Can a Freeholder make Service Charge demands in advance for repair costs?
Posted on 4th March 2020
We appreciate that those of you who have a life, unlike MG Legal’s Garstang Conveyancing Team, may not be aware of the Avon Ground Rents Case.
So quick reminder; the case was in relation to a mixed-use development built in 2008 which was later acquired by Avon Ground Rents in 2015. A short time after buying the building the freeholder discovered serious water leaks which would cost close to £300,000.00 to repair. The building was still under warranty and NHBC had indicated that it would cover the costs of the repairs but in the meantime the freeholder had to pay for the works upfront then claim the costs back from NHBC. So, to cover the costs, the Freeholder issued service charge demands of up to £6,200.00 to all Leaseholders. The Leaseholders appealed and the FTT determined that whilst the costs were reasonable, the service charge contributions should be reduced to £0 as the NHBC had already confirmed that it would cover costs.
The Upper Tribunal have upheld the decision.
So, when can Freeholders recover the costs of major works and when can these costs be demanded in advance?
Any Property Law Solicitor will advise that where works can be carried out at no cost to the leaseholder, as was the case in Avon Ground Rents because the NHBC were to cover the costs, then it is unlikely that it would be considered reasonable to demand a contribution in advance.
The sticking point in the Avon Ground Rents matter was that the Freeholder did have to bear upfront costs which would then be repaid at a later date by NHBC.
The Upper Tribunal confirmed that where a third party has indicated that it will cover the repair costs then it is not reasonable to issue a demand in advance through service charge. In the absence of confirmation that repair costs will be recoverable it may still be reasonable to demand service charges in advance. Each case will therefore be decided on its own individual merits.
A clear common-sense approach from the Court of Appeal. That is until you consider Freeholders who do not have the funds to cover costs for repairs until repayment is received from NHBC.
The Avon Case is, a bucket of water in the face of a sleeping person, to remind Freeholders of the importance of an effective maintenance programme and to ensure that at all times there is “enough in the pot” to cover emergency works! That said is your lease is well drafted the lease may allow Freeholders to reserve funds to cover a shortfall pending a payment from third party!
A further point for freeholders is that this case stressed that the FTT only needed to be satisfied that it was “highly likely that the repairs would be covered” by the NHBC policy rather than a “definite commitment to pay”. There is a clear intention that the Courts are seeking to place the burden to finance the repairs squarely on the Freeholder in the first instance.
MG Legal - Your Local Solicitors
Share this post: