Emma Voce, property management expert at Brady Solicitors, highlights a useful recent case on service charge apportionments.
Most managing agents are familiar with the challenge of correctly apportioning service charges. It’s an essential part of the smooth running of service charge demand and collection and, of course, good block management.
We are often approached by managing agents and RMC directors with leases where the percentages either do not add up to 100%, or the provisions of the lease are unclear. This can create quite the headache when issuing service charge demands.
Historically, advice has always been to stick to the lease, as non-compliance with the lease can invalidate a demand for service charges.
However, the recent case of Price v Mattey & Ors [2021] UKUT 7 (LC) provides a helping hand for agents, landlords and management companies experiencing apportionment issues.
What happened in the Price v Mattey & Ors service charge case?
The Upper Tribunal was required to consider if an otherwise valid demand was invalidated because the apportionment of the leaseholders’ contributions was incorrect.
In this instance, we had a freeholder (Ors) seeking a S.27A determination in the FTT for service charges issued between 2009 and 2017.
Ors had issued otherwise compliant demands for service charges but sought a contribution of 1/24th of the expenditure from the leaseholder. The lease in this case stated that the leaseholder was to pay a 1/31st contribution.
The FTT determined that the leaseholder was indeed only liable to pay a 1/31st share of the service charge contribution.
The leaseholder then appealed, arguing that this error made the demand invalid as it did not comply with the terms of the lease, and so was not payable.
The freeholder by this point was outside of the 18 month rule in which a demand for the expenditure would need to be issued. (By way of a quick reminder, Section 20B(1) imposes a limitation period on recovering service charges: costs are not recoverable if they were incurred more than 18 months before they are demanded.)
The freeholder argued that the demands were valid, and that the FTT had correctly determined the amount payable under S.27A.
The Upper Tribunal agreed and found that, although the original sum demanded was higher than the leaseholder was liable to pay, the demand itself was not invalidated by the incorrect apportionment, and that the FTT had the jurisdiction to determine the amount payable under S.27A.
This decision goes some small way in assisting RMC directors and their managing agents in dealing with the complexities created by apportionment issues with leases. Though the advice remains (where possible) to comply with the lease, this decision at least helps in situations where lease compliance is not always fully achievable.
The pivotal point for Ors in the Upper Tribunal decision was that the demand was not found to be ‘defective’ and so was still payable, albeit at the revised 1/31 proportion determined by the FTT.
Had the decision at appeal gone the other way, and the demand was considered invalid, then Ors would have been at risk of falling foul of the 18 month rule, creating a significant shortfall in service charge funds.
However, all is not lost in such circumstances provided that the leaseholder was informed in writing, within 18 months of the costs being incurred, that those costs have been incurred and are recoverable. This is known as a Section 20B(2) Notice and has the effect of stopping the ‘18 month clock’.
An ‘incorrect’ demand, such as the one in the Price v Ors case, can serve as a Section 20B(2) notice if it includes all the relevant information and was served correctly, enabling a corrected demand to be issued and payable even though it’s outside of 18 months. This can be very helpful when dealing with problem developments and challenging apportionments!
