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 place 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.
DIVIDING THE BUDGET
The budget should be divided into clearly marked categories and subcategories and could look something like this:
- Accountant: Fees paid to an accountant to Audit or Certify the year-end service charge reconciliation;
- Bank: Fees charged by the bank in relation to the developments bank account;
- Company and Secretarial Services (if applicable);
- Consultancy Fees and other costs in providing and reviewing all legally required risk assessments and audits;
- Managing Agent: Fees paid to the managing agent to include salaries and employment costs. In the case of Resident Management Companies, these fees are agreed between the agent and the company directors;
- Solicitors: Fees for the collection of service charge arrears as after a certain amount of time, they are often handed over to a debt collection company.
Health and Safety
- Health and safety audit of the common areas;
- Fire risk assessment;
- Maintenance of the fire control panels, air/smoke vents systems, lightning conductor systems;
- Water risk assessment;
- Five-year periodic electrical inspection;
- Maintenance of emergency lighting.
- All Risk buildings insurance costs where recoverable through service charges;
- Liability Cover for directors and officers;
- Insurance Revaluation to make sure adequate cover is in place (about every three to five years).
It is important that service charge collection is managed robustly as any failures on the part of the leaseholders to keep to their covenants (promises) to pay will impact on the ability of the freeholders to meet their own covenants to maintain the common areas i.e.the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings, covers the plant rooms, lift motor rooms, and meter cupboards. In other words all areas that are not owned by individual leaseholders.