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Service Charge Demands – Why managing agents should ensure they understand the lease

As the financial year draws to a close, this provides a timely reminder to review year end processes under the terms of your lease. At year end managing budgets becomes a key priority for property managing agents. One critical aspect that often requires close attention is the accurate and enforceable demand for service charges. However, the enforceability of these demands hinges on a fundamental principle: a clear understanding of the terms of the lease. 

At Brady Solicitors, we’ve encountered numerous cases where service charge demands have been challenged due to non-compliance with lease terms. These challenges can lead to delays, disputes, and even financial shortfalls—all of which can be avoided with the right approach. 

The role of the lease in service charge demands

The lease is the primary document that governs how service charges are calculated, demanded, and paid. Key provisions within a lease may specify:

  • Payment Schedules: The frequency and timing of service charge payments.
  • Items Covered: What costs can be included within the service charge.
  • Notice Requirements: Any formal notice periods or methods of communication.
  • Certification and Auditing: Requirements for the certification of accounts or the provision of budget estimates.

Failure to adhere to these provisions can render a service charge demand invalid and unenforceable, leaving managing agents and freeholders exposed to legal challenges and financial risk.

Common pitfalls in Service Charge Demands

One frequent issue arises when property managers rely on assumptions rather than the lease itself. It is not uncommon for a property manager to assume that the practices of their predecessor were correct without independently verifying compliance with the lease terms. This can lead to repeated errors in demanding service charges and managing the block in general, compounding over time. 

Another critical consideration is the 18-month rule, which broadly states that costs incurred by the freeholder cannot be recovered from the leaseholders unless the demand is issued within 18 months of those costs being incurred. The exception to this is when leaseholders are notified that the costs have been incurred and will be demanded at a later date. 

Other common areas of non-compliance include:

  • Incorrect timing: Demanding service charges outside the specified periods outlined in the lease.
  • Invalid Notices: Failing to provide required notices in the prescribed format or within the required timeframe.
  • Budgets and Actuals Discrepancies: Demanding payments that are not properly supported by certified accounts or accurate budgets.
  • Non-recoverable Costs: Including items not permitted under the lease.

Importance of Compliance at Year End

The end of the financial year in the lease is a particularly sensitive time for managing agents. It is often when budgets need to be reconciled, accounts certified, and any deficits addressed. Inaccurate or unenforceable demands can result in: 

  • Budget Shortfalls: Inability to recover the funds necessary for essential maintenance or repairs.
  • Cash Flow Issues: Delayed payments impacting the financial health of the management company.
  • Increased Disputes: Heightened likelihood of challenges from leaseholders, leading to disputes that are costly and time-consuming to resolve.

Best Practices for Managing Agents

To ensure service charge demands are enforceable, managing agents should:

  • Review Lease Terms: Carefully examine the lease for specific provisions related to service charges. Avoid relying solely on inherited practices.
  • Understand the 18-Month Rule: Ensure all costs incurred are demanded within 18 months or meet the necessary notice requirements to remain recoverable.
  • Seek Legal Advice: Consult legal experts when in doubt about the interpretation or application of the lease.
  • Maintain Accurate Records: Ensure all notices, accounts, and budgets are properly documented and compliant with the lease.
  • Communicate Clearly: Provide leaseholders with clear, timely information about charges and any supporting documentation.
  • Plan Ahead: Anticipate year-end demands by reviewing financial requirements and ensuring compliance well in advance.

Conclusion

For managing agents, understanding the terms of the lease is not just a legal obligation—it is a cornerstone of effective property management. As the financial year-end approaches, taking the time to review and align your service charge demands with lease requirements is an investment in your financial security and professional reputation. Avoid assuming that previous practices were correct—instead, verify compliance through careful review or expert advice. Additionally, always keep the 18-month rule in mind to avoid irrecoverable costs.

If you have any questions in relation to service charge demands or need assistance in recovering service charge arrears, please get in touch and one of our experts will be happy to help. 

Get in touch with our experts

With hundreds of years’ worth of combined experience, our experts have dealt with nearly every leasehold property matter you can imagine. If you’re currently in need of legal support or advice, please get in touch.

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