Undercharged Service Charge

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    Hello All

    Thank you for your responses.

    I’m not even aware whether the vendor knows that they should be paying 10% instead of the 12%, our solicitor has asked their solicitor to ask the managing agent direct, so I’m not even sure if this has been relayed back to the vendor about the current situation.

    From the managing pack which was sent to us, it states that the Management Company is a resident’s management company limited by Shares registered with Companies House. On the lease is clearly states that owner should pay 12%.

    The Share Capital of the Company is £100 divided into 100 Shares of £1 each. It is in this pack where it states ‘Your client’s Service Charge are at 10%’. The pack also contains Statements of Accounts and Company Accounts going back 3 years, Memorandum and Articles of Association, the Budget and other documents.

    Eagle2 – I carried out a search of the MA on the Companies House website and the M&A is exactly the same as the one they sent me, does that mean that no amendment has been made? What does this mean?

    Gordon999 – The service charge for this year is £12000 which is divided between the 10 flats. The problem with asking for retention is that we don’t know when or if a residential will claim for being overcharged, so how can we possibly know how long to keep a retention for?

    Leaseholder64 – Are you saying that if all the residents know about the 10% that they can only claim for up to 18 months?

    Macromia – You are correct, I don’t know whether the current leaseholder knows that what he is paying is incorrect according to the lease. I am hoping that all the leaseholders have all accepted the change to paying 10%. And thank you for your detailed post which I’m still trying to get my head around, I don’t have answers to many of the questions you raised.

    Thank you all again, I am very inexperienced in this area and it’s confusing the hell out of me, so please forgive me if anything I write does not make sense.


      I'm saying that, if the leaseholders know the cost has been incurred, within 18 months, that is an allowable cost, even if recovered much later.

      There could be a grey area if they had been told that their share of the cost was only 10%. My view is that the lease clearly told them the correct proportion. It is not, as happens some time, that there is only a requirement to apportion reasonably. I think it could go either way depending who you got at the FTT, and which side of bed they got out of, on the day. As such, I would say go with your solicitor, if you want to be safe.

      A likely cause of this situation is a block that is self managing, where the directors have never read the lease (fairly standard for such self managing blocks) and, at some time in the past, someone came up with the bright idea that splitting up everything evenly makes the paperwork easier.

      Do expect them to get other things wrong and don't assume that the LPE1 is correct. I don't think anyone will be lying on it, but they will be reporting their misunderstanding of the truth. Basically take this incident as a warning that you need to check everything that matters to you, in detail, from original source documents.


        If the flats are all charged 10% , then the current service charge demand would be £1200 per flat .

        If your flat should be paying 12 %, then it would mean an extra £240 to pay . So over last 12 years, the arrears may come to £2,880. So you would ask for a retention of £2,500 to cover the arrears if billed within 2 years. After you become the owner, you would ask the management company to sort this problem out during the first year.

        Its quite possible that charging at 9% and 12% did not add up to 100% and so the current management decided to charge 10% on all flats.


          Actually, they there is no combination of positive integral multiples of 9 and 12 that can ever add to 100. It looks like the leases are defective!


            Originally posted by leaseholder64 View Post
            Actually, they there is no combination of positive integral multiples of 9 and 12 that can ever add to 100. It looks like the leases are defective!
            I wonder if this has been to the LVT years ago for that reason, and the LVT instigated 10% per flat?


              My solicitor tried to obtain the leases for the other 9 flats, he did for 6 of them.

              Two of the flats states 12% whilst four of the flats state 9%.

              He said one of the flat was varied from 12.5% to 9% (I'm not sure what this means) and said that there is a good chance that 3 remaining flats would have a payment of 12%.

              What are the consequences if it doesn't add up to 100%?


                If it adds up to more than 100% there is no doubt that the lease is defective, and the freeholder, or any leaseholder can request the First Tier Tribunal to vary the leases to make them add to 100%, although there will be costs to the leaseholders in doing that (lenders will charge for being consulted, for a start).

                If it adds up to less than 100%, that is less clear; the freeholder may be responsible for the short fall. My view would be that, unless there is something else in the lease requiring the freeholder to cover some costs themselves, it should be considered defective, but I don't know if the tribunals agree.


                  What are the consequencies ? Those flats which pay more can claim they are being overcharged.


                    No. The consequence is that those flats can request the FTT to vary the leases to remove the problem. I think the FTT may also be able to specify one off payments and refunds to correct the historic problem, but I haven't read all the detail to check that.

                    The relevant legislation is http://www.legislation.gov.uk/ukpga/1987/31/section/35 sub section (4).

                    It doesn't actually mention the possibility of the landlord also contributing, and does include less than 100% as a valid defect.

                    Someone is going to end up paying tribunal fees, Land Registry charges, and any lender charges, and it is probably not the freeholder. You can avoid the tribunal charges if every leaseholder, and the freeholder, agrees to the variation, but if anyone's proportion increases, they may well object. You may have to add solicitor charges, especially with the non-FTT route.


                      Originally posted by Charlie122 View Post

                      Eagle2 – I carried out a search of the MA on the Companies House website and the M&A is exactly the same as the one they sent me, does that mean that no amendment has been made? What does this mean?
                      If there is no filing history at Companies House referring to “resolution – Memorandum and/or Articles of Association” it means that the Articles have not been changed and the management company is unable to charge monies to shareholders under the Companies Act. That in turn means that the Company is relying on the lease to collect monies.

                      So you do not need to worry about Macromedia’s valid comment at #8 regarding the possibility that the Company is charging shareholders rather than the leaseholders.

                      It is certainly looking like the Company has decided to ignore the leases and come up with its own solution of charging all the leaseholders 10%. That is all very well until someone else comes along and says hang on we can charge this leaseholder 12% or one of the leaseholders complains that he is being overcharged and he should be charged 9%.

                      The warning by leaseholder64 of the costs which may be incurred should not be ignored.


                        Excuse my ignorance, but can indemnity insurance be bought to protect us in this circumstance?

                        My solicitor hasn't mentioned the lease being defective, should I be worried about this?

                        What is the best solution to this problem, I really don't want to pull out of this sale but couid this be one of the better options?

                        I'm guessing my best bet is to await the response from the managing agent and then go from there, but I'm running out of patience.

                        Thanks in advance.


                          If the freeholder knows you are concerned about the issue, you won't be able to get insurance.

                          The lease being defective means you have the right to get it changed, as do other parties to it.


                            I suggest that you go back to your solicitor and ask him what grounds he has for thinking that the other 3 leases are charged at 12%. Point out that if he is right, there are 6 x 12% and 4 x 9% which totals 108% and does that not make the leases defective? Ask him if Deeds of Variation are required to rectify the problem and if he can let you have some guidance of the cost involved.

                            As you can see, if you purchase the leasehold interest in the flat, you are going to have difficulty selling it unless the problem is resolved properly. The fact that the MA has not responded quickly is a further warning to you, he must be aware of the problem.


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