Service Charges Never Been Calculated According to Lease Specifications

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    Service Charges Never Been Calculated According to Lease Specifications

    Hi,

    I live in a development of 30 flats. We self-manage the entire site, and the whole thing has been continuously run over the last 49 years, with all flat owners as shareholders of the Management Company, with committee members as directors during the length of their tenure.

    It has recently come to our attention that the site has never been managed according to the lease: The site contains two blocks. One of 18 flats, and another of 12 flats. The larger block is of painted render, whilst the smaller is of ordinary brick.

    The lease states that the building maintenance costs should be split so that flats in the larger block pay 1/18 of the costs arising from their block, whilst those in the smaller block should pay 1/12 of the costs arising from theirs. All other costs associated with the site itself are (thankfully) split in a straightforward 1/30 per flat.

    However, it seems that the service charges have never been split according to the lease (going back for at least 40 years). At some unknown time in the past it was decided that the costs would be shared equally between all flats, but the lease was never varied to reflect this!

    Daft as it sounds, all subsequent Chairs, Treasurers, and committee members have simply carried the process forwards on the assumption that it was correct. Yep, I know!!

    The problem was only discovered when we looked at employing a Managing Agent as all the current committee members wish to stand down after many years of service (and no volunteers have come forward to take over). Naturally, a MA would run it to the letter of the lease and, although we have yet to employ them, it was they who first pointed out the error. It was something of a bombshell.

    We have tried to get all the owners to agree to a Deed of Variation so we can go forwards with the 1/30 split we have always used, but a few residents have decided that it's not necessary "because it's never been an issue before" (and they don't want to pay for it). Yet they somehow expect the service charge to remain as a straight 1/30 split!

    So far as I can see, regardless whether we hand over to a MA or retain it in-house, now that we know of the error, we have to begin running things according to the lease. This is causing all sorts of issues as we have never kept meticulous records of what was done to each block. Of course some of the work is easily pinned down but, by and large, most is almost impossible to allocate per building - especially this far down the line. To be honest we'd be hard put to even pin down the work done over the last 10 years to its appropriate block.

    To complicate matters, there is a communal contingency pot for planned maintenance such as renewing flat roofs, and future repainting, and we have no idea how this should be split fairly - bearing in mind that the residents of the non-painted block have been subsidising the painting of the other block for gawd knows how many years, and one block is in the middle of being re-roofed.

    I'm also extremely worried that the current and former committee members may have committed some offence by permitting this to happen.


    I'd be extremely grateful if anyone can tell me if they have come across a similar situation, how it might be resolved, and/or whether or any offences might have been committed.

    #2
    Yes the Management Company has committed an offence by not adhering to the leases. It's a straightforward breach of contract. Theoretically the leaseholders in the 12-flat block could demand restitution for the amounts they have overpaid. I believe there would be a cut-off point though, going back either 7 years or 12 years, according to contract law.

    If you can get majority agreement (*see below) from the leaseholders and freeholder, the Management Company can apply to the FTT for a variation of the leases without 100% agreement. I think you would have to word your proposal in such terms that all the leases are being varied to the same effect, e.g., "each property will henceforth be responsible for 1/x of the communal costs of their block, with x representing the number of flats in the block".

    Any dissenting parties would have the right to object, and/or to ask for compensation if they are financially disadvantaged, although they may not bother.

    I would recommend you contact the Leasehold Advisory Service for free advice on how to do this.

    Or, you might decide it is easier to adhere to the leases as they are drafted. The managing agents should henceforth be keeping track of what is spent on each building. As for the reserve fund, it would probably be considered reasonable to allocate any existing funds to the two buildings in 18/30 and 12/30 proportions. I'm not sure if you could apply to the FTT for a determination on this if all the leaseholders don't agree, but again, you could ask the LAS for advice on this.

    I am not a legal professional by the way, but we just went through something similar with our RMC.
    *Application to the FTT to have a number of leases varied

    Under Section 37 of the LTA an application can be made to an FTT in respect of two or more leases for variation and the changes can only be achieved if all of the leases are varied to the same effect.

    Where the application to the tribunal is in respect of less than nine leases, all leaseholders or all but one must consent.

    Where it is in respect of more than eight leases, at least 75% of the leaseholders must consent and the application must not be opposed by more than 10%. For these purposes the landlord shall be regarded as one of the parties.


    Comment


      #3
      Thanks HazeltonLane, that puts my mind at rest for the most part, and gives me solutions for the way forward that I can raise at the next meeting. I'll probably actually get some sleep tonight!

      I don't believe any of the residents of the smaller block (of which I am one) would be inclined to seek restitution, and almost all residents simply wish to carry on with the 30th split anyway.

      As to the 18/30 and 12/30 split of the reserve fund, I suspect that that will become the next bone of contention as one block is mid-way through having its roof replaced and I can already hear the voices crying "but you just had your roof done!".

      Comment


        #4
        If you do go the Tribunal route you can get a solicitor to draft a specimen deed of variation that will apply to all the flats. You can include this with your Tribunal application and ask the Tribunal to make an order to give effect to the Variation proposed. You then just need a solicitor to file the changes with the Land Registry.

        For us it cost £280 for the draft deed of variation and £175 per flat to file the variation with Land Registry. Someone on your committee might be able to do the latter task but we didn't know how, or want the hassle!

        The alternative is that every leaseholder gets their own solicitor to re-draft the relevant section of their own lease. This option is a lot more expensive—we were quoted in the region of £900 per flat.

        Comment


          #5
          I suggest that you start to comply with the lease with effect from the current service charge year, the agent is correct, you do need to comply with the lease. You can argue that it will be impractical to go back and adjust the previous years' charges, some leaseholders will have sold their properties and the leaseholders appear to have accepted the current method of charging.

          The reserve fund or contingency pot is a different matter, You are required to keep a separate record of the balance relating to each block and you are not allowed to let one block be in deficit and be subsidised by the other, I suggest that you calculate the amounts for each block as best you can, no doubt you will need to make some estimations and explain the position to the leaseholders.

          You seem to have a group of supportive leaseholders so they should accept attempts to put things right. You can explain that it is a genuine error which was first made by your predecessors and you are correcting the error as soon as it was brought to your attention..

          Comment


            #6
            Possible double-post here as my original appears stuck as "unapproved".


            Thanks folks, some great suggestions here.

            The tribunal information is really useful. I knew of the FTT, but I hadn't realised it also had the power to make an order to vary the lease on financial matters. It makes sense though; it wouldn't be much use if it couldn't rule on all aspects of a lease. I will refer this information to our Chair and Secretary.

            Handing over to the MA seems to solve most problems then. In the meantime, I'm pretty sure we can split the block expenditure from the start of the current year without too much trouble. The first step, to meet the lease as written, is just a matter of separate accounts for each block. But obviously it's going to need separate budgets and service charges to be put into place ASAP. Ironically our treasurer is one of the leaseholders who insists it's fine to just carry on as we are without a DoV. I'm sure he'll be thrilled to learn of the extra work!

            "Supportive" isn't quite the right word, but it's close enough! Most of the leaseholders are best described as "apathetic" when it comes to anything to do with managing the development. Just so long as it looks nice and they don't have to hand over extra money - or indeed actually do anything themselves. But I guess that's normal!

            So, as you say, I think we'll probably be OK so long as we address it right away. The grounds and buildings are well-maintained and there aren't any disgruntled leaseholders to worry about on that score at least.

            Comment


              #7
              Originally posted by anotherfinemess View Post
              Most of the leaseholders are best described as "apathetic" when it comes to anything to do with managing the development.
              Completely normal, in my experience, unfortunately!

              The up-side is they are likely too apathetic to object if it does go to the FTT.

              Comment


                #8
                It speaks volumes that the leaseholders have never challenged the charges over 49 years and obviously there has been no legal action taken over that period of time which would have highlighted the error,

                Comment


                  #9
                  Originally posted by HazeltonLane View Post

                  Completely normal, in my experience, unfortunately!

                  The up-side is they are likely too apathetic to object if it does go to the FTT.
                  I can't grumble: I was just as naive and uninterested until I got involved, and that was by complete accident. I simply offered to change the lightbulbs in the stairwells as I was tall enough to reach them without a ladder!!

                  Originally posted by eagle2 View Post
                  It speaks volumes that the leaseholders have never challenged the charges over 49 years and obviously there has been no legal action taken over that period of time which would have highlighted the error,
                  It does indeed!

                  Comment


                    #10
                    Originally posted by eagle2 View Post
                    You are required to keep a separate record of the balance relating to each block and you are not allowed to let one block be in deficit and be subsidised by the other...
                    We had quite a heated committee meeting last night, and it turns out that the bone of contention appears to be this specific point.

                    Our dissenter maintains that it's no different to, for example, a car dealership passing money internally between its Service and Parts Departments, and that it "all goes into one big pot anyway, at the end of the day". So, to him, handing over to the MA will make no difference to the monies being shared between the blocks. He thinks that the MA can simply be told they must allow this fund-sharing, and therefore no lease variation is wanted or needed.

                    No matter how often we've tried to explain it, he simply can't (or won't) grasp the simple logic that, the instant external money (from whatever source) is injected into a given block's budget to cover a shortfall against the block's costs, it means that the residents of the block have failed to pay their full 1/12 or 1/18 share that the lease demands.

                    To me, this is as simple as stating that "water is wet", and simply needs no explanation.

                    Even our proposed MA has told him the monies can't be shared. But, alas, our dissenter refuses to accept this, and is now distributing letters to all flats, telling leaseholders that the rest of the committee is all but lying to them, and that the funds can be shared even if we go to a MA who sticks to the lease.

                    Is there any citation, guideline, rule, or precedent that you know of where it specifically states that funds cannot be passed around between blocks? Or is it really as simple as the fact that water is wet?!!

                    Comment


                      #11
                      The RICS management code 7.6 states "If leaseholders contribute towards different costs ... the funds should be differentiated. This should be done by way of different service charge schedules, each schedule should total 100 per cent ..."

                      It is not necessary to change the lease, but you should definitely keep separate records for each block.

                      Comment


                        #12
                        Originally posted by eagle2 View Post
                        The RICS management code 7.6 states "If leaseholders contribute towards different costs ... the funds should be differentiated. This should be done by way of different service charge schedules, each schedule should total 100 per cent ..."

                        It is not necessary to change the lease, but you should definitely keep separate records for each block.
                        That, is absolutely perfect. Many, many, thanks indeed.

                        Comment


                          #13
                          Originally posted by anotherfinemess View Post
                          No matter how often we've tried to explain it, he simply can't (or won't) grasp the simple logic that, the instant external money (from whatever source) is injected into a given block's budget to cover a shortfall against the block's costs, it means that the residents of the block have failed to pay their full 1/12 or 1/18 share that the lease demands.
                          It may not be quite that simple.

                          There is a principle in law called 'estoppel by convention' which means something like, if all parties have accepted a way of doing things for a long enough period they cannot later challenge that way of doing things, even if it is contrary to the terms that should apply (note: someone who actually has legal training regarding this may well disagree with how I put it!).

                          I would suspect that it should be OK to change to using the service charge proportions given in the lease going forward, if you properly inform all parties, but I would suggest that legal advice should definitely be sought regarding what would happen if a leaseholder was to challenge this change using the estoppel argument.
                          A very important consideration is likely to be whether or not any expensive work has recently been carried out on one of the blocks, and whether any is expected in the near future. If one block has recently benefitted from expensive refurbishment with the other block contributing towards the costs, and the other block will likely require similar in the new future, you may have a problem.

                          The post in the link below describes some Upper Tribunal leasehold cases that dealt with estoppel. The third example, Admiralty Park Management Company Limited v Ojo [2016], may be particularly relevant as that involved service charges that were incorrectly split across several blocks (although perhaps there are more recent cases that are important):
                          https://www.leaseholddebt.co.uk/2017...se-law-update/

                          Comment


                            #14
                            Thanks Macromia, That provides an interesting slant on the overall issue.

                            So far as I know, all 30 leaseholders here want to continue the customary (but incorrect) way of apportioning the Service Charges. The problem we have had is finding a local MA prepared to calculate charges differently from the lease. We even tried offering a letter of indemnity if they were to run it to our historical (but incorrect) split. But to no avail; they don't want the risk - and I can't say I blame 'em!

                            This situation is how our committee came to adopt the position (after a unanimous show of leaseholder hands at an EGM) that we needed a DoV to change the lease in the first place. We were in the process of doing a formal written request to the leaseholders, preparatory to going ahead with it, when our dissenter decided none of this was necessary, and began taking a stand against it.

                            If I'm honest, there's a part of me so sick of the whole situation (it's been going on for months now), that I'd gladly turn the running over to a MA, as is. They can then start running it to the lease, and deal with the inevitable challenge from our dissenter in due course. In practice, though, that'll probably cost all the leaseholders (including me ) a lot more than the couple of hundred per flat we were anticipating for the DoV we originally envisaged.

                            It now looks like a FTT application for an Order to Vary (I think we still have enough support for that) may well become the best way forward at this point, and estoppel seems to be a useful way of setting out our case.

                            Comment


                              #15
                              I think that your difficulty is that the cost of maintaining one block is always going to be greater than the other block. So some leaseholders are permanently subsidising others if you charge equal amounts. That is fundamentally wrong, you are asking some leaseholders to pay unreasonable charges,

                              Unless you advised those leaseholders that the current method of charging is unreasonable and not in their best interests and you recommended that they obtained independent advice ahead of the EGM, I don't think that you can rely on the vote at that meeting.

                              A Tribunal would not only consider the position of current leaseholders, it will also consider the position of future leaseholders throughout the remaining term of the lease and I would not expect it to permit a change which will commit those future leaseholders to pay unreasonable sums for what could be 900 years.

                              It could also affect your ability to sell your properties, a clued up solicitor should advise a prospective purchaser that the system of charging is unreasonable.

                              The point regarding estoppel is an interesting one which you may be able to use in the event that any leaseholder requests correction of charges made in the past. That seems to be unlikely with your existing leaseholders. I doubt that the same point can be made to commit other persons to pay unreasonable amounts in future.

                              It is not a simple matter by any means..

                              Comment

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