One of the biggest and most time-consuming headaches for managing agents and RMC directors is non-payment of service charge. With service charges the only source of revenue, it is crucial to ensure they are collected quickly to ensure good building management, block safety and to maintain client relationships.
A common reason for non-payment by leaseholders is where there has been a failure to comply with the strict terms set out in the lease when issuing demands or preparing year end accounts.
Helen Carey, property management lawyer at Brady Solicitors, explains the importance of adhering to the lease terms – and the possible consequences of failing to do so.
What does the lease say?
The lease will state when service charges are to be demanded, i.e. in advance or in arrears, and how often e.g. quarterly or half yearly. The lease will also set out if there is a right to demand a reserve and/or sinking fund.
The lease may also have a specific clause that stipulates that someone of a certain professional status is needed to certify the accounts and that service charge is not payable until the certified accounts are served on the leaseholder within a certain period of time.
Failure to comply with the lease terms can lead to the leaseholder having a valid reason to withhold payment of service charge, as highlighted in the 2011 case of Akorita v Marina Heights (St. Leonards) Limited, where the managing agent had the accounts prepared and sent to the leaseholders. The lease required that for the final service charge to be payable, a certificate from a chartered surveyor was needed. In this case, the accounts had been certified by an accountant.
The judge hearing the case concluded that nothing was payable as the requirement of the lease had not been fulfilled. A certificate from a chartered surveyor was required for the service charge to be payable by the leaseholders.
Do we need to get our service charge accounts audited?
Many leases set out a requirement for service charge accounts to be audited.
Without wishing to stray too far into the world of accountancy, it’s important to note that the interpretation of this requirement will depend heavily on the age of the lease, as an audit today has greater scope than would have been originally envisaged with older leases.
In broad terms, for leases drafted pre-1980, an audit will not require any procedures beyond those needed to accurately prepare the accounts. Audit requirements in post-1980 leases must however be interpreted as meaning an audit by a qualified auditor or accountant in line with accepted ‘modern’ audit standards.
Audits can be expensive and time-consuming and so, for smaller blocks with no complications, there is however scope to make an argument against carrying out an audit based on ‘disproportionate costs’.
Managing the handover
An issue that we often come across is when a managing agent takes over management of a block and issues service charge demands as per the demands issued by the previous agent. If the previous agent had not been demanding in accordance with the lease terms, this can mean that issues arise at an early stage in the managing agent / leaseholder relationship and could set the tone for difficulties going forward unless they are identified and corrected at an early stage. (Read our expert view on how to manage the handover.)
First and foremost check your obligations within the lease before issuing service charge demands and preparing the year-end accounts.
Ensure you understand the when and how to issue demands – and any requirements for audits and third-party certificates.
Taking over the management of a new block is an ideal time to complete a thorough review of the lease terms to ensure that service charge demands and year end accounts are prepared in accordance with the lease to reduce the risk of non-payment.
For help or advice on any aspect of service charge procedures or arrears recovery please do get in touch with our property management solicitors; we’d be pleased to help.