Given all the current circumstances, sadly, this is a clear risk & a number have asked for our thoughts. This is a record of our practical experience in dealing with the issue over the past 30 years – it’s not a legal summary but what we have directly experienced. Here’s a short Q&A addressing some of the key points.
Are my on-account payments safe? We have never experienced a situation where on account payments have not been recognised post sale. There have been issues proving payments were made but once proven, the payments have been recognised when the accounts are reconciled. Best practice is for monies to be held in a separate bank account – that’s not always the case.
What about Sinking Funds? There are less of them nowadays but there was a problem with a scheme in Stockton on Tees (back in the early 1990’s). An overseas entity owned the scheme, they collected a sinking fund and it disappeared! So, there’s a risk here. Things have improved since then, with the RICS Professional Statement and Industry best practice but this remains a risk, especially where Funds are held and the landlord is less than transparent. Furthermore, we are concerned by the use of unofficial sinking funds, otherwise referred to a provisions for future expenditure and these can often be included by the accountants as an accrual. Lets look at that……..
What other approaches to service charge accounting should I be concerned about? Where sums are accrued for works/services that have not been incurred during the financial year ie ‘incorrect/inappropriate’ accruals, the relevant sums are included in a year end certification but may not have been spent and in some cases, the project is not even underway. This practice is being tackled but some Landlords and Agents continue to operate in this way – question to auditors – why are you signing these off? Our concern is that these accrued sums could be ‘lost’ in the process ………and in many cases, they should not have been included in the first place. Similarly phased payments i.e. recovering the costs of a project over a number of years needs to be monitored – these may or may not be in the tenants favour.
What if the Landlord is behind with their year-end certifications? The RICS Professional Statement suggests 4 months to issue a year end….many don’t have any regard to that and in some cases 3 or more years are outstanding. You don’t know if these will give rise to balancing charges or credits although more balances are credits rather than charges (that’s a fact based on our analysis). This is a risk especially if the Landlord has consistently over-budgeted in the past. Keep on top of your latest year ends and chase them down.
My dispute has not been resolved – what next? Sadly, in our experience, this very much hinges on whether you have withheld a sum proportionate to the dispute. If you have (and you have a reasonable & legitimate dispute), in many cases it is written-off i.e. you never have to pay that sum. If you have not withheld against the dispute, you may find it far more difficult to resolve.
What happens to expenditure levels before and after the Landlord goes bust? In our experience, immediately prior to the failure, expenditure levels are typically lower than budgeted as projects have been delayed and deferred. After, if there is a caretaker manager during an Administration, again spend is typically below historic levels BUT there are things to look out for. For example, we have been working on a large mixed use building in Central London and during the Administration, significant legal and professional fees found their way into the service charge. We successfully argued against those fees & charges on behalf of our client…….others in the Building did not protect their position in the same way.
We are interested in all things #servicecharge.
Our next article will be focussed on re-basing service charge for a ‘new normal’ – watch this space.
If you have any ideas or suggestions for other topics, please contact me: email@example.com