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Accrued Uncommitted Service Charge – Avoiding the pitfalls

The Commonhold and Leasehold Reform Act 2002 provided leaseholders with the legal right to take control of the management of their blocks. The Right to Manage process allows leaseholders to transfer the obligation of the landlords management functions to a company they have collectively set up.

Before Right to Manage

The transfer of management obligations can cause problems when dealing with the responsibility to collect service charge payments. Prior to the acquisition date (the date at which the management company takes over management) the RTM Company is entitled to receive information from the landlord about moneys which are held on account and moneys which are likely to fall due. The RTM may even serve notice on the landlord requesting this information if it is not readily provided.

Following Right to Manage

Once the acquisition date has passed and the Right to Manage status has been acquired, the landlord is obligated to provide information to the RTM to allow a smooth transition of management functions. The landlord will need to provide details of existing management contracts, details of employed contractors and any other services being for the benefit of the block. Importantly, the landlord is also obliged to pay over to the RTM Company any accrued uncommitted service charges.

What are accrued uncommitted service charges?

Section 94 (2)of the Commonhold and Leasehold Reform Act 2002 defines accrued uncommitted service charges as (1) any sums paid by leaseholders by way of service charge and (2) any investments representing these sums or income for the landlord resulting from the investment.

What is there is a dispute?

If a dispute arises between the landlord and the RTM Company over what is deemed to be accrued uncommitted service charges, application can be made by either party to the First Tier Tribunal. The Tribunal can then determine the correct amount of service charge to be paid over to the RTM Company and this will take into account such as:

  • How much money has been paid to the landlord by leaseholders?
  • How much of the money paid to the landlord has been properly spent
  • How much of the money paid to the landlord has been allocated to landlords costs

There have been many cases heard by the Tribunal on this point, but one case to note is that of OM Ltd v New River Head RTM Co Ltd. In this case the Tribunal determined that the landlord is required to pay over to the RTM Company any sums ‘held by’ them on the acquisition date. The terms ‘held by’ is interpreted to mean sums held in bank accounts or in an investment entered into by the landlord which represents the sums paid to the landlord by the leaseholders.

This makes a distinction between what sums the landlord actually holds on the acquisition date and what sums he is entitled to hold at the acquisition date but has not yet received.

Any arrears of payment due to the landlord prior to the acquisition date will remain payable to them, these arrears do not pass to the RTM Company.

Conclusion

It is important to determine what payments the landlord actually holds on the date the RTM Company takes over management. Disagreements over what constitutes accrued uncommitted service charges can result leaseholders not making payment to the correct party if the landlord and RTM Company are both claiming the same sums. Protracted disputes may ultimately have to be settled by determination by the Tribunal and there are of course the cost implications of this.

Only sums actually held by the landlord, either in bank accounts or investments will need to be handed over the RTM Company. Any payments due from leaseholders under the terms of the lease which have not been collected will remain payable to the landlord. An RTM Company has no entitlement to collect arrears outstanding prior to the date they took over management; this right remains with the landlord.

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