Leasehold flat with unfair service charge distribution

[aidoo326]

I own a long leasehold flat in a building containing 15 flats. My lease (and the lease of 13 other flat owners) states that we are each responsible for 7.1% of the service charge costs. We queried with our managing agent whether this made our leases defective since 15 x 7.1% would come to 106.5% and we are aware that if the total service charges collected at a development is greater than or less than 100%, this renders the leases defective. To our surprise, our managing agent informed us that one flat owner had noticed this anomaly a few years ago and had approached the freeholder to agree a lease variation which reduced his own service charge percentage to 0.6% - thereby reducing the total service charge collection to 100%.

 

The annual service charges for our building are roughly 25K per annum. This means that 14 of us are having to pay £1775.00 each and one (sneaky) flat owner only pays £150.00!

 

My questions are these:

1. Is it legal for one flat owner’s service charge percentage to be so much lower than the rest of the flat owners?
   
2. Should the freeholder have re-distributed the service charge percentages evenly so all 15 flats would pay the same service charge percentage?
   

[unclebulgaria67]

I own a long leasehold flat in a building containing 15 flats. My lease (and the lease of 13 other flat owners) states that we are each responsible for 7.1% of the service charge costs. We queried with our managing agent whether this made our leases defective since 15 x 7.1% would come to 106.5% and we are aware that if the total service charges collected at a development is greater than or less than 100%, this renders the leases defective. To our surprise, our managing agent informed us that one flat owner had noticed this anomaly a few years ago and had approached the freeholder to agree a lease variation which reduced his own service charge percentage to 0.6% - thereby reducing the total service charge collection to 100%.

 

The annual service charges for our building are roughly 25K per annum. This means that 14 of us are having to pay £1775.00 each and one (sneaky) flat owner only pays £150.00!

 

My questions are these:

1. Is it legal for one flat owner’s service charge percentage to be so much lower than the rest of the flat owners?
   
2. Should the freeholder have re-distributed the service charge percentages evenly so all 15 flats would pay the same service charge percentage?
   

 

I cannot see that it is right, as it is unfair. They should have re-distributed the share amounts so everyone was in the same position, if all flats are equal in size. If the flats are different in size, then the argument could be made to base contribution partly on flat size.

 

If you are correct in what you have found out, then i think what you could do is insist that the managing agent writes to all leaseholders explaining what has happened in regard to the service charge and what they are intending to do, to rectify the situation. Advise them that if they don't write to all leaseholders seeking to resolve this unequal position, that you will write to all leaseholders telling them about it and suggesting that they discuss actions against the freeholder.

 

Legally, i am not sure, as it might depend on what the lease agreement says about service charge split and responsibilities of different parties. I should imagine that there is a clause allowing the service charge arrangement to be altered, provided notice is given.

[aidoo326]

Legally, i am not sure, as it might depend on what the lease agreement says about service charge split and responsibilities of different parties. I should imagine that there is a clause allowing the service charge arrangement to be altered, provided notice is given.

 

In our leases our service charge percentages are stated as a fixed amount - e.g. 7.1%.

 

Yes, there is a clause allowing the service charge distribution to be altered (if it is considered to be in the interests of good estate management). The lease clearly states though that the decision to do the alteration rests with the management company - which in this case means the freeholder - since the managing agent is instructed by him.

 

Is there some legal process by which the freeholder could be forced to 'level the playing field' and make all 15 flats pay the same service charge percentage? The flats are more or less the same size, after all.

[unclebulgaria67]

Don't know what court claim you could bring.

 

When all leaseholders were contributing towards a 106.5% overall service charge, does this mean that collectively you were being overcharged ?

 

Can you claim back a relevant sum related to being overcharged ?

 

What did this management company do with the 6.5% extra that they were collecting ?

 

I wonder whether you are entitled to ask the management company for a copy of the accounts related to their management of these flats.

[aidoo326]

Don't know what court claim you could bring.

 

When all leaseholders were contributing towards a 106.5% overall service charge, does this mean that collectively you were being overcharged ?

 

I asked the managing agent the very same question and their response was that (at the freeholder's suggestion) they applied common sense and rounded down the service charge percentages for all 15 flats - so instead of 7.1% each, they each paid an equal share of the total cost - e.g 6.6666%. This way they managed to only ever collect only 100% of the service charge costs. This was all done behind the scenes though and none of us were sent notices of the rounding down. When the sneaky flat holder came up with his suggestion to the landlord of varying his own service charge percentage to 0.6% - the landlord readily accepted and the managing agent reverted to charging the remaining 14x flat owners (myself included) the 7.1% stated in the leases.

[unclebulgaria67]

Suggest that the management company are hiding something and that the sneaky leaseholder has caught them out. Why would they agree such a sweet deal, if this is not the case ?

 

There must be accounting rules related to the management companies handling of these service charges and perhaps they have breach rules. Were they collecting more than is legally due ?

[aidoo326]

Were they collecting more than is legally due ?

The managing agent swears blind that he has never collected any more than 100% of the service charge costs and he challenged me to check my historic billing to prove this. I did so and I must admit that I have never previously been charged more than 6.6666% of the total service charge. It is only in the last couple of years (since the sneaky lease variation with one flat owner) that my contribution has reverted to 7.1% of the total service charge - as stated in my lease. The difference between 7.1% and 6.6666% may not sound very significant but when you consider the fact that we are paying £1775 per annum and one leaseholder is getting away with only paying £150 per annum - then that is VERY significant.

 

The managing agent tells me that this is all above board and that there is nothing we can do about the unequal service charge distribution. The managing agent went as far as to state that so long as the total service charge percentages do not equal more than or less than 100% the First Tier Tribunal has no jurisdiction to intervene. This can't be true, can it?

[unclebulgaria67]

Something smelly going on here. One leaseholder given a discount, funded by the other 14 leaseholders !

 

Sounds legally dodgy, but i don't know enough about the law that applies.

 

I am sure i have read of management companies involved in questionable behaviours before and it would not surprise me if the leaseholder got the discount because of information they found out.

 

Hopefully others who know more about these issues will comment later.

[andydd]

The lease is the binding contract and in theory your solicitor/conveyancer should of spotted this before you purchased it and asked for a deed of variation otherwise youd walk away (this happened to me and some minor changes/corrections were made to the lease before we purchased).

 

I think in theory you have to pay the amount stated in the lease as does every other LH BUT the extra amount once collected should then stay in the service charge account and act a bit like a reserve fund so that next years amount would be less.

 

There is ability in law to apply to FTT to fix defective leases (without need for both isdes to agree to deed of variation), this normally involves a FH making application for the opposite reason, i.e that the total service charge doesnt add upto 100%.

[aidoo326]

The lease is the binding contract and in theory your solicitor/conveyancer should of spotted this before you purchased it and asked for a deed of variation otherwise youd walk away (this happened to me and some minor changes/corrections were made to the lease before we purchased).

At the time I bought the flat the leases must have been defective. During my conveyancing neither my solicitor nor I thought to delve into the remaining 14x leases to check whether the service charge percentages overall added up to more than or less than 100% though. It was only after having owned the flat for a handful of years (and speaking with the neighbours) that I realised that all the flat owners have exactly the same service charge percentage that I have (7.1%) - the jammy beggar with the 0.6% service charge contribution being the exception ....

 

I think in theory you have to pay the amount stated in the lease as does every other LH BUT the extra amount once collected should then stay in the service charge account and act a bit like a reserve fund so that next years amount would be less.

Is collecting more than 100% legal then? If so, then to have the surplus amount going into some kind of reserve fund that all the flat owners could benefit from would be far preferable to the current situation. It surely cannot be fair or legal for just one flat owner to be given preferential treatment over the other flat owners?

 

There is ability in law to apply to FTT to fix defective leases (without need for both isdes to agree to deed of variation)

The leases are no longer defective though. The ship has sailed ....

[unclebulgaria67]

Have you actually seen the lease with the 0.6% service charge ? Or spoken with the neighbour concerned to confirm the amount they are paying ?

 

If not, i wonder whether the management company have not given you factual information. If so, what are they doing with the extra money.

[aidoo326]

Have you actually seen the lease with the 0.6% service charge ? Or spoken with the neighbour concerned to confirm the amount they are paying ?

No, is the short answer but I did download the flat owner's title register from Land Registry and it states that there was deed of variation entered on his title in early 2015 - which appears to tie in with the time-frame that the managing agent gave for the change occurring.

[unclebulgaria67]

No, is the short answer but I did download the flat owner's title register from Land Registry and it states that there was deed of variation entered on his title in early 2015 - which appears to tie in with the time-frame that the managing agent gave for the change occurring.

 

So you have no actual proof of this reduced service charge and this change to land registry could relate to something else.

 

The reason i am suspicious, is that i cannot see a management company thinking it was right for 1 leaseholder out of 15 to pay a much reduced service charge. Unless they were related to the freeholder or there was some issue.

 

The amount of this reduced service charge might not cover their share of the buildings insurance, let alone any contribution towards the upkeep of the flats and grounds.

 

I think i would be asking for a full disclosure of the accounts for the block of flats and details of this 2015 land registry change.

[aidoo326]

So you have no actual proof of this reduced service charge and this change to land registry could relate to something else.

 

The reason i am suspicious, is that i cannot see a management company thinking it was right for 1 leaseholder out of 15 to pay a much reduced service charge. Unless they were related to the freeholder or there was some issue.

 

The amount of this reduced service charge might not cover their share of the buildings insurance, let alone any contribution towards the upkeep of the flats and grounds.

 

I think i would be asking for a full disclosure of the accounts for the block of flats and details of this 2015 land registry change.

 

I already have the accounts for the development. The accounts however do not go into detail about how much each individual leaseholder pays. They just give overall totals for each heading of service charge expense. I will see what more I can unearth over the next few days and attempt to get a copy of the jammy beggar's lease. In the meantime, I would appreciate some advice on whether there is anything that can be done to force the freeholder into levelling the playing field if it turns out to be true that one leaseholder's service charge contribution is only 0.6% when the rest of us are contributing 7.1%

[aidoo326]

So you have no actual proof of this reduced service charge and this change to land registry could relate to something else.

 

The reason i am suspicious, is that i cannot see a management company thinking it was right for 1 leaseholder out of 15 to pay a much reduced service charge. Unless they were related to the freeholder or there was some issue..

 

I have now had a chance to read the jammy beggar's lease and (as the managing agent said) it does state that this person's service charge percentage is only 0.6%. This was done by deed of variation in early 2015. I have also searched for but cannot find any connection between the jammy beggar and the freeholder. I am guessing that the jammy beggar might have paid a premium to the freeholder for the deed of variation? At any event the jammy beggar has achieved a service charge discount of c. £1600 per annum (based on present charges) for the rest of his lease term. This is 990 years! I have just been pm'd a link to the Morgan v Fletcher case in 2009 - which seems to imply that service charge distribution inequality is acceptable practice since the overall service charge contribution now equals 100%. The link to the Morgan v Fletcher case is here:

http://www.bailii.org/uk/cases/UKUT/LC/2009/LRX_81_2008.html

This is truly an appalling state of affairs for which we have no recourse...

[steampowered]

Well done on finding the Morgan v Fletcher case, which looks very relevant.

 

I've read through it and unfortunately it doesn't look to be good news. That case suggests that the LVT does not have a statutory power to remedy an unfair distribution of service charges, if the total adds up to 100%.

 

There is a good article about it here: https://nearlylegal.co.uk/2009/10/unfair-but-not-unsatisfactory/

 

I agree with the author of that article that the relevant parts of the Landlord and Tenant Act are ambiguous, and I think that the decision in that case may not be right and could potentially be overturned if it reached the appropriate level of the appeals process. However, getting to that step would mean multiple appeals and that could be very expensive, and you'd obviously not be certain what the outcome would be.

[andydd]

Well done on finding the Morgan v Fletcher case, which looks very relevant.

 

I've read through it and unfortunately it doesn't look to be good news. That case suggests that the LVT does not have a statutory power to remedy an unfair distribution of service charges, if the total adds up to 100%.

 

There is a good article about it here: https://nearlylegal.co.uk/2009/10/unfair-but-not-unsatisfactory/

 

I agree with the author of that article that the relevant parts of the Landlord and Tenant Act are ambiguous, and I think that the decision in that case may not be right and could potentially be overturned if it reached the appropriate level of the appeals process. However, getting to that step would mean multiple appeals and that could be very expensive, and you'd obviously not be certain what the outcome would be.

 

Yes..many service charges are not split equally, some are based on all sorts of factors, property cost, room size etc so its not unusual for some LH to pay more than others, it doesnt appear that the FH has done anything wrong..the total adds upto 100% so I dont think there is anything that you can do...unless there was some sort of wrong doing when the agreement to change amount to 0.6% for the 'lucky' LH.

[unclebulgaria67]

Really depends on how much this type of situation annoys you. Someone really annoyed could write to all other leaseholders to let them know about it and if they are bothered about it, to reply with their comments. Perhaps suggest that a leaseholder group could be set up where there is a discussion about the service charges and general upkeep of the block of flats. Pressure could then be applied on the management company/freeholders for the benefit of all leaseholders.

[aidoo326]

Really depends on how much this type of situation annoys you.

It annoys me quite royally. I am royally ticked off that this jammy article (whose flat is no smaller than any of the others) is sitting pretty and paying £150 per annum whilst the rest of us are paying £1775 per annum and what's more this discount is set for the remainder of the jammy article's lease term - which is 990 years!

 

Someone really annoyed could write to all other leaseholders to let them know about it and if they are bothered about it, to reply with their comments. Perhaps suggest that a leaseholder group could be set up where there is a discussion about the service charges and general upkeep of the block of flats. Pressure could then be applied on the management company/freeholders for the benefit of all leaseholders.

All the other leaseholders know about it already as I have told them. The managing agent also knows that I know and that all the other leaseholders know. Somehow I cannot see the jammy beggar and the freeholder being shamed into action - especially when there is UT case law stating that we have no grounds to compel them to take any action. Can you?

[andydd]

But the law is the law, the contract (lease) is the binding contract between the parties, it may be 'unfair' but lifes a bitch, it doesnt appear that anyone has done anything wrong, although I admit it is a bit strange.

[unclebulgaria67]

But the law is the law, the contract (lease) is the binding contract between the parties, it may be 'unfair' but lifes a bitch, it doesnt appear that anyone has done anything wrong, although I admit it is a bit strange.

 

Unless they did actually collect over 100% for a period.

 

I wonder whether the management company are accountable to any professional bodies, where the actions of reducing the service charge on 1 lease out of 15 would be seen as unethical/poor practice.

[steampowered]

Do you happen to know how the arrangement with the leaseholder paying £150m was documented?

 

If it was properly documented in a formal variation to the lease, it might be difficult to do anything about it.

 

But it if is a more informal arrangement, I suppose you could challenge it.

[aidoo326]

Do you happen to know how the arrangement with the leaseholder paying £150m was documented?

 

If it was properly documented in a formal variation to the lease, it might be difficult to do anything about it.

 

The leaseholder pays £150 per annum whilst the rest of us pay £1775 per annum. The reduction was made by a lease variation - agreed with the freeholder.

[aidoo326]

Unless they did actually collect over 100% for a period.

 

I wonder whether the management company are accountable to any professional bodies, where the actions of reducing the service charge on 1 lease out of 15 would be seen as unethical/poor practice.

 

But isn't the managing agent free and clear of any professional body sanction as the reduction to one lease was made by the freeholder and not the managing agent?

[andydd]

Unless they did actually collect over 100% for a period.

 

I wonder whether the management company are accountable to any professional bodies, where the actions of reducing the service charge on 1 lease out of 15 would be seen as unethical/poor practice.

 

As I mentioned earlier, any extra money cant disappear youd expect to show in the accounts and go towards the next years amount.