Unpleasant surprises: Service charge disputes during lease extension and collective enfranchisement claims

By LEASE volunteer, Tornike Purcell, Senior Solicitor at Bolt Burdon.


When a flat owner decides to extend their lease or to join together with other flat owners in the building to collectively purchase the freehold, paying off any outstanding service charge on completion is a task that may not cross their minds when they initially instruct a solicitor.

Moreover, constantly rising and unfair service charges in the past and expected in the future, may well be a reason why flat owners exercise their right to compel the sale of the freehold by using the law.

Lease extension and service charge disputes

When using the law to compel the extension of their lease, a flat owner is not entitled to enter into a new lease if, in addition to the payment of the premium, the ground rent, and the landlord’s reasonable costs, he does not settle any other sums due and payable by him in respect of his existing lease. These provisions in the law allow the landlord to recover any outstanding amounts on the day of completion including payments for services, repairs, maintenance and insurance as long as these costs are recoverable under the existing lease.

Unfortunately, the law gives little guidance as to how to deal with circumstances where the amount payable for the service charges is in dispute. Hence, practitioners will often advise the flat owner to offer their landlord “reasonable security” for the alleged outstanding sums. However, the law does not make clear what is “reasonable security”. Accordingly, solicitors will take a practical view, by putting the following sorts of options to the landlord for what should happen on completion:

Pay the likely maximum sum which could become payable and deposit this in a joint account or leaseholder’s solicitor’s account until the dispute is resolved; or

Pay up all the sums allegedly due to the landlord, on the strict condition of reserving the right to challenge the payability and/or reasonableness at the First- tier Tribunal (Property Chamber) (the Tribunal) or the county court.

If one of the above options cannot be agreed, the flat owner may be advised to make an application to the county court for an order compelling the landlord to complete the lease extension. If the landlord is unreasonable and uncooperative, they risk being penalised in costs.

Freehold purchase and service charge disputes

After a lease extension, in theory, the flat owner is given some piece of mind by the very fact that the landlord continues to maintain the building and therefore it will be easier to communicate with him to resolve any disputed service charges.

The same luxury is not afforded to flat owners who have collectively purchased the freehold, after which, the landlord would have moved on and tracing him may be difficult. It is therefore paramount that any possible disputes are considered from the outset of the claim and a plan is put in place well ahead of completion.

In a freehold purchase, where the law is used to compel the sale, the law allows the freeholder (and intermediate landlords if applicable) to recover any outstanding payments for services, maintenance, repairs and insurance by way of a security over the property until any outstanding debt is settled. This protection also relates to non-participating flats, if for example a non-participant fails to keep up with the service charge payments, the freeholder is likely to request that any outstanding balances are settled before completion or a notice is registered at the Land Registry against the freehold interest. Those participating in the freehold purchaser will need to bear in mind that even if their service charges are paid up to date, they may still be required to settle any outstanding service charges owed by the non-participating flats.

Unfortunately, the relevant legislation does not address circumstances where service charge payments are in dispute in collective enfranchisement claims. If flat owners find service charges unreasonable, they may consider making an application to the Tribunal to determine the disputed invoices in parallel to their collective enfranchisement claim.

Whilst the legislation is unhelpful as to how to deal with service charge disputes during the collective enfranchisement claim, some guidance on the process for resolution has been provided by the Tribunal in Dinglis Properties Limited v Sinclair Gardens Investments (Kensington) Limited (2004). There it was decided that when the terms and/or price payable for the freehold is not agreed, a Tribunal can combine the service charge dispute with the price dispute and determine both issues together.

However, if the terms etc. are already agreed, the flat owners will need to consider making an application to the county court asking the court to transfer the freehold to them (a ‘vesting order’).

The county court will make an order it deems suitable in the circumstances. The court may order the freehold to be immediately transferred to the participating tenants or it could delay the transfer until the service charge dispute has been resolved.

‘Takeaways’

  • there is no simple solution to service charge disputes that are live during the process to purchase the freehold or extend a lease.
  • flat owners must notify their solicitor of any foreseeable disputes as soon as they are aware of them.
  • when preparing for lease extension or freehold purchase, one must include in the budget any service charge payments that may be due on completion.

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