such as repainting, redecorating the whole of the building and replacing window frames etc. The leaseholders will not face a large one off bill when necessary work comes along as they have a reserve fund contribution to pay for it.
Do the service charges need to be reasonable?
Yes, they do need to be reasonable. The Landlord and Tenant Act 1995 as amended states that the service charges are only recoverable from a landlord so far as the costs have been reasonably incurred. It also states that they are only recoverable if works carried out for the charge of a reasonable standard.
A Leaseholder can challenge the reasonable sum of the service charge if it does not comply with the above and by the appropriate tribunal which in England is the first tier Tribunal.
What happens if you want to extend your lease or do collective enfranchisement with disputed arrears? If you have decided to extend your lease or join together with other flat owners in the building to purchase your freehold. Then you need to understand that paying any outstanding service charge on completion may be a task that might not have crossed your minds when you initially instructed any form of professional
What would be of more concern is that unfair service charges in the past and expected in the future may well be a reason why flat owners exercise their right to compare on the sale of the freehold using the law and this could be a problem.
Lease extensions and service charge disputes
When using the law to compel the extension of a lease a flat owner is not entitled to enter into a new lease if in addition to the payment of a premium and the ground rent and the landlord’s reasonable costs. He does not settle any other sums due and payable in respect of his existing lease. This is something that a lot of leaseholders don’t take into account.
These provisions of the law allow the landlord to recover any outstanding amounts on the day of completion which includes payments for service charge, repairs, maintenance and insurance as long as these are recoverable under the existing Lease. This is something that people don’t take into account.
The law unfortunately also gives little guidance on how to deal with circumstances with the amount payable for the service charges in dispute. You will often find that petitioners will often advise the flat owner to offer the landlord with a reasonable security to the alleged outstanding sums to try and resolve this. The law does not make clear what a reasonable security is.
Most solicitors will try and take a practical view by putting the following sorts of options to a landlord they might be able to ensure that the matter completes:-
a) Pay the likely maximum sum which could be payable and deposit this in a joint account or with the leaseholders solicitors until such time as any dispute can be resolved. Whist this is a good plan it also can be cumbersome have you have to look towards the terms of the contract and how it is going to be resolved.
b) Pay all the alleged sums due to the landlord on the strict condition that reserving your right to challenge the reasonableness of these in the first tier tribunal or any county court. There is no guarantee that the landlord will agree to this but it obviously depends on the dispute
c) If the options above can’t be agreed the flat owner may be advised to make an application immediately to the County Court for an order compelling the landlord the complete the lease extension. If the landlord is unreasonable and uncooperative they risk being penalised in cost. Yet, it may be worthwhile even considering making an application before the lease extension for a certificate of reasonableness from the first tier Tribunal.
What happens on a freehold purchase in service charge disputes?
After the lease extension the flat owners given some peace of mind at the very fact that the landlord continues to maintain the building and therefore it would be easy to communicate with him to try and resolve any disputed service charge.
This is not always the case afforded to flat owners who have collectively purchased the freehold, after which, the landlord would have moved on and tracing him may be difficult. It is thus so important that any possible disputes are considered from the outset of the claim and a plan put in place well ahead of completion to try and organize what to do with these disputed arrears.
When it comes to a freehold purchase where the laws used to compel the sale. The law allows the freeholder to recover any outstanding payments of service charge, maintenance rpeairs and insurance by way of a security over the property until all the outstanding debts settled. This isn’t perfect when purchasing a freehold. But, this protection also relates to non-participating flats and if for example the non-participant fails to keep up with the service chare payments the freeholder is likely to request any outstanding balances are settled before completion or notices registered with the Land Registry against the freehold interest. You would need to take this into account when purchasing the freehold. If you are participating in the purchase of the freehold you need to bear this in mind and have to pay their service charges up to date. You may still be required to settle these and any outstanding service charge owned by non-participating flats so it is important that you ensure that you are aware of what is involved
Unfortunately, legislation does not address circumstances where service charge payments are in dispute in collective enfranchisement claims. If the flat owners find the service charge unreasonable they may consider making an application to a Tribunal to determine the disputed invoice. In parallel to the collective enfranchisement claim so that these can be resolved beforehand.
Some of the legislation is helpful in how to deal with service charge disputes during enfranchisement claims and some guidance has been provided by the Tribunal.
It was decided in a recent case that where the terms and/or price payable for the freehold is not agreed a Tribunal can combine the service charge dispute with the price dispute and determine both issues together at the same time. This allows the leaseholders to know what their price would be. But, if the terms are already agreed then the flat owners will need to consider making an application to the County Court. Asking for the court to transfer the freehold to them i.e. a vesting order in the event that the freeholder does not.
Please see our previous articles on this, click here.
Unfortunately, there is no simple solution when it comes to service charge disputes that are alive during the process of the purchase of a freehold or extending a lease. You need to find out as early as possible of any disputes and notify your professional advisors to discuss the best way to deal with this. You would need to ensure that you include within your budget any service charge payments that may be due on completion.
Why don’t you contact us to discuss your insurance requirements? As you may find that we can reduce your insurance payments to such a large extent that it will help you pay for any service charge arrears