Service Charges on a MIXED (freeholders + leaseholders) estate

ploot

Please does anyone have any experience - or received legal wisdom they're prepared to share! - about Service Charges (for shared gardening, roads, entrance gates etc) on a MIXED (freeholders + leaseholders) estate?

Where I live, the Service Charges for these things are regularly invoiced - equally - to BOTH the (large number of) Leaseholders living in blocks of flats AND to the (small number of) Freeholders in their own detached houses living side-by-side on our large 'green' (several acres!) estate and sharing the use (and therefore costs!) of the shared site-wide gardening, internal roads, entrance gates etc (but not, of course things like the lifts in the flats as they don't use them!).

Recently the 'Management Company' (staffed by volunteer directors, mostly from the flats) has discovered a major problem with its Service Charge accounts - due to there being too many utility meters around the place - and their getting themselves confused as to what was connected to what and who should pay for consumption (it's a fairly new build and some things are only now coming to light!).

In particular, they've only just found out that they'd been WRONGLY 'booking' part of the DOMESTIC WATER used in the freehold houses. Instead of charging JUST the freeholders themselves (which is what should have happened of course!), in fact the Management Company has for years been booking the freehold houses' domestic water to an incorrect accountheading in the site Service Charge bills that EVERYBODY pays, namely 'for watering the shared grounds'!!! The leaseholders in the flats are understandably livid now this has just been found out, and have demanded that the freeholders 'pay them back' for the water that's been wrongly allocated to THEIR bills as well.

BUT this error goes back many years, and the FREEHOLDERS are claiming they can't pay and anyway that they aren't LIABLE to for more than EIGHTEEN MONTHS of this wrong allocation, under something called the "Landlord & Tenants Act" (?) which says a lot about such 'statutes of limitation'. They say that as it was the Management Company's fault, THEY must sort things out by drawing money from the Management Company's 'contingency fund' - which was setup to cover exactly this sort of thing - and paying it back to the Leaseholders. They say they'll pay for the most recent 18 months but can't be required BY LAW now to pay any 'arrears' MORE THAN 18 months old – which everyone sort-of understands as they could be talking about 'sudden unexpected debts' of several thousand pounds!

I'm trying to help the Management Company's sort this out, and my question is this:-

Are the freeholders correct in saying that – even though they ARE freeholders – they're still PROTECTED by the Landlord & Tenant Act(s) in the same way as the Leaseholders would have been if this had happened to THEM, because these are SERVICE CHARGES. They say they have to be given something called a 'Statement of Rights & Obligations' with each Service Bill, specifying the Statutory Limits, Need for Consultation, 18 months' max backlog, their 'rights' to see detailed accounts etc. The Leaseholders are indeed sent this 'Summary' with each Service Charge bill, but the Management Company has never bothered with this Summary for the Freeholders before now. But now there's this issue with the water as above, the Freeholders are saying THEY can claim the same protection that this Act gives them, too.

Is this right or are they up-a-tree, and would they have to go to Court and have it all checked out on a case-by-case basis (which sounds even more expensive!).

Thanks!

Ulfar

The only way you will sort this out is with legal advice and going to court, even then you aren't guaranteed a win as the freeholders paid what they were asked for in good faith. It may be a pyrrhic victory.

There is also the issue of the statement of rights and obligations and I assume they also didn't get a copy of the audited accounts, which they were legally entitled too and without which they could argue they were unable to see that they had been undercharged.

Service charges do have a statute of limitations of 18 months. The freehold must also be subject to a lease for the service charges and so would be covered, if their is no lease attached then the freeholders would tell you to take a flying leap of a short cliff when you asked them to pay for any shared costs.

ploot

Thanks Ulfar (& for superfast response!) but can I please get a fix first on JUST the "Landlord & Tenants Act / Statement of rights and obligations" business first, because that's what the freeholders are shouting about today!

So, are you saying that - notwithstanding the way their 'Deeds' are structured (esp their 'freehold transfer documents': I understand theirs have a set of sensible back-to-back covenants allowing the Mgt Co to charge them for its 'reasonable and legitimate' costs, and requiring them to pay any arrears AND include those clauses when 'they' in turn sell-on) - they actually ARE protected by the 'statutory limitations' rules in the "Landlord & Tenants Act" - EVEN THOUGH THEY ARE FREEHOLDERS AND NOT 'TENANTS' IN THE USUAL SENSE?? That sems to be the main point of dissension at the moment - the Leaseholders say the freeholders AREN'T protected because they AREN'T 'TENANTS' and the freeholders say they ARE protected because it's a Service Charge, and the word 'Tenant' doesn't apply.

Here's the 'learned opinion' given by the leaseholders' solicitors only yesterday:-

"With regard to the "18-month timeout rule" and other Statutes of Limitation: The Landlord and Tenant Act 1985 applies to "persons bound by covenants of a tenancy", and a tenancy is in turn defined in the act as any lease or other tenancy which includes (a) a sub-tenancy, or (b) an agreement for a tenancy. This relationship between the freeholders and the Management Company is however by way of a COVENANT WITHIN THEIR TRANSFERS, not a LEASE as such, so THIS Act, and therefore the 18-month rule and other Limitations, do NOT apply."

Sounds the opposite of what you're now saying? Or are they simply quoting the wrong bits!?!

princeofpounds

There are protections in place for leaseholders on a statute of limitations basis, but if it is 18 months exactly I don't know.

Your best source of free advice is LEASE, the government-funded advice service. Think website is lease-advice.org. They are very good and the best first step before thinking of court.

You should also go to landlordzone forums, the long leasehold board. some experts there.

EDIT:

Actually, I am confused. If they are freeholders why are they paying service charges at all to a management company? Is there a covenant or something, because there won't be a lease compelling them to pay (or if there is, they own the freehold of the lease).

princeofpounds

Ah ok, your second post seems to imply it is a covenant, not a lease.

Therefore I think your solicitor is right, they are not protected in the way a leaseholder would be (although they might have other protections as part of that covenant or from statute, impossible to tell without all information).

Ulfar

It will depend on how the paperwork is but usually in addition to having their freehold there is usually an attached lease for service charges. If it isn't a covenant they get the protection as they have a lease for service charges.

If it is a covenant that is a whole other mess of worms because the current owners if they aren't the first buyers may not be responsible for charges as covenants don't automatically carry over. They have to agree on purchase to the covenants.

ploot

>...usually in addition to having their freehold there is usually an attached lease
> for service charges...they get the protection
> If it is a covenant that is a whole other mess of worms...

Hi Ulfar & PrinceOfPounds: thanks, and yes, it's definitely done by a Covenant - back-to-back clauses in their Transfers.

And there's been a new twist re that, TODAY: the freeholders are now refusing to negotiate any kind of settlement based on 'equal shares' of some sort of assessed overall charge, because they say that paying a BILL against a CHARGE on THAT basis would constitute a covert attempt to create a FURTHER Covenant between THEM, and that if the Management Company want to try THAT on, they'd have to take the freeholders to Court (individually of course!) and SUE them to make the necessary changes to each Freeholder's individual Deeds - which sounds even more expensive than simply writing-off the unpaid bills as a bad debt (ie out of a Reserve Fund).

One glimmer of hope also today though: one of the Freeholder's has today offered to lead the way out of the impasse by 'making a donation' equal to the charges the local water company WOULD HAVE CHARGED HIM individually for the water he'd ACTUALLY used - he says he can get certified PROOF of that from the water company, as they are now reading his private meter and have also found an old record of the date and reading given to him on the day he moved in. If he can persuade all the other Freeholders to do the same (they all now have private meters and he thinks he can persuade them) then we could settle this immediately.

However there's also a further NEW problem come to light: the account under which the Management Company HAD been paying for the water which they'd been wrongly allocating to site cleaning, gardening etc was designated as a COMMERCIAL account, so the water company's bills had VAT on them!!! The very freeholder who's made the above offer has made it clear he won't pay the VAT because it wasn't his fault the Management Company had made THAT mistake; he says the Management Company can hardly claim they were paying for the VAT on his behalf!! Water yes, but VAT no - just (their!) admin error. I can see his point, but it adds another 15-20% to the problem!