Leasehold service charge proportion payments unclear/discrepancies

brainiack

I have reviewed a friend's service charges and lease and it appears their lease quotes two proportions for internal block costs as 1/xxx and external costs as 1/xxx. 

In their service charge demands (over 10 years worth) with the same managing agent, there is a table of 7 components/charges constituting the annual service charge demand, of which none of the proportions relate to the two figures in the lease.

Is it possible the managing agent is overcharging or charging erroneous proportions, which do not feature in the lease at all? 

What would be the best way to resolve this? An initial approach to the managing agent will be made first thing Monday, however will it take a tribunal or legal action to ultimately resolve the situation? Why is the managing agent seemingly creating random additional components, if these don't appear anywhere in the lease, how can they be charged and legal?

P.S. We have also so far requested an official copy of the lease from the Land Registry just to check it matches the copy held since purchase, and both reconcile, with only 2 proportions of lease mentioned, neither of which reconcile with any of the service charge demands.

eddddy

As you suggest, a polite letter/email to the managing agent asking for more info would be a good starting point.

Is your friend being asked for bigger or smaller proportions to those mentioned in the lease?

It would be easier to comment (or guess) if you mentioned the 7 components and the discrepancies in proportions. And maybe the number of flats.  But it's up to you, if you want to mention those details..




It may be that the managing agent has made a mistake. Other possible explanations might include:

• Some leases say things like the proportions can be varied by a surveyor, if it's reasonable to do so. Is there anything like that in the lease? (If so, you can ask when, why, etc the variations took place)

• A lease variation document can vary the proportions - but your friend's solicitor should have made you aware of any lease variations when they bought. (A previous leaseholder could have voluntarily agreed to a variation, or a tribunal could have imposed a compulsory variation.)

• Has the building been extended (or partly demolished, or significantly changed) since the lease was granted?

Or could there be calculation 'assumptions' which aren't obvious? For example, for buildings insurance...

• Your friend is responsible for 1/10th of the cost of insuring their block

• The freeholder insures 4 blocks under one policy - the annual premium is £4000

• So it's assumed that £4000/4 = £1000 applies to your friends block

• So your friend pays 1/10th of £1000 = £100

• But it's shown on your friends service charge bill as 1/40th (or 2.5%) of £4000 = £100

brainiack

The lease states 1/535 for internal block costs and 1/850 for estate costs. No other figures mentioned in the lease.

The managing agent has none of the above figures, and has 7 random figures including 1/353, 1/297 etc for items such as other block costs, and company costs. None of these other figures make any sense or can be cross referenced to the lease.

There's been no variations entered into or changes to the building in over 10 years.

eddddy

So probably best to ask the managing agent for an explanation.

brainiack said:

There's been no variations entered into or changes to the building in over 10 years.

It would be variations/changes since the lease was first granted - not necessarily in the last 10 years.

(For example, if the lease was first granted 50 years ago, it could be variations/changes that happened within those 50 years.)

gm0

Allocation shares in the lease (size, flat v house for cost categories like garden only vs all) don't tell you anything about what is on the list of charges.  The lease will have top level obligations.  Unless leases are archaic or very broken. They will legally allow what needs to be done for overall structure and communal facilities to be recharged.

(Re)building Insurance. Fire safety. Lift engineers.  Gates. Gardening etc. Painting. Repairs. Replacements.  Agent costs.  Plumbers, Commmunal energy. Without listing it out in the lease in detail.  Your lease has internal and external.  Sites with a mix of houses and flats often have something similar.  Some things are obvious - gardening being outside.  Some cut across both - communal energy, managing agent fee - and need allocating across the two or sharing equally by unit (which the lease may be silent on).  Work invoices and metering/cabling may not match lease categories - approximate allocation again - on some reasonable argued from assumptions basis.

To check allocation you need the annual total fees. (site wide) - perhaps from accounts or by asking as already suggested.  And assess your individual bill to see if it approximately makes sense.  This many houses. This many flats (of various sizes).  The mix of internal v external after cross cutting smearing.  Adding up to 100%.  Is it about right

There is no direct read across from arbitrary "categories" in a service charge budget letter to the lease. Items on the list must (will most likely) fall under one of the general provisions and obligations described.  

The purpose of that service charge budget letter is to present the charges for next year and the change year to year so that leaseholders can understand inflation in different areas.  Energy Ukraine war - commercial contracts.  Insurance trends for flats.  Whatever is a hot topic on the site with those residents. Or the convention that MA uses.  Which often changes when the MA does.  For optional items it feeds into "better" or "cheaper" discussions and feedback on the popular will.  Usually both at once.  We want more.  It's too expensive.  Either way the % total rise is explained.

There is a spreadsheet somewhere with the current agent - but perhaps not originated by them (handed over from prior agents up the chain) which takes the planned total service budget and splits it by unit.  If formula correct to ALL the leases it will allocate all the costs somewhere and the split adds back up to 100% (As it must).  Correctly coded in the spreadsheet.  But of course - it's a spreadsheet so it may not be or stay correct forever. Finger trouble.  And some bills (invoices) don't split neatly across unit types or as with the agent fee may not specify shares for houses v flats. 

Even per unit or something else. It's not internal or external.  Nor the same effort split interior to exterior to lease admin etc. every year.  An approximation is used.


Real world - allocations have to be made upstream of splitting the bill - at least at the margins - accounting happening.  Expecting your reconciliation to be exact from the summary number and lease alone - is rather optimistic.

If you have flats and houses then there will be more to allocation than just gardens = houses.  Flats = everything equal or split by size/beds per lease rules.

There are loads of site specific things - lifts. gates. communal lighting, insurance, fire safety etc. etc.  And service and emergency call out contracts for some of them - which are recharged as part of the annual budget - in whatever proportion the lease specifies.  Some belong to flats only. Some to both.  Replacing lifts and some of the windows. 

It's often a 999 year journey.  A lot of stuff gets replaced by freehold MA recharging the lessees to fund it on that journey.  Sometimes the lessess have bought said freehold collectively and pay their own company to pay an agent to do the thing. Control.  And local democracy - yay.

Validating that the specific "my share" calculation is correct requires a more focused question and answer session. 

Where the lease is silent and crosscutting costs are allocated - you can start a war over the reasonableness of the assumptions used to do it.  And it likely can be argued back and forth.  And perhaps taken to tribunal.  All at much greater cost than the amounts being argued about.  For some people "it's the principle".  This is why you don't show *those* people the detail or the spreadsheet unless you absolutely have to.  As an RTM/Share of freehold director or MA.  As they will immediately waste everyone's time and money 10x over a princple about pence and general nitpicking. The typical behaviours and incentives to lesser transparency are very clear.  And most agents were not born yesterday.  Even if volunteer directors need a touch of naivety to get caught and influenced to take it on.

danco

Ask, and see if you get an acceptable response. 1/535 for internal costs could easily be transposed to 1/353 by a simple mistake, and just never have been noticed.

I had to spend some time getting my managing agent to correct a wrong percentage. They said it was just a rounding error due to two different calculations, but it struck me that there must have been some other cause. They did not contest that they  were charging me the wrong figure, but were just slow in refunding an amount alreadly paid.

brainiack

gm0 said:

Allocation shares in the lease (size, flat v house for cost categories like garden only vs all) don't tell you anything about what is on the list of charges.  The lease will have top level obligations.  Unless leases are archaic or very broken. They will legally allow what needs to be done for overall structure and communal facilities to be recharged.

(Re)building Insurance. Fire safety. Lift engineers.  Gates. Gardening etc. Painting. Repairs. Replacements.  Agent costs.  Plumbers, Commmunal energy. Without listing it out in the lease in detail.  Your lease has internal and external.  Sites with a mix of houses and flats often have something similar.  Some things are obvious - gardening being outside.  Some cut across both - communal energy, managing agent fee - and need allocating across the two or sharing equally by unit (which the lease may be silent on).  Work invoices and metering/cabling may not match lease categories - approximate allocation again - on some reasonable argued from assumptions basis.

To check allocation you need the annual total fees. (site wide) - perhaps from accounts or by asking as already suggested.  And assess your individual bill to see if it approximately makes sense.  This many houses. This many flats (of various sizes).  The mix of internal v external after cross cutting smearing.  Adding up to 100%.  Is it about right

There is no direct read across from arbitrary "categories" in a service charge budget letter to the lease. Items on the list must (will most likely) fall under one of the general provisions and obligations described.  

The purpose of that service charge budget letter is to present the charges for next year and the change year to year so that leaseholders can understand inflation in different areas.  Energy Ukraine war - commercial contracts.  Insurance trends for flats.  Whatever is a hot topic on the site with those residents. Or the convention that MA uses.  Which often changes when the MA does.  For optional items it feeds into "better" or "cheaper" discussions and feedback on the popular will.  Usually both at once.  We want more.  It's too expensive.  Either way the % total rise is explained.

There is a spreadsheet somewhere with the current agent - but perhaps not originated by them (handed over from prior agents up the chain) which takes the planned total service budget and splits it by unit.  If formula correct to ALL the leases it will allocate all the costs somewhere and the split adds back up to 100% (As it must).  Correctly coded in the spreadsheet.  But of course - it's a spreadsheet so it may not be or stay correct forever. Finger trouble.  And some bills (invoices) don't split neatly across unit types or as with the agent fee may not specify shares for houses v flats. 

Even per unit or something else. It's not internal or external.  Nor the same effort split interior to exterior to lease admin etc. every year.  An approximation is used.


Real world - allocations have to be made upstream of splitting the bill - at least at the margins - accounting happening.  Expecting your reconciliation to be exact from the summary number and lease alone - is rather optimistic.

If you have flats and houses then there will be more to allocation than just gardens = houses.  Flats = everything equal or split by size/beds per lease rules.

There are loads of site specific things - lifts. gates. communal lighting, insurance, fire safety etc. etc.  And service and emergency call out contracts for some of them - which are recharged as part of the annual budget - in whatever proportion the lease specifies.  Some belong to flats only. Some to both.  Replacing lifts and some of the windows. 

It's often a 999 year journey.  A lot of stuff gets replaced by freehold MA recharging the lessees to fund it on that journey.  Sometimes the lessess have bought said freehold collectively and pay their own company to pay an agent to do the thing. Control.  And local democracy - yay.

Validating that the specific "my share" calculation is correct requires a more focused question and answer session. 

Where the lease is silent and crosscutting costs are allocated - you can start a war over the reasonableness of the assumptions used to do it.  And it likely can be argued back and forth.  And perhaps taken to tribunal.  All at much greater cost than the amounts being argued about.  For some people "it's the principle".  This is why you don't show *those* people the detail or the spreadsheet unless you absolutely have to.  As an RTM/Share of freehold director or MA.  As they will immediately waste everyone's time and money 10x over a princple about pence and general nitpicking. The typical behaviours and incentives to lesser transparency are very clear.  And most agents were not born yesterday.  Even if volunteer directors need a touch of naivety to get caught and influenced to take it on.

We have the total budget for the last 15 years, since the lease was granted and there are 2 proportions in the lease.

All of the service charges received since state a table of between 4-7 additional layers or broken down items such as 'other internal block costs' no idea what this is and why it is separate from just 'block costs' as stated in the lease, and the figures as the proportion seem totally ambiguous and do not represent the lease.

In one managing agent letter they stated the 'addition of cost schedules' and added these onto the service charge demand. Can this legally be done? If so, its a mockery of the entire system because whats to stop the managing agent or whoever deciding next year we are going to build a swimming pool and you lot can pay for it as just another thing added to your service charges?!

It is also concerning as my friend (from discussion with neighbours and a community group) has begun to wonder why their service charge appears one of the highest in the estate and the block, with the only real difference (all are 1 or 2 bed flats) being a balcony which not all properties have.

eddddy

brainiack said:

In one managing agent letter they stated the 'addition of cost schedules' and added these onto the service charge demand. Can this legally be done? If so, its a mockery of the entire system because whats to stop the managing agent or whoever deciding next year we are going to build a swimming pool and you lot can pay for it as just another thing added to your service charges?!

You probably need to take a step back, to understand how leasehold service charges work (or are supposed to work).

Assuming it's a typical 2 party lease -

• the lease will state things that the freeholder is required to do.

• the lease will state that the freeholder can recover the costs of doing those 'required things' from the leaseholders That's what the service charge is.

(The freeholder has hired a managing agent to do things on their behalf.)

• The 'required things' mentioned in the lease won't include building a swimming pool

• Typically, the 'required things' will be insuring the building; and maintaining/repairing the building and grounds

• Presumably, 'addition of cost schedules' is a necessary task for  maintaining/repairing the building.

If you believe that 'addition of cost schedules' is not a necessary task for  maintaining/repairing the building, you can challenge it at a tribunal.

In general, the Managing Agent can also add a charge for the admin work that they do.

DullGreyGuy

brainiack said:

The lease states 1/535 for internal block costs and 1/850 for estate costs. No other figures mentioned in the lease.

The managing agent has none of the above figures, and has 7 random figures including 1/353, 1/297 etc for items such as other block costs, and company costs. None of these other figures make any sense or can be cross referenced to the lease.

There's been no variations entered into or changes to the building in over 10 years.

Whats the setup of the development?

Is it two blocks of flats? 1 block of flats and a load of houses? Multiple blocks of flats and houses?

Does it say how those numbers were arrived at?

I know in our current place it says each unit will pay an equal share ie 1/34th whereas the previous flat it was ratioed by internal floor space in each unit. Personally dont know if the logic or the number takes precedence... ie if they added an extension to the building and another 3 units does it automatically become 1/37th because the logic is what's enshrined and the number is just illustrative as it was at the time the lease was drawn up. 

gm0

Same leases, same property type and unit design should be paying the same amounts in nearly all leases and setups. 

Anything else does suggest there is a billing error to formally complain about.

A suggestion

If there are other flats of the same pattern - size, design, balconies whatever.  Identical blocks, different floors.

Then the cup of tea / cake discussion about the common enemy useless agent with the other neighbour can be used to wheedle what they are asked to pay ideally a trip to the file and several years worth of data points.

If it's the same.  Mitigates suspicion quite a bit on allocation.

If it's not then there is something else you don't yet understand - or there is an error in the allocation mechanism - or indeed more than one

Leading ultimately - worst case scenario - to a full audit and reconciliation - collect all leases.  Validate spreadsheet or other system.  Recalculate prior years so far as data allows.  Identify cumulative debits and credits (if some have overpaid it is more than likely others have underpaid due to the same error).  Resolve issues on debit or credit interest - perhaps none either way is simplest. But leases may not be silent on "arrears" so watch out.

For obvious reasons the agent would rather not reach the trigger for doing this kind of site wide exercise that upsets almost everybody - if they can satisfy you some other way without obvious audit trailed duplicity. 

Fixing your isolated problem and just presenting the overall cashflow as it now is would be a common approach to avoid opening a full historic Pandora's box. 

A historic true up over many years - will not go well as a conversation for recent purchasers being presented with a decade historic bill that didn't appear in the conveyancing management pack. Because the error was not detected then.  Size dependent - some will refuse to pay (even if legally liable - sort of).  An impasse may then develop where underpayments don't get repaid nor chased to the point of property charge.  And the agent doesn't get sued for negligence (just) perhaps because they aren't the cause albeit now have to fix it.  Because it's all a bit hard and the cost to play makes the game too uncertain.

The site is then worse off by any credits issued to other leaseholders who have erroneously overpaid. 

This sort of dispute can create a mess that could keep lawyers busy to the tune of many thousands in legal fees. 

To be avoided if the amounts under dispute don't justify it.