What is a 'reasonable sum' when paying service charges on account?
Many people who own a flat or property on a long lease will pay a service charge towards the upkeep of the common parts such as driveways, gardens, the exterior of the building, buildings insurance, etc. The amount of the service charge is often a bone of contention between the flat owners and the landlord or managing agent.
It is sensible accounting for the landlord or managing agent to ask the flat owners to pay service charge sums on account to cover future costs. Long leaseholders are protected by the Landlord and Tenant Act 1985 which provides that if payment is being made on account of future costs, then any such sum must be a ‘reasonable sum’. These amounts will then be adjusted up or down at the end of the accounting year once the actual costs are known.
A recent case considered what a ‘reasonable sum’ means.
A building that had commercial and residential parts experienced problems with water penetration and the cost of the repairs was about £300,000. The landlord demanded the full sum from all leaseholders on account of these costs. The leaseholders refused to pay asserting that the building had the protection of National House Building Council (NHBC) insurance. On this basis the leaseholders argued that demanding the full £300,000 was not a ‘reasonable sum’.
The Upper Tribunal held in favour of the leaseholders. The Tribunal took the view that although the NHBC had not formally agreed to meet the cost of the repairs, it was highly likely to do so, thus a demand for the full cost did not meet the ‘reasonable sum’ criteria laid down in the Landlord and Tenant Act 1985. The leaseholders were only liable to pay about £11,000 in advance.
The landlord should have taken the likely insurance payment into account when deciding what amounted to a ‘reasonable sum’.
If you are a landlord facing such a decision or a leaseholder having received a high demand for service charge on account, you may wish to take specialist advice.
To discuss this or any other landlord and tenant issue, contact us.