Service Charge Nightmares
Help! We simply cannot collect the service charges is common cry particularly from small blocks. Mary-Anne Bowring, creator of www.leaseholdersupport.co.uk reveals the solutions.
Collecting service charges can be problematic. Especially for small blocks of flats if they have inherited leases perhaps drawn up in the 1950s, 1960s or 1970s, when it was still typical for the freeholder to foot the bills and seek recovery of the service charge at the end of the year.
Demanding service charges in any form, other than the letter of the lease, is likely to lead to non recovery of the service charge in a Court of Law. It is also a fact that paragraph 9.5 of the Code of Practice for Residential Property Management put together by ARMA* and the RICS** states that variation of such leases may be an advantage to both parties but continues to acknowledge that Leaseholders/tenants have no obligation to assent to variation of their leases. Leaseholders in small blocks will also know that getting everyone to agree to pay their share of service charges, repairs or other costs is a must, if the block is to be well run and effectively maintained.
The pain of collecting service charges sufficient to run a block becomes more acute when big repairs or redecorations are proposed, as there is no reserve or sinking fund that has built up over the years towards this type of cyclical expenditure. Many blocks find that works just don't get planned or executed as there is no such year as a year that every flat owner cannot cite some form or story of financial hardship. It is rather ironic that when the leaseholders collectively also sit in the shoes of the Freeholder and cannot agree, unless one or more brave leaseholders forward fund big works it is very often the lease itself that a lessee wanting to put a stop to plans to get works underway that will halt a project to merely carry out maintenance the lease says is due or overdue shelved. It sounds crazy but it's true!
Mercifully, there is a solution As long as most of the leaseholders are agreed, by enacting Section 37 of the Landlord and Tenants Act 1987, a dissident leaseholder can be overruled and you can change the lease to include an effective service charge clause or make provisions to collect a reserve fund.
Is re-drafting a lease not horrendously expensive? Our survey of High Street solicitors fees revealed that the typical cost was £500-£750 + Vat of course. But www.leaseholdersupport.co.uk which is the Ringley Groups support package for self-managed blocks charges are just £225 + Vat per lease for members (provided there are 4 or more being executed simultaneously). Not a large outlay if it means that finally a few heroes don't need to pre-fund all costs, and maintenance can get under way. What is even better is that once the lease is changed there is no going back as the new system of budgeting what you are likely to spend in the year and collecting instalments on the relevant due dates lasts until the lease ends. Typical chargeable disbursements will be £40 per lease for registration with HM Land Registry and perhaps another £20 for obtaining title searches.
The legal background . The document used to change the lease is called a Supplemental Lease and Deed of Variation which must
a) be entered into by mutual consent of a majority of leaseholders.
Section 37 of the 1987 Act sets out that if there are more than 8 flats, at least 75% must consent and not more than 10% oppose,
otherwise, if there are less than 9 leases, all but 1 party must consent.
b) be registered with the Land Registry to then become binding on all present and future lessees.
Once you have enough willing leaseholders either education of the parties who do not consent, to secure consent or an application to the Leasehold Valuation Tribunal to get an order to enact your Section 37 rights is required.
Other consideration. Whilst contemplating the cost of changing the lease here is our checklist for other clauses often omitted by a defective lease:
1- the ability to collect interest on service charge or ground rent arrears
2- for improvements to be valid if approved democratically by a majority leaseholder vote
3- to enable a reserve or sinking fund to be accrued
4- to widen the list of relevant expenditure included within the service charge clause, e.g. for the cost of a managing agents fees to be a recoverable service charge expense
One last piece of advice, if you own the freehold why not consider as a carrot, extending the leases at the same time to 999 years?
If you feel additional clauses would be useful and worthwhile or require your lease to be re-drafted contact www.leaseholdsupport.co.uk
* Association of Residential Managing Agents
** Royal Institution of Chartered Surveyors
*** These regulations are governed by Section 37 of the Landlord and Tenants Act 1987.
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