Budget Setting: Essential Guidelines & Good Practice
Once the overall context of the budget is established, there is essential guidance and good practices that should be followed:
- The ‘reasonableness’ of the charge for any item of expenditure should be able to be explained as leaseholders can approach the FTT for a determination of whether:
a) The service charge costs were reasonably incurred;
b) The services or works are of a reasonable standard; and whether
c) An estimated service charge, payable before costs are incurred, is reasonable.
They can’t however avoid liability to pay service charges on the grounds of hardship. If repair work is reasonably required at a particular time and is carried out at a reasonable cost and to a reasonable standard, the tenant must pay the corresponding service charge dictated by the terms of its lease.
- The budget should be as close to the previous year end accounts as possible (and the other way round) unless any discrepancies can be fully explained. It is the standard of budgeting that can decide manager credibility with leaseholders. For example any significant underestimation can cause problems when a) there is not enough money in the service charge account and b) leaseholders are not going to be happy when they are expected to make up the shortfall on top of the next years contributions. Setting a budget is however not an exact science and in an old building such as ours, it can be very difficult to project exactly what will be required.
- Artificially low forecasts of the costs for the following year are a breach of consumer protection legislation even though it is often used by developers as an incentive to make purchasing a property more attractive. The developer can walk away with the profits or at least distance themselves through whoever manages the block, but it will cause major problems for leaseholders later on.
- Budgets should be in the same format as the annual accounts (with the same expenditure headings) to enable leaseholders to make proper comparisons.
- Enough time must be allowed for the review period to enable leaseholders time to comment;
- Any annual increases (such as increments to staff salary) must be allowed for;
- Any contract reviews for services and supplies to the budget period should be linked where possible so that increases and costs can be confirmed in advance of the budget being set;
- Any ‘one-off’ costs should be allowed for;
- VAT should be allowed for but it is not normally recoverable on residential property invoices;
- Some contracts charge by lunar month and not monthly (and so 13 payments are made and instead of the monthly amount multiplied by 12);
- Current expenditure is usually the best sign of future costs but any marked changes need to be able to be explained;
- For items such as utilities there are likely to be fluctuations, such as heating costs. Seek approval from the client which will be the freeholder or resident management company;
- Consult leaseholders and residents associations;
- Ensure the budget is sent out giving enough time for leaseholders to comment and/or raise questions;
- Invite all leaseholders to an annual budget meeting whether they are owner-occupiers or renting landlords.