A recent appeal at the Upper Tribunal looked at the reasonableness of demanding service charge payments on account and underlines why you should take extra care when budgeting. Brady Solicitors highlight the key points from the Knapper & others v Francis case.
Members of the tenants association of Point Curlew Chalet Park had originally applied to the First-tier Tribunal for a decision on the reasonableness of service charges being demanded on account.
The FTT had found in favour of the landlord, and the leaseholders were given permission to appeal.
The Upper Tribunal was asked to decide, when looking at service charge payments demanded on account, what information can be taken into account to determine the reasonableness of the sum payable: should the Tribunal consider only the information which was known by the landlord at the time it set its annual budget, or everything known at the date of the determination?
The Upper Tribunal’s decision
There were several key points to come out of the UT’s decision, which led to the appeal being dismissed:
- The UT confirmed that the landlord cannot recover whatever sums on account it desires.
- The landlord should take into consideration anything that it learns between drawing up a service charge budget and the date when the leaseholders are liable to pay sums on account.
- Where payments on account are to be made half-yearly, the landlord should adjust these on-account payments throughout the year as the service charge costs become known.
- The UT found that a reasonable sum demanded on account did not automatically become unreasonable simply because the expenditure forecast was not spent.
What does this mean for landlords and managing agents?
The case confirms that in future the First-tier Tribunal will continue to look at budgets and ‘on account’ demands carefully.
Whilst it is not automatic that an on-account demand will be unreasonable if sums included are not spent, landlords (or their managing agents) should take extra care when calculating on-account payments, and should do what they can to adjust the budget as the year progresses.
This was ultimately a sensible outcome but reinforces the need for not just procedural accuracy but also sound financial management and accurate budgeting for service charge expenditure.
The case should also encourage landlords and managing agents to maintain open and transparent communications regarding service charge expenditure to reduce the risk of future disputes. For advice or assistance on how to correctly demand service charge payments on account, contact Brady Solicitors’ service charge team.