Leaseholders should note, before challenging service charges payable in advance, that these are an estimate of the amount that will be needed to manage the estate for the forthcoming year and the actual expenditure on services will not be known until after the accounting year ends. Although it is understood that leaseholders will not wish to pay a great deal more in advance than is necessary it is the actual expenditure that will be the most significant factor. If the landlord or manager finds that the expenditure was less than they predicted in the service charge budget, any excess, known as a surplus, will be credited against future service charges or returned to the leaseholders, depending upon the wording of the lease. If there is a shortfall, known as a deficit, the lease will usually require the leaseholders to pay this in full as soon as the amount has been identified in the annual service charge accounts.
The landlord will have the contractual right to set the level of service charge payable in advance, although this is required by legislation to be a reasonable amount. If an agreement cannot be reached between the landlord or manager and the leaseholders regarding the service charge payable in advance, members can seek advice from the LA. If the LA considers it appropriate for investigation it will review the matter by looking at the lease, the proposed budget and the previous year’s service charge accounts to try to assist both parties to resolve the matter. If an agreement cannot be reached at this stage, it may be referred to an independent Service Charge Panel (SCP).
If either party was dissatisfied with the decision of the SCP they could make an application to an FTT, which has the authority to make a decision on whether any service charge might be reasonable. It is hoped that an application to the FTT can be avoided but in some cases, the LA might help with this process where there is no alternative. Leaseholders should be aware that if they make an application to an FTT, against professional advice, and subsequently lose the case, they may incur the other parties’ costs which may be substantial.