Sam Andrews of Brady Solicitors talks about the importance of having a service charge budget that is fair and reasonable.
Creating a service charge budget is rarely straightforward; you need to predict maintenance costs for the year which is difficult without being able to see into the future. If leaseholders contest anything in the proposed budget, it may result in non-payment of the service charge in the demand period, which results in extra costs for managing agents and landlords to recover.
What is reasonable?
The First-tier Tribunal (Property Chamber) determines whether service charge matters are reasonable. This is to ensure leaseholders are getting value for money and transparency about how their money is spent. Landlords and managing agents therefore have to abide by strict regulations and bear in mind what is reasonable.
The points below set out some of the factors the FTT consider when determining the reasonableness of service charges:
- The frequency of works carried out
- Use of independent contractors
- Collective benefit of works for leaseholders
- Proportion of property size to maintenance required
- Quality of works carried out
- Maintenance history of building
It is worth taking the time to review the service charge budget against the above points as the FTT can rule to reduce the service charge and other fees such as management and insurance fees.
Educating the leaseholders
Leaseholders may not see the necessity of some proposed expenses in the service charge budget. Educating your leaseholders on the proposed service charge budget is highly valuable. You could do this through literature, an online survey or an open evening.
We recently had a client who educated their leaseholders on why painting the building was going to require more expense than expected. The building faced harsh winds of the North Sea which required specialist materials to protect the delicate stonework from further erosion.
In doing do our client had created open dialogue with the leaseholders by addressing the cost issues directly.
Reservations about reserve funds
If your lease does not currently have a reserve fund you may wish to consider going to the FTT. The FTT actually encourages applications for reserve funds as this is seen as seen as good management practise.
We regularly advise clients to check their leases for reserve fund clauses. It is good practise to inform the leaseholders in writing about the reserve fund’s presence and its benefit to them, quoting the lease if needed.
Expenditure paid for using the reserve fund can still be challenged by an application to the FTT, so managing agents should consider reserve fund expenditure in the same manner as normal expenditure.
Putting reasonableness into practice
Writing a reasonable service charge budget is only half of the matter, it’s vital to put this into practice, the below tips can help maintain service standards throughout the year:
- Maintain detailed records: this includes documenting interactions with leaseholders to keeping a digital/paper trail of all quotes, bills and correspondence with suppliers
- Get comparable quotes from third party, reputable suppliers
- Maintain service standards, this also includes internal policies such as responding to leaseholders queries in a timely manner
- Provide documentation to leaseholders on how you select service providers and conduct regular spot checks to ensure work is being done to a high standard
On the surface drafting a service charge budget seems to be a mystical art, but by ensuring it is reasonable to leaseholders, you will have a well-run block with happy leaseholders.