When it comes to the financial management of blocks of flats there are two types of accounts:
- The service charge accounts which cover service charges paid by leaseholders for the upkeep and maintenance of the common areas (which don’t have to be filed at Companies House);
- The statutory accounts of the resident management company which is company money (income) acquired by the payments of ground rent and lease extensions, which do have to be filed at Companies House).
Both types of accounts at year-end will consist of an Income and Expenditure Sheet, a Balance Sheet and Notes to the Accounts.
Service charges are the lifeblood of blocks of flats and leasehold houses and the way they are used are broken down into 3 main areas:
- Day-to-day expenditure such as external lighting, security camera maintenance, drainage cleaning, buildings insurance, salaries and management fees all of which are payable every year and collected according to the terms of the lease;
- Cyclical expenditure such as external redecoration, according to the lease;
- Periodic long-term expenditure which is usually major spending on infrequent problems such as a lift or roof replacement.
It is the lease that is the starting point as to when and how the service charge budget is set. It will specify a) whether service charges are recoverable in advance or in arrears of the provision of works or services, b) whether they are to be collected regularly and c) whether they are to be levied as costs arise. The most common provision for collection is where prescribed dates for payment (known as interim service charges) are typically required either twice or four times a year, usually around the ‘quarter days’ of 25th March, 24th June, 29th September, and 25th December.
It is usually the managing agent who demands and collects the service charges and the statutory codes relating to service charge recovery are s21b of the Landlord and Tenant Act 1985 (notice to accompany demands for service charges) (amended by s153 of the Commonhold and Leasehold Reform Act), s47 of the Landlord and Tenant Act 1987 (landlords name and address to be contained in demands for rent) and s48 of the Landlord and Tenant Act 1987 (notification by landlord of address for services of notice).
Leaseholders will either pay a fixed or variable percentage of the total service charge budget with clearly stated contribution clauses but there are some leases that have very general and brief/restrictive contribution clauses such as ‘to pay a fair proportion of the cost of maintaining and repairing party walls and structures, shared pipes and wires and other things used in common’.
This somewhat woolly description means that leaseholders may not always agree on its interpretation and often compare the cost of their service charge contributions to those paid by others in the same block, especially if they have similar leases. However working out the cost on different sized flats is a percentage cost based on a number of factors. So the apportionment should generally show the following:
- The amount of rooms (usually bedrooms) in each flat especially if the block has a similar number of identically written leases;
- The size of the flats calculated by floor area and which is usually considered the most fair and is the most commonly used because a larger flat will have cleaning and decorating/maintenance liabilities than those of smaller flats;
- What facilities are provided and which flat uses them, (such as lifts or main front doors);
- The rateable value in largely pre-1990 leases (council tax banding);
- Other considerations can include the location and the view.
The methods used for applying apportionment will be one of the following 3 ways:
- A simple fraction, where a building with 20 flats with each flat owner paying one-twentieth of the service charge expenditure;
- A simple percentage, so one twentieth would be 5%;
- A variable percentage, where some flat owners may pay more because of size or overall number of rooms. For example if 10 flats have one bedroom and the other 10 have two, then the first 10 may pay 4% and the other 10 pay 6%.
Knowledge of the block, a site plan (or both) can also help to make sure the costs are divided fairly but the apportion payable per flat always needs to total 100%.
If there is no apportionment then leaseholders and freeholders can apply to the First Tier Tribunal to get them to decide what is payable under s27a of the Landlord and Tenant Act 1985. The FTT not only has the jurisdiction to decide whether the charges are reasonable but also to decide:
- Who is liable to pay;
- Who to make the payment to;
- The amount to be paid;
- The date of payment and how it is payable.
Most leases will usually allow the building up of funds to give a safety net for both planned and unplanned long-term expenditure. One is known as a reserve fund and the other a sinking fund, both of which can be found here.