At Inspired Property Management we like to make it clear and transparent with all our charges and what is involved in the service charge and balancing charge.
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 initial estimate of future expenditure for maintaining the building 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.
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/work carried out during the service charge year.
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.
18 Month Rule
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 provides the landlord or management company more time to produce accurate accounts and should also give you notice of the possibility of a deficit or surplus.
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.
Ensure you read your Lease as 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.
If you have any questions about your Lease and would like further information about services charges please take a look at the FAQ section on our website where we have answered some of the common questions we get asked.