Owners regularly struggle with the ideas that common practise in most leases is that
1 You pay in advice the estimated costs of services “what they think they will spend”
2 The actual expenditure is not totalled until the end of the year “what they actually spend”
3 The difference Profit or loss known as surplus or deficit is then distributed.
Distribution may mean a repayment or a credit against the current service charges, rolled into the current year’s budget or transferred to reserves.
The logic of “I don’t pay for meal until I am happy and eaten it, do I?” doesn’t apply it is a canteen.
I am omitting some leases where the interim is small often for historic reasons or where they are charged for in arrears.
The single tow biggest misconceptions are
1 It’s a one off inclusive fee to the landlord or their agent who in turn employ sub contactors and have to provide service no matter what and accept the cost and risk on non-payment just like anyone elks.
2 That the monies are held on trust separate from the landlord or their agent own corporate money, and therefore any expenses are deducted from this for the block/estate whether its cleaners or the landlords costs or agents fee.
This is the only money they have to drawn upon and non-payment only leads to further diminution in services.
Most modern lease are service subject to payment of service charge and while in simple terms this is not entirely true or enforceable, it means that in practice the LL or agent will reduce service quality and frequency to a level not expected by anyone and ensure there is enough to pay utilities and insurance.
In such cases if services are reduced then the actual costs is compared to the amount estimated and distributed as earlier stated.
Owners can discuss or formally challenge whether 1 above is fair and reasonable at the Tribunal, but must remember that it is an estimate and that they are unlikely to have the detailed understanding of complex services.
The most common source of dispute is what s actually being done for that estimate and costs and what an owner thinks is or should be done.
It is key to establishing that and gaining an understanding of complex services and in some cases that may need professional advice.
At the end of the year landlords, should they choose not to do so, should be compelled to certify the costs as the lease requires or under Section 21 and 22 landlord and tenant Act 1985.
Now note many companies are set up for residents to run and in some cases the owner are told that under company law as a shareholder or member they have no right to see the bills which form the accounts etc. Now that is correct, however the service charges are demanded and under the control of the leases and under the control of the above act and therefore the right does exist as a leaseholder if the rights under the Act are exercised.
Now key to dealing with disputes during the year and at year end is, bearing in mind what has been said, to keep a detailed record of issues and evidence while trying to effect changes in service or ultimately asking the tribunal to reduce the amount.
It is important that it is recorded and presented in such a way that an independent person can quickly assimilate the information and see the issues as they will be unfamiliar with the block.
All this is counter intuitive and seen as a rip off. What is not understood is that if landlords and agents did operate on all risks basis the fees which form part of the service charge would vastly increase as in general the rate of return on block management fees is around 4% to 6%. That’s why some try and take the money elsewhere and doing the least they can.
But its also a huge opportunity- a sensible residents group that takes a mature approach to work with an agent can vastly increase the performance of the blocks services and the home environment and therefore make it better for both the agent and the owner residents and owner investors.
Where situations do deteriorate, an agent may in fact be quite open to an approach to turn to it all around.
You should agree to
- a list of priorities
- stage payments to fund those
- encourage non payers that the standard to be set and delivered is being monitored by your group
This will build confidence and resolves most situations.
Typical roadblocks are
- agents or LL’s refusing to budge “until its all paid up”, so try and agree to this process rather than resorting to litigation and right to manage or similar. nb staff often don’t have that authority and you may need senior level approval especially where automatic processes are in place to pay insurance old bills or fees first
- - owners wanting to extract revenge or compensation, bit while some cases do merit a good kicking, the immediate well being of your home and investment is far more important
- Legacy issues where it is important to agree to settle these separately under mediation arbitration or tribunal determination, as the later is now often expensive, don’t overlook arbitration as a cheaper alternative
- Major project and a lack of trust which may require owners paying into an independent solicitors client account ( held on trust) and paid on certification by the projects contract administrator
These steps might avert a long and expensive battle if both sides take a realistic view and the issues are not insurmountable- nor need formal determination or the removal of the landlords role as a manager.
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