Year End Balancing Charges

Many service charge payers do not realise that the charge they pay at the start of the service charge year is actually an interim payment. It is an estimate of future expenditure and is not the final service charge payment. In fact the service charge payment cannot be considered to be finalised until after the completion of the service charge accounts.

The service charge accounts will compare the amount budgeted for the year with the amount actually spent.  If the actual is more than the budget then a deficit will be produced, if less was spent than budgeted, there will be a surplus. Although I advise that the lease is always checked to determine what to do in either situation; it is very rare for anything other balancing charges being required.

This balancing charge, which in the event of a surplus will actually be credit, will ensure that the service charge is no longer an estimate. After the charge is invoiced you will only have been billed for the services you received during the service charge year. For this reason (and I have mentioned this in other articles) it is pointless to dispute a service charge when you are invoiced at the start of the year. No services will have been provided and the charge is purely an estimate. Wait until the accounts are produced and the balancing charge applied, if at this point you still think the charge is unreasonable, now is your time to challenge.

In essence the principle of balancing charges is a very basic process however sometimes (as always with leasehold) there are issues you need to be aware of.

Previous Owners - Once you purchase a lease you become responsible for it; this includes the liabilities of the previous owner. For this reason solicitors should always ensure that arrangements are made for the payment of any outstanding service charges prior to the lease changing hands. They should also make enquiries into the financial position of the service charge and determine if a retention is required in case of a deficit. I would always advise a retention is kept as you can never guarantee a financial outcome. Anything could happen! Don’t be surprised if you find yourself given a full balancing charge even if you didn’t own the lease for the full service charge period. Speak to your solicitor.

18 Month Rule - As a leaseholder you can only be charged for expenditure within 18 months of the landlord or management company incurring the costs. This includes the balancing charge. This is the reason why service charge accounts have to be produced within 6 months of the year end (18 months from the year start and the first expenditure). However you may find that this is not the case, instead you could receive a section 20b notice, which provides a summary of charges. This buys the landlord or management company more time to produce the accounts and should also give you notice of the possibility of a deficit or surplus. If you do not receive the accounts or a section 20b notice within 6 months then you are not obliged to pay any balancing charges that are levied.


You may find that even though the accounts are produced within 6 months the charges are not applied for some time after this. This is perfectly fine as long as your landlord or management company provide a notice with the accounts (usually in the form of a covering letter) stating that there is a deficit and you will be invoiced for a balancing charge. If the notice wasn’t provided within 6 months of the year end, then the balancing charge does not have to be paid.

Read the Lease - As I stated above it’s not 100% guaranteed that balancing charges will be required. Leases are all different and some may not have the provision for balancing charges. Some leases have the provision to recover a deficit position by charging however there is no provision to credit back a surplus. Regardless of what your landlord or management company do I suggest you check your lease so you know what to expect and therefore what you can challenge.
     
Charges Not Applied - Unfortunately I have to end this article on the negative side of property management.  Sometimes, even though the lease may specify balancing charges, managing agents do not charge out deficit positions. They will cover the deficit from the reserve fund, which is a serious act of miss-management. There are three issues I can think of with doing this.

1. They are not following the terms of the lease and therefore breaking a contractual agreement.
2. By using the reserve fund they are using funds that are ring fenced to cover future major works. You will therefore find a large one off invoice coming your way when the works are required.
3. The whole point of balancing charges is to ensure that the expenditure of the landlord/management company is recovered and anything extra is given back. By taking from the reserve they are putting the landlord/management company and your development out of pocket twice. Once by not charging out the deficit and again by dipping into the reserve fund.

For these reasons if you have never received any form of balancing charge and you should get one every year (I very much doubt a service charge budget would be bang on what was actually spent) then you need to challenge your managing agent straight away. If they have historically been doing the above then you need to make them pay the money back.

I hope you find this informative and helpful and as always if you need any further advice please get in touch.