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If there is an overspend on the budget then leaseholder may find themselves having to pay an additional amount (balancing charge) for the fact that more was spent than budgeted for (shortfall) after the accounts have been reconciled at the end of the year. This balancing charge will show as a deficit figure and the request for the shortfall will be collected from either a reserve fund or demanded in the form of Notice under s20b of the Landlord and Tenant Act 1985 (limitation of service charges: time limit on making demands).

A demand under s20b will either be for payment for an estimated future service charge liability (in other words ‘on account’) or for costs which have already been incurred. A payment to a reserve fund is not applicable under this piece of legislation.

In order for the Notice to meet the legal requirements it must contain at the time of writing a list of what costs have actually been incurred by the landlord relating to the leaseholder’s building or estate. These costs must only be the relevant costs because any non-chargeable areas where a leaseholder does not have to make a contribution fall outside of the legislation.

It must also contain every cost that the landlord intends to charge for because if they are not listed then again, the legislation requirements are not being met. Finally leaseholders must be clear that they are going to be charged a share of these costs as a service charge under their lease terms.

Surplus of Contributions

On the other hand, if there is a surplus of contributions over what was actually spent this can a) be transferred into a reserve fund (if there is one) b) credited back to each leaseholders service charge account if this is dictated by the lease or c) carried forward to the next accounting year, as service charge accounts are worked out by the total charged to leaseholders throughout a budget year, not what has actually been received.

It is however important to note that surplus figures are not necessarily physical money in the bank as a result of everyone paying their service charges. If any surplus figure is credited back to each leaseholder then it is not added to the Balance Carried Forward figure.

CASE LAW

Case law has established at the Court of Appeal in the case of OM Property Management Ltd v Burr – [2013] EWCA Civ 479 rules that costs are not “incurred” for the purposes of Section 20b of the Landlord and Tenant Act 1985 on the mere provision of a service or supply, but only when the liability has crystallised (whether on payment or presentation of an invoice). So the 18 month period runs from the date a Landlord receives an invoice rather than the date the services or works are supplied.

 

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