Leaseholders and service charge on different sized flats?

by Readers Question

9:29 AM, 16th November 2020
About 2 weeks ago

Leaseholders and service charge on different sized flats?

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Leaseholders and service charge on different sized flats?

The building split into 15 different sized flats is managed by a board of directors from the leaseholders. It has worked reasonably well, but now that the building is in need of updating and also some hefty repairs (roof) the directors have decided that they will change the way that the service charge is paid.

It was on percentage, and they want to make it an equal split – obviously there have been objections so backed down on that, and now want the service charge on the original percentages and the repair fund to be split equally as there is a bit of a weird thought that all flats use the building equally – they are from 1 beds to 3 bed penthouses (2 of those).

Major works have already been done to the roof with no S20 (if it’s self-managed do they need to issue this?) and no tender process, it was the people who usually do the repairs instructed.

4 directors from 3 different flats are currently making these decisions, one director has disagreed so the letters are going out without his name on it.

A loan was taken out by the directors in the name of the building to fund some works last year.

I can’t help but thinking that this is not quite right but finding it hard to word.

Elizabeth


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Ron H-W

10:59 AM, 16th November 2020
About 2 weeks ago

S20 is needed for a work or a series of linked works (e.g. exterior decorating £3K plus scaffolding £3K) that is likely to exceed £4k in total, NO MATTER WHO is arranging it, whether a separate freeholder or a lessees' RMC.
The S20 process must give each lessee the opportunity to suggest somebody to put in a quote.

Things like change in percentage OUGHT to be formalised by a well-documented (minuted, AND minutes distributed) general meeting of the lessees, and in my view this then needs to be followed up by an "order for the better management" in the manner that most such leases allow.
(I've been there: The 10 flats in a large converted house were supposed to contribut according to Rateable Value, since 1987. But, from before 2002, it had been a straight 10% each. By 2004, when I bought the smallest flat, the RVs were becoming difficult to ascertain. So I suggested we must either work according to the lease, which means that I'd be contributing 8.5% and the others 10.1% to 10.4%, or formalise the 10%. I said I was willing either way, because of the difficulty of validating the R.V. figures - which in theory might change from time to time. I think you can guess what the others chose!)

"They ... now want the service charge on the original percentages" - Well, that's in accordance with the leases.
But I don't understand the next bit: "and the repair fund to be split equally" - I cannot get my head around this distinction between the (usually monthly) service charges, and the "repair fund", which I presume is the money held as a result of collecting the service charges - and must be held in trust for the lessees. It is very unusual for this to be "split" (i.e. divided up and returned?), especially at a time when there isn't an excessive sutplus!

Also, I wouldn't be happy about the loan and the circumstances.
In another building, we funded major works by requesting those lessees who felt able to, to pay the next 6 months' service charges in advance, to improve the cash flow.

It would seem that the lessee of a small flat can take this matter to the First-Tier Tribunal (formerly Leasehold Valuation Tribunal).
The FTT might also be involved if a lessee is unhappy about the loan (and interest on it!) or other details & terms of the loan, unless the loan were agreed or ratified at a general meeting of the lessees.

My usual disclaimer: "IANAL"

Happy Landlord

11:04 AM, 16th November 2020
About 2 weeks ago

Hi You have to follow the lease - if anyone wants to alter the lease everyone who is party to the lease has to agree - very unlikely as there are almost always winners and loosers.

Ron H-W

11:22 AM, 16th November 2020
About 2 weeks ago

On re-reading it: "4 directors from 3 different flats" - I am VERY surprised that one flat should contribute 2 directors. Although probably not actually against the "mem and arts" of the company, it is very unfair that such power be concentrated in one flat!

Harlequin Garden

11:54 AM, 16th November 2020
About 2 weeks ago

Reply to the comment left by Ron H-W at 16/11/2020 - 10:59
Thanks for this detailed comment, very much appreciated - the comment re 'services charges on original percentages' - because there was an objection by one director who is no longer put on any letters to the other leaseholders, they have conceded for the moment to keep to the percentage regular service charge (for example a larger flat will be £97 a month better off and a small one will pay around £85 more if it was split equally) all directors voting for this (including the two in the one flat) are in larger units. The money collected for repairs is proposed to be split equally between all flats which I can't see as being fair as they vary from a 1 bed to a 3 bed.

Ron H-W

12:20 PM, 16th November 2020
About 2 weeks ago

OK, I now understand that by "splitting" you don't mean splitting up the kitty as if to distribute (which might anyway be against the M&A of the company!), but splitting the burden of contribution.
But I still can't tune in to the difference between the "service charge" (on the original percentages) and the "repair fund" (with equal contributions) - unless the roof repairs are being met by a sort of "surcharge". Using a different percentage would, though, be on very dangerous ground!
WHY am I not surprised to learn that all 4 directors "are in larger units"?
I think one can expect that somebody will involve the FTT, unless none those in the smaller flats have heard of it!

Harlequin Garden

13:07 PM, 16th November 2020
About 2 weeks ago

Reply to the comment left by Ron H-W at 16/11/2020 - 12:20
Yes, the roof repairs are being split equally and billed to the leaseholders equally by the directors of the management company - and they intend to carry on with this method for the rest of the updating/major works. There is a threat that they could in time (try to) change the service charge to an equal share (for unequal units).

I have to say that I'm quite amazed that a bunch of self servicing leaseholders can get away with this, surely it is not in the spirit of the right to manage if their aim is to get others to pay part of their share. The percentages are set out in the leases.

Ron H-W

14:05 PM, 16th November 2020
About 2 weeks ago

If the owners/lessees of the smaller flats do nothing, then the directors WILL get away with it, 'cos there'll be nothing to stop them!
The owners of the smaller flats will have to get up off their @Я$€Ƨ and get organised - which they probably won't do without somebody willing to take the trouble to explain things to them and push them into raising their voices - "Stand up and be counted!"
If it comes to it, the directors could end up being personally liable to repay the additional sums ...
It might be useful if at least one of you is friends with a lawyer who can maybe give a snippet of free advice, or perhaps Citizens' Advice Bureau can help?
Another idea might be for one of you to try to discuss the matter with the dissenting director? (might learn something useful)

silversurfer2017

14:50 PM, 16th November 2020
About 2 weeks ago

INHO the fairest way is to apportion service charges is on a square footage basis. This is how it is calculated on one of our flats in a development.

Ron H-W

15:13 PM, 16th November 2020
About 2 weeks ago

Reply to the comment left by at 16/11/2020 - 14:50
"a square footage basis" - Well it is ONE way, but NONE of these would be strictly in proportion to the area, for varying flats in the same block: property value (sale or purchase price), monthly rent (or valuation thereof), Rateable Value, and Council Tax.
And it gets even more complex, to decide whether gross or net internal or external area.
With the larger flats (in the block under discussion) using "count equally" as their starting point for negotiations, maybe those in the smaller flats should use "per square metre" (let's be up-to-date!) as their starting point?
I can't see them achieving that, but ...

Graham Bowcock

16:48 PM, 16th November 2020
About 2 weeks ago

Firstly, you must see what the lease says. That is what will guide the parties in the first instance to the correct apportionment of costs.
If the lease is silent, however, then you do need to find a way which is equitable; unfortunately this may prove difficult. No doubt everyone will have a different view on the best way forward. You do say that the directors want to "change" the way the assessment is made, which suggests that there was some method already in place. If there has been custom and practice (which is what most people will have bought into) then a unilateral change could be reasonably resisted. Of course, they may argue on this being an unusual scenario and they need to consider fairness as a one-off - this isn't like paying to have a few lightbulbs changed.
A square footage rate may well turn out to be the most equitable.

Work of this nature should not be undertaken without a proper tender process - yes s20 does apply.

I would be worried about the loan. Does the directors' remit given the authority to borrow in the name of the company? Is it secured? Was this agreed with members/shareholders? There are so many questions. I have never seen a managed block giving such authority.

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