Service charge arrears - who is liable?

[Finallyspringishere]

We are selling our leasehold flat and there is set to be an arrears on the annual accounts. The reason for the arrears is that one of the other flats owes several thousand pounds in service charge arrears.
The arrears date back several years and for some reason the managing agent and or freeholders are not taking any legal action against the leaseholder.

Now that we are selling up the buyers solicitor is expecting us to put a large sum of money aside to cover our flats share of the shortfall. Apparently the managing agents have suggested this! We are furious as we don't see why we should be expected to pay the other leaseholders debts.

Can they hold us liable for this?

That's two questions.

The debt travels with the lease, so yes, you would become liable for any service charges which are applied to that property at the point when you own it. Usually when accounts aren't complete or similar, the solicitors will hold a retention against expenditure dating back to when the previous owners were in situ. At the point at which the accounts are completed for the year after they sold, the retention is released.

Whether that debt is chargeable however is a completely different issue. From what you say, it sounds like they've done the accounts on a cash balance basis rather than proper accounting balance.

There should be two aspects of the accounts - the income and expenditure reports, and the balance sheet.

The I&E will show money invoiced vs monies spent. If the money expended exceeds the invoiced amount then there will be a deficit on that financial year, and that will be charged back to the flats according to their individual apportionments. That is allowed, and the right way to do it.

On the balance sheet, you will have debtors and creditors. Under this section, you will be able to see if there are large arrears of service charges (usually called 'monies owed by tenants' or similar). This shouldn't affect your service charge, it just shows that someone isn't paying their service charges. However, what it can result in is a cash flow problem for the block - if there are massive arrears spanning years, then you may be short on cash as it'll have been running short year on year, and this can affect other services such as cleaning and gardening (or maintenance works) - the managing agent shouldn't be instructing any works like that if there's no cash at bank as it would be fraudulent.

Its not the previous owner of our flat that owes money it's another flat in the block.

They owe several thousand and this is why there is a shortfall in the accounts. There haven't been any overspends over what was budgeted for. However, with one flat not paying up there is now a debt. This is what the managing agent is trying to get us to pay towards.

We have paid our service charges up to date.

Sorry, I answered the first aspect of the question as if you were buying rather than selling. As sellers it's perfectly normal to ask you to put money on a retention against a future deficit relating to the period you owned it.

However it doesn't sound like those accounts have been drawn up properly. Were they done in house or independently? The figure at the top of your income and expenditure report, under income - does it match the budget total? It should, give or take a couple of £.

I don't have the accounts. Our managing agents are useless. The 2014 accounts are still not available. We can't really afford the retention they are requesting and especially since we know that it could be late 2016 before the 2015 accounts are prepared.

The figures do match on the budget we were given.

Which period do these accounts relate to? When's your year end?

Year end is September.
I presume they expect a shortfall from 2014 which will carry into this year.
This is from the managing agent who informed me they won't be carrying out required maintenance work due to the other flats arrears.

The 2013 accounts suggest a reserve of £3400, they now say there is a £3000 debt. No work has been carried out to my knowledge and there are many outstanding repairs.

Yes - that will be due to the cash flow issue caused by the non-paying flat.

Have you been issued with a Section 20b notice?

No we haven't.

Are you me?
We are also selling a leasehold flat and have been asked to put aside something against a shortfall for the year. It isn't a huge sum compared to the cost of the flat or the annual service charge so we've just said OK.
The managing agents are equally useless though, AFAIK, do little work etc.

However no one flat owes money to my knowledge. Perhaps you know something about me that I don't know??!

I would be asking the managing agents why they haven't taken legal action against the flat not paying?

Do all the flat owner agree on priorities to spend money on and likewise would you not be required to agree to pursue or not pursue the other flat for the service charge not paid ?

In your lease, does it state the consequences of not paying the service charge - ie can the freeholder demand payment?

Can the managing agents afford to take legal action against the offending flat, I.e will the service charge bear it? If there's no money there then there's nothing for court costs or similar. Taking it to county court to get a judgement is relatively cheap (and is usually enough to get the mortgage company to pay it) but if the owners defend the action it will be referred to FTT for arbitration and that means a lot more in cost to the service charge.

How can that be right that people don't pay their service charge and then those who do pay theirs have to also pay the other people's?

So is it two issues:

• actual expenditure in the 2014 year exceeded the estimated budget, agents have advised that there will be a balancing charge billed out once the accounts are finalised.
• one of the other leaseholders is in arrears, no recovery action taken by the managing agent (who will be acting on the freeholder's instructions btw, so might not be them being crap), and they are asking other leaseholders to pay that flat's share?

If so, first issue is par for the course. There are particulars to be checked such as if a s20b notice has been served as advised above, but generally this sounds feasible.

Second issue is utter crap. The only situations I can think of where you'd be asked to pay another leaseholder's service charges are:

• if the freeholder has tried and failed to recover the arrears via the courts or property tribunal and has a clause in the leases allowing them to demand the irrecoverable sums from other leaseholders
• if they are actually just asking other leaseholders to loan the service charge the funds needed to carry out major works ASAP, with the intention of taking arrears action against the debtor leaseholder in tandem. Again, they could only force this if the lease clauses allow.

I can't see anything stating what your own solicitor's advice on all this is, have they given any / read your lease for you? Something sounds like it's been lost in translation regarding you being asked to fund another flat's debt.

Oof, sorry, that post was longer than expected!

Until we see the accounts we aren't sure what they are referring to.
They haven't issued any s20 notices and there is a backlog of repairs that need to be done.

Something else has occurred to me. The managing agent did carry out roof repairs that they told us were covered by the buildings insurance.
If they haven't claimed on the insurance for this can they charge us? No section 20 was issued.

If they did the work and didn't issue a section 20 then your liability is limited to £250 payable by the flat with the largest apportionment (if yours isn't the largest then your liability is lower than that). Even if the money is in reserves, they can't spend over the s20 limit.

The S20b relates to the accounts. If they haven't issued one indicating that there may be a deficit, they're not allowed to recover any sums relating to expenditure from over 18 months ago. So depending on how long it takes them to prepare the accounts, you may be able to challenge the deficit payment either way.

Practically speaking, you will either need to resolve this before completion or set the money aside (which you may then get back on resolution), surely?

I thought all flats would have the same apportionment?

The accounts are a real mess. I don't understand how they went from having £3400 reserves to now being in deficit. The roof repairs are all they have carried out.

I hope this isn't going to delay our completion. But we aren't prepared to leave the sum they have requested because they are so incompetent that it could be years before we see it back. If we legitimately owed it then fine, but they haven't issued any notices so we have no idea where our money has gone.

It may delay your sale if you're not prepared to provide a retention - it leaves your purchaser at risk of having a liability for a period when they didn't live there. If I were buying a flat I wouldn't proceed if the precious owner wasn't prepared to put up a retention.

It depends from block to block what the apportionments are. When I set them up I usually use sq footage to work it out but it can be done equal split or by number of bedrooms, etc.

Finally

But from the perspective of your buyers, they don't want that potential liability, which came about before they owned the flat, to fall on them.

I agree with you that you shouldn't be liable, so the only way forward is to sort it out before completion, leave the money or lose these buyers and re market the flat when it's resolved.

X post.

We won't lose the buyers they aren't bothered at all by all this. We are just annoyed by the crap managing agents.

In what way aren't they bothered? They can instruct their solicitor that they are prepared to take the risk against her/his advice, if they like.