Demands based on budget costs versus Section 20B costs

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    Demands based on budget costs versus Section 20B costs

    I've searched old posts but wasn't able to find a discussion about this. Please forgive me if it has been covered before.

    I am a lessee and RMC director looking at managing agent documentation. From reading Section 20B in the 1985 Act my understanding is that a Section 20B notice effectively caps costs that can be demanded from lessees above the budgeted estimates demanded. I understand the intention to be to protect lessees from unexpectedly large demands after eighteen months from the start of the financial year.

    In a case where a budget was created for a financial year and valid service charge demands issued to lessees for the year based on that budget, how are the maximum liabilities to leaseholders set, in practice, using a Section 20B notice? Or more specifically:

    Which figure(s) on such a notice form the effective cap(s) on costs? The consolidated total across all schedules, the total for each schedule, the total for each cost code in each schedule, or the total for each cost code across all schedules? e.g. is the notice capping individual costs for Cleaning, Landscaping etc, or simply capping the grand total of everything?

    If a Section 20B notice states a cost as lower than the original budgeted/demanded cost, is the Section 20B notice capping the cost at the lower level and overriding the budget demand? If so, does this effect only apply to the entire consolidated total, or to schedules or cost codes as above? e.g. if the budget quotes cleaning as £2,000 but the Section 20B says £1,200, what is the maximum liability to leaseholders?

    If anyone can clarify or point me towards threads or resources that do I would be very grateful.

    Ollie





    #2
    I think you are making a lot of assumptions here that are not at all correct. There is no "cap", not all leases work with budgeted demands, if works need doing the size of demands can be unlimited. There is no maximum liability (the liability can be greater than the market value of the property). Section 20B has nothing whatever to do with cleaning. There is no "intention to be to protect lessees from unexpectedly large demands". All S20 is for is to provide an appearance of transparency and to make sure that inappropriate major works are not done (but actually does nothing of the sort with a crooked freeholder). The 18 month rule has nothing to do with unexpectedly large demands.

    Comment


      #3
      What exactly are the circumstances involved here?
      What is the reason for sending leaseholders a section 20B notice in the first place?

      The estimated costs that most leases allow to be demanded in advance are precisely that - estimates. The freeholder or managing agent that demands them has a duty to ensure that the estimates are reasonable at the time that they are demanded, but the actual cost can end up being higher, or lower, than the estimate due to unforeseen circumstances.

      A section 20B notice should only very rarely be required, as it only becomes necessary if the final service charge accounts for the year cannot be sent to leaseholders within 6 months of the end of a service charge year (which ensures that even costs incurred at the beginning of that year are demanded within 18 months of being incurred).

      If a section 20B notice is sent to leaseholders, the amount stated for any particular cost should be the actual sum that the freeholder has paid, or will be required to pay, for that particular service.
      This means that a section 20B notice could be considered to be a 'cap' on charges - but only because freeholders are only legally allowed to recover the actual costs of providing services (the exception being where the lease allows for a reserve/sinking fund to be collected, as this will require payment above actual expenditure).
      It is possible that there may be some circumstances where freeholders don't know what the final cost of some services will be (for example, where building work has been carried out, but they have not yet been provided with the final invoices from the contractors), but the 18 month limitation on collecting those sums shouldn't start until the freeholders know what the actual final total will be.

      Comment


        #4
        Apologies for not being clearer. The scenario is that the year-end was 30th June 2019. In June 2018 demands were issued based on a budget estimate for the year. The accounts for that period are still not complete, and so the managing agent issued a Section 20B notice on 31st Dec 2019 in order to clarify the costs leaseholders were expected to be liable for.

        My understanding is that the managing agent (whose client is a management company) issued the Section 20B notice in order to protect their right to collect any expenditure deficit that would be clarified by the accounts in due course. I also under that the agent cannot then demand more than the costs listed on the Section 20B notice.

        What I do not understand is the mechanism and specifics of how a Section 20B notice limits what can subsequently be collected from leaseholders, which in practice is typically any overspend above the budget expenditure all of which has already been received from leaseholders.

        It is hard to reconcile the responses from both of you which although interesting and much appreciated, appear to contradict. Does a Section 20B "cap" the ability to demand service charges, or not?

        Comment


          #5
          Originally posted by ollie72 View Post
          The scenario is that the year-end was 30th June 2019. In June 2018 demands were issued based on a budget estimate for the year. The accounts for that period are still not complete, and so the managing agent issued a Section 20B notice on 31st Dec 2019 in order to clarify the costs leaseholders were expected to be liable for.
          It that case, precisely what the section 20B notice said is what might determine how much is payable.

          Currently the section 20B notice will only have had to cover costs that the freeholder (or their managing agent) was invoiced for between 1st July 2018 and 11th December 2018 - because it is still within 18 months of the date that any later costs were incurred.

          If the section 20B notice was valid in all respects, and stated that costs of £1200 were incurred for cleaning between 1st July and 31st December 2018, or stated specific dates of six invoices for £200, there is nothing to stop the final end of year accounts charging £2400 (or more) for cleaning - as long as the total cost is properly demanded and the invoices for the reminder are all dated within 18 months of the demand, or an additional 20B notice is provided in time.

          If the section 20B notice that was sent out stated that the costs incurred for cleaning for the entire service charge year (1st July 2018 - 30th June 2019) was £1200, the amount for cleaning may be limited to £1200, but a higher amount should still be allowed by a tribunal if the invoices that are dated within 18 months of the final demand being sent come to a total of more than £1200.

          I'm assuming that when you say that the 20B notice was "...to clarify the costs leaseholders were expected to be liable for.", this is your wording and not what was said on the notice. A section 20B notice needs to detail the actual costs incurred, if only estimated costs are given the notice is likely to be deemed invalid, for any costs that weren't properly specified.

          So, the answer to your question: "Does a section 20B 'cap' the ability to demand service charges?" is likely to be "it depends".

          Comment


            #6
            The notice is titled "SECTION 20b NOTICE FOR THE PERIOD 01/07/2018 TO 30/06/2019" and states "Pursuant to Section 20(b) of the Landlord and Tenant Act 1985 (As Amended) Notice is hereby given that the following costs incurred in the year ending 30 June 2019 and that lessees may be required to contribute to them by payment of an additional Service Charge to the extent that they exceed amounts already paid on account. The following costs are based on Unaudited Accounts and may be subject to amendment and adjustment following completion of the accounts."

            There then follows a series of pages, each of which represents a schedule and for each schedule, there is a list of costs, e.g. Cleaning, Lift Maintenance etc with a figure next to each.

            Is it correct to take those figures (for each cost code on each schedule) as being effective caps on what the managing agent can charge lessees for the period, above and beyond what they have already demanded against the budget at the start of that year?


            Comment


              #7
              The service charge budget is only an estimate of annual cost costs for setting the annual payment from each flats. It can be wrong if the budget as been under estimated.

              If you don't trust the managing agent with the service charge money and reserve funds , then you should set up RTM company to take over administration of the service charge account.

              Comment


                #8
                Originally posted by ollie72 View Post
                Is it correct to take those figures (for each cost code on each schedule) as being effective caps on what the managing agent can charge lessees for the period, above and beyond what they have already demanded against the budget at the start of that year?
                Not necessarily.

                Firstly, as far as what you will finally be required to pay is concerned, you can forget about what the budget from the start of the year said, that will have been estimated costs, nothing more. The only way this might have relevance is if the actual costs for the year come in below the estimate.

                With regard to the sums stated in the 20B notice, this will only affect costs that were "incurred" more than 18 months before you are provided with a legally valid demand to pay the costs (or settle the balance).




                An example might make it easier to explain:
                If the section 20B notice says that lift repairs costing £1000 were incurred during the year, but the demand for payment that you later receive says that the cost of these repairs was actually £1200 (because VAT was accidentally excluded when the section 20B notice was sent), the amount that you will need to pay a share of will depend on when the cost of the works was incurred and when you are sent the actual demand for payment.

                If the freeholder was invoiced for the lift repairs at the beginning of the service charge year (lets say, on 1st August 2018), the £1000 quoted on the section 20B notice will apply because there is already over 18 months since the costs were incurred.

                However, if the invoice for the lift repairs is dated 30th June 2019, right at the end of the service charge year in question), the freeholder still has just over 6 months in which they can correct that error because the cost was incurred just under 12 months ago. In this case the 20B notice will only 'cap' the cost if no invoice, or corrected section 20B notice, is sent before 18 months have passed following the cost being incurred.




                It will be more complicated if some of the costs for a particular item on the 20B notice were incurred over 18 months before a valid demand is received, and some were incurred within 18 months.
                In this case I would expect the maximum payable to be either the amount stated on the 20B notice or the total of all invoices for this particular cost category that were incurred less than 18 months before the demand is received (whichever is the greater) - although the courts/tribunal might disagree.

                So, if there were lift repairs costing £500 in August 2018, and further repairs costing £1200 in June 2019, and the section 20B notice gives the cost for lift repairs is £1000 because the June 2019 repairs were, in error, also put down as the same as the August 2018 cost, the FTT may decide that the total on the June 2019 invoice can be charged because it is within the 18 month limit, but the £500 from August 2018 is forfeit by the freeholder because they will already be receiving more for the year for life repairs than the 20B notice said that the cost would be.

                Comment


                  #9
                  Many thanks, that's helpful.

                  Leaseholders have full control of the management, the issue is concern over and a sense-check of the correctness of demands by the managing agent.

                  Using another example if I may, if lift costs, say, were expected to be £1300 for the "Year" (1 Jul 2018 to 30 Jun 2019) and demands were issued against that budget figure for the Year on 1 Jul 2018 (start of Year), and then if during that Year a bit more, £1800, of costs were incurred (invoiced and delivered) during that same Year, but then accounts were not finished and Section 20B on 31st Dec 2019 then stated the lift costs as £250, what would a tribunal likely deem as the amount owed by leaseholders for lifts?

                  £250? Or £1300?

                  I assume probably not £1800 as that amount from that period was never demanded and a much lower figure shows on the S20B that covers the period of costs incurred.

                  (I'm assuming costs incurred from 1 Jul 2019 to 31 Dec 2019 were demanded based on estimates, so am assuming no effect on the S20B for this example).


                  Comment


                    #10
                    Again, section 20B only becomes relevant if the actual demand for payment is not received by leaseholders within 18 months of the costs being incurred by the landlord.

                    If payment from leaseholders is demanded within 18 months of the costs being incurred, any section 20B notice that has been issued becomes irrelevant. A section 20B notice is to protect the landlord if a valid demand cannot (or is not) provided within 18 months of the costs being incurred by the landlord.
                    Before the 18 month limit is reached the landlord (or their managing agent) can correct any errors that have been made. In your example, if all invoices for work on the lifts were dated between 1st May & 30th June 2019 the landlord/managing agent has until at least 30th November 2020 to demand the full amount of £1800.


                    It is when the costs are incurred and when a valid demand for payment is received that are important. If a cost is allowed by the lease, and the amount cannot be argued to be 'unreasonable', nothing else limits the amount that can legally be demanded if leaseholders demand payment within 18 months of the costs being incurred.

                    Section 20B notices only limit costs if a valid demand for payment of those costs is not received by leaseholders within 18 months of the costs being incurred, and estimates provided at the start of, or during, a service charge year don't limit costs at all (unless the lease specifically says that they do).
                    This would mean that, if a valid demand is received within 18 months of all costs for lift maintenance being incurred, neither the £1300 or £250 mentioned in your example would limit the amount that might need to be paid.

                    Comment

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