Take care re-setting your service charge caps at renewal – Assure saves over £100,000!

Take care re-setting your service charge caps at renewal - Assure saves over £100,000!

Shortly after our client agreed a lease renewal in 2020, it became clear that the Managing Agent was not calculating the cap in accordance with the new lease terms.  After some debate, it was accepted that the wording did not reflect the intention of the parties. A Deed of Rectification was put in place along with an agreement to credit £40,000 to our client’s account.

Then we turned our attention to the previous lease.  This specified that the “Lessee’s proportion of the Service Charge for the Financial Year commencing at Jan 2008 shall not exceed the Initial Sum and thereafter for each subsequent Financial Year shall not exceed the Lessee’s proportion of the Service Charge payable for the previous Financial Year subject to a yearly increase of four per centum (4%)”

The Managing Agent had been calculating the cap based upon the Initial sum plus 4% each year (for example £100,000 plus the 4% cumulative each year over a 10 year term would increase the cap to £142,000) instead of applying the cap to the actual annual service charge liability, which did vary considerably.

This distinction had been overlooked by the previous service charge advisors, so the team at Assure investigated what the annual liability had been historically. We found that for some years there was a considerable budget underspend and, in those years, the cap should have been re-based to a lower level. For instance, on the above basis, if the spend was only £80,000 one year, then the cap could only be increased by 4% to £83,200. So the cap could effectively decrease for the next year!  After some debate, our interpretation of the new capping mechanism was agreed, giving rise to a further refund of £60,000.  Note: When a lease is signed as a deed, errors can be corrected for up to 12 years previously including issues related to a prior lease term.

The mechanisms used to determine service charge caps are becoming increasingly complex – here there was a problem both before and after renewal!

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