Undercharged Service Charge

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    Undercharged Service Charge

    I'm in the middle of buying a leasehold flat. Our solicitor has discovered that the current owners are paying 10% service charge but the lease states that they should be paying 12%. We are not aware how long the owners have been paying 10%. The leases for the other flats state that they should be paying 9% or 12%. Every flat is currently paying 10%, meaning some have been overcharged and the rest undercharged. The place is run by a residental company.

    Our solicitor has advised us that there is a risk the residental company could request for backdated payment of the difference of up to 12 years should a member of the residental company be alerted to this. I'm not sure whether the residents have all agreed to this 10%, nor am I sure what could happen if this was the case.

    My problem is, how can we buy this flat without risking a large bill coming our way? Is there any way to safely buy this property without being liable for this potential bill?

    Any help will be appreciated.

    Nervous First Time Buyer.

    #2
    I don't think they can go back more than 18 months, so it shouldn't be very much money.

    Comment


      #3
      Originally posted by JK0 View Post
      I don't think they can go back more than 18 months, so it shouldn't be very much money.
      Thank you so much for your response. If that is the case then I would go ahead with the sale.

      But then why is our solicitor saying they could backdate it to 12 years?

      Comment


        #4
        You can ask for monies to be withheld from the sale until the matter is resolved or it becomes statute barred. I would be concerned that the management company is not being run properly and there could be other problems of which you may be unaware. Have a thorough look at the service charge accounts.

        Comment


          #5
          Originally posted by Charlie122 View Post

          Thank you so much for your response. If that is the case then I would go ahead with the sale.

          But then why is our solicitor saying they could backdate it to 12 years?
          I suggest you ask him that.

          Comment


            #6
            Originally posted by eagle2 View Post
            You can ask for monies to be withheld from the sale until the matter is resolved or it becomes statute barred. I would be concerned that the management company is not being run properly and there could be other problems of which you may be unaware. Have a thorough look at the service charge accounts.
            Thank you for your response.

            Our solicitor has suggested a rentention but thinks the owner will unlikely agree to one given that the bill could be thousands of pounds if they can claim up to 12 years.

            We have asked the managing agent for clarification on the matter but they are being pain slow. They did say that the 10% figure were from the directors though.

            Comment


              #7
              Your response to the vendor regarding the retention is why should you pay any liability relating to previous years.

              If you have brought the matter to the attention of the MA and if they have confirmed that there are no arrears, you may have a case for avoiding any liability.

              The fact that they are being slow and the reference to the directors should be sending you warning signals. The directors cannot override the terms of the lease.

              Comment


                #8
                Questions I would be seeking answers to include the following:

                Are all leaseholders equal shareholders in the RTM company?

                Have resolutions been passed by the RTM that enable service charges, and any other costs of running the RTM to be collected from shareholders?

                Who would be responsible for making up any shortfall in the accounts of the RTM?

                What exactly did the service charge demands/ accounts that were sent out tol easeholders during the last 12 years contain?


                It can be possible for share of freehold companies, and RTM companies to agree that shareholders pay a contribution to the company, and that each leaseholders contribution to the service charge will be taken from that payment. This requires the companies Articles of Association to allow the company to demand money from shareholders, and resolutions to be passed by shareholders, but would usually result in each shareholder making an equal contribution.

                Whether the RTM could claim the additional 2%, that should have been paid for your property for past years, is likely to depend on what was sent to the leaseholders for the property.
                Section 20b of the Landlord & Tenant Act 1985 stops freeholders (or in your case the RTM company) from demanding payments for invoices that are over 18 months old - unless they have previously notified leaseholders of the amount of expenditure that had been incurred and that they would be required to pay as required under the terms of their lease.
                If the invoices/ statements give the total amount of expenditure and say that the leaseholders will have to pay according to their leases, then it might be possible for under payments to be back dated. On the other hand, if the invoice, statements and other communications only say that the leaseholders are required to pay 10%, this might not qualify as sufficient notice under part (2) of section 20b, and this would likely prevent any demand being made for you to pay any additional contribution as a service charge for charges older than 18 months.

                However, the leaseholders who have been overcharged can potentially obtain a FTT decision that will require their overpayments to be refunded. If this happens someone will need to fund the shortfall, and even if you don't have to make up what you have been interchanged, if you are a shareholder in the RTM you may have to contribute 10% of the shortfall.

                You need to be speaking to your solicitor to clarify the situation.



                Comment


                  #9
                  I would carry out a company search for the management company on the Companies House website.and look at the filing history and see if the Articles of Association have been amended. A copy of the Articles may be obtained within the "Incorporation" document, which is usually the first document to be filed.

                  Comment


                    #10
                    What is the annual service charge for current year and what is 20% of that ?

                    I suggest your solicitor asks the seller to agree for a retention of £2000 for 2 years to cover any service charge arrears.

                    Comment


                      #11
                      The 18 month rule applies to being made aware of the expenditure, so I'm not convinced your can rely on it here. The 12 years is because service charges are collected under the terms of a deed, but are not rents, so the statute of limitation is 12, rather than six years.

                      Comment


                        #12
                        Originally posted by leaseholder64 View Post
                        The 18 month rule applies to being made aware of the expenditure, so I'm not convinced your can rely on it here. The 12 years is because service charges are collected under the terms of a deed, but are not rents, so the statute of limitation is 12, rather than six years.
                        Section 20b requires leaseholders to be notified of costs within 18 months and be told that they will be required to pay a relevant share.
                        What has previously been sent to leaseholders could be important because if all they have been sent is an invoice for 10% of the total, without the total or the proportion being charged clearly stated, it might not be possible to backdate additional costs.

                        The maximum 12 year limit could be deemed to be 6 if the lease says that all payments are"reserved as rent".

                        Comment


                          #13
                          We are told that the current leaseholder has been undercharged, so it is reasonable to assume that he has been informed of the expenditure and that he is required to contribute towards that expenditure.

                          We are also told that the MA has been made aware of the potential problem so the issue should be addressed soon. I suggest that you wait for a satisfactory response before proceeding.

                          Comment


                            #14
                            Originally posted by eagle2 View Post
                            We are told that the current leaseholder has been undercharged, so it is reasonable to assume that he has been informed of the expenditure and that he is required to contribute towards that expenditure.
                            Not really.
                            We have been told that the solicitor dealing with repurchase conveyancing for Charlie122 has found that the seller has been paying 10% of the annual service charge for the block but the lease states 12% is due.
                            The solicitor has warned that the difference might be demanded in the future, possible backdated for up to 12 years, but Charlie does not know if he will be charged, let alone how much any back dated payments might be.

                            There is even a possibility that it could be ruled that all leaseholders have accepted the change to all paying 10% and an estoppel now applies.

                            Comment


                              #15
                              I just don’t think that s20B would apply. It would be impossible to prove that expenditure had been incurred but not notified to leaseholders within 18 months. The landlord would claim that the service charge accounts were the notification. We await the explanation for the apparent undercharging but it may simply be a clerical error which could be corrected. If the leaseholders have accepted the change, it should be documented and evidence should be supplied to the purchaser.

                              Comment

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