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6 Federation of Private Residents’ Associations Newsletter Ask the FPRA continued from page four A

Two years have now passed and we have recently received a Section 20 notice specifying lift work that, on the face of it, looks like routine maintenance. We have asked the managing agents how much extra service charges have been collected but as yet, they have not given us a figure. We estimate that the amount must now be in excess of the original £20,000 quoted. The most recent service charge demand still includes the extra amount and we are concerned that the managing agents have been, and are still, using delaying tactics as an excuse to keep collecting the increased service charges. Are the managing agents within their rights? Should this extra amount they are collecting be kept separate from our service charges in a sinking fund? Should we be getting interest on the amount held? FPRA Hon Consultant Roger Hardwick replies: Firstly, your member should consider whether the amount that is being requested is strictly recoverable under the terms of their lease; and whether the manner or mechanism for recovery in the lease is being followed. Often, landlords and agents will try to recover “one off” charges to cover anticipated major works, when the lease does not allow them to do anything of the sort (see Southwark L.B. v Woelke). Without sight of the lease (or the demands for payment), I cannot comment any further on contractual recoverability. Most modern leases work in the following way: 1. The landlord or RMC produces a budget/estimate, and requests an amount “on account” of anticipated expenditure throughout the course of the year. Those “on account” payments might be payable monthly, quarterly, bi-yearly or even yearly. The lease will specify the correct payment dates. 2. At some point after the financial year end (which should also be specified in the lease) the landlord or RMC will be required to produce end of year service charge accounts (usually within a reasonable period of time), showing actual expenditure incurred by the landlord or RMC during that year. 3. The lessee will then either make a balancing payment (if actual expenditure exceeds anticipated expenditure), or a credit will be applied to his/her/their account (if on account payments exceed actual expenditure).

4. Often, the lease will allow the landlord or RMC to set aside money for future expenditure (often major works, which are carried out every 5 or 10 years). This is known as a reserve or sink fund.

Leaseholders have the right to challenge the reasonableness of budgets or anticipated costs as much as they have the right to challenge the reasonableness of costs that have actually been incurred (s.19(2), Landlord & Tenant Act 1985). If the lift repairs were urgent, I would have expected those repairs to have been carried out. If they were not carried out, why not, and what happened to the money that has been collected for those repairs? Was it reasonable to ask for those monies on account? Were they really intended for lift repairs; and if so, does the agent have expert evidence to back that

up? Do they have a planned preventative maintenance programme? Whether or not the reserve fund should be kept separate will depend on the terms of the lease. All service charge monies are held on trust by virtue of s.42 of the Landlord & Tenant Act 1987, and it is considered best practice under the RICS Service Charge Residential Management Code (2nd edition) to keep service charge monies separate, but the requirement to keep funds in a separate designated account (s.42A, 1987 Act) is not yet in force.

It is usually the case that the lease will specify what the reserve fund may be used for. Any unauthorised use (e.g. meeting a temporary shortfall in funds, or covering a shortfall due to unpaid arrears) would be likely to amount to a breach of trust. Although s.42 (pending implementation of s.42A) does not provide expressly that service charge monies be invested, as a matter of the general law of trusts a trustee ought to invest the sums.

Furthermore, s.42(5) provides for such sums to be invested in any manner prescribed by regulations made by the Secretary of State. The only regulations made pursuant to that sub- section to date are the Service Charge Contributions (Authorised Investments) Order 1988, which provides that such sums may be:

a) Deposited at interest with the Bank of England or b) Deposited in the UK at interest with various other persons and institutions.

From a practical point of view, it is worth considering Part 4 of the RICS Service Charge Residential Management Code (second edition) which gives useful guidance for landlords and managing agents in respect of how to account when holding tenants’ money.


Holiday Chalets I am chairman of the residents’ association. We are owners of holiday chalets – these are detached brick built properties on a holiday park – occupancy is eight months and they are now classed as “dwellings”. The leases have some 54-57 years left and ground rent is £25 pa. There are 44 chalets on site, four are owned by the freeholder and our members account for 38 chalets. Do we have the right to purchase the lease? The current value is approximately £90,000 – is it possible very broadly to estimate a purchase price of each lease? Would there be right of access problems should we buy our leases? Who would be responsible for the upkeep of communal areas? What serious pitfalls would you envisage? FPRA Hon Consultant Andrew Pridell replies: Any acquisition of the freeholds would come under the provisions of the 1967 Leasehold Reform Act. To acquire the freehold of a dwelling it has to be a “house” and surprisingly there have been a large number of cases including some which have gone all the way up to the High Court to decide what is a house. These have been concerned mainly with mixed use

Issue No. 109 Summer 2014

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