ACCOUNTS
For the majority of flats, the service charge accounting system is similar, is set out within the lease and cannot be altered or amended by us. It can be summarised as follows;
At the beginning of each service charge year an estimate is prepared detailing what amounts we consider will be needed to provide the services to your building.
You are invoiced on the basis of this estimate according to the frequency set out within the lease. This will either be annually in advance: half yearly in advance or quarterly in advance. Payment is then due.
We have set out the most commonly asked questions about the account together with the answers:
The Service Charge
How is the estimate service charge calculated?
The lease requires us to estimate at the beginning of each financial year the total likely expenditure to be incurred during the year. Figures are based upon a combination of known expenditure during the previous year, existing regular service contracts, quotes from contractors and our own knowledge and experience, and is subject to adjustment after the end of each financial year.
The estimate includes Buildings Insurance, but I already pay this to my Building society/bank/other lender?
Under the terms of the lease we are required to insure the whole building but not the contents of your apartment. If your bank or building society has requested you to insure through them, you should obtain from us a copy of the buildings insurance cover note to give to them.
Why does the estimate contain a provision for ‘building repairs’ when there is a maintenance period from the developer/a ten year NHBC guarantee?
There are numerous matters that may have to be dealt with by the service charge fund as building repairs. Examples are blocked drains, door entry system repairs, electrical repairs, blocked gutters, etc.
There are a lot of misunderstandings regarding both the developer’s repair liability obligations and the NHBC cover. The developer will only deal with defects due to bad/defective workmanship within the two years of the sale of your flat. This is not a maintenance provision for any item that requires repairs. Electrical items such as door entry systems are often only covered for six months or one year from the completion of the installation. This could expire before the first flat is occupied!
The NHBC insurance cover only deals with major structural failure which occurs during the guarantee period. Therefore minor repairs (chipped roof tiles etc) are not covered by them and will be dealt with as building repairs. Windows and doors are not deemed as structural and are therefore normally excluded.
Why is the figure in the estimate different from the figure in my lease?
The service charge figure shows in the lease refers to the estimate for the first financial year only, often estimated by developers. After first financial year of trading service charges are reviewed.
The Auditered Account
Within six months of the year end of year account of what has actually been spent is produced and independently audited. This account is sent to you.
The account seems to be simple. Why therefore does it sometimes take so long to produce?
Whilst most accounts take a few hours to produce, they have to be audited, duplicated and the resulting adjustment posted to the individual lessee accounts. There are often several hundred properties with the same year end date. This means that they cannot all be prepared at once. We try to rotate the order in which they are prepared and circulated so that you may wait up to six months in one year, but only one month the next year.
I am paying a different amount to my neighbour. Why?
There could be several reasons for this. The most common is that the lease of your property specifies a different percentage or proportion of the charges to your neighbours. This is legally binding upon you. Another reason could be that this is the first account for your building. In these cases charges are usually levied on a ‘daily rate’ basis. You would be charged for each day of the accounting period the flat was owned by you and your neighbours would be charged for the days they owned their flats. The ‘on adjustment’ payment during the period of ownership could be different and this would mean that your adjustment is different even though the percentage is the same.
What happens to money collected which is not spent for a period?
All reserve funds and service charge receipts surplus to currant requirements are allocated in a site specific bank account. The net interest earned is added to the reserve fund. Details of this are shown on your annual service charge account.
Some of the expenditure on the building looks very high considering the description of work. Why?
Within the account we can only give a very brief description of the type of work that was undertaken and not a full note. For example clearing gutters could include remaking joints etc. and it may well have involved the use of some scaffolding tower or ‘cherry picker’ hydraulic platform for access.
Non Limited Companies
You will receive with the accounts a Statement of Account. If the account shows we have spent more than we estimated, then further payment is due on receipt of the statement. Where the account shows we have spent less than the estimate, the statement will show the amount of credit which has been placed on your account, which will reduce what you already owe (if amounts are outstanding) or will reduce the payment you make when the next regular invoice is issued. The Balancing Credit is only applicable against your service charge and not other charges such as Ground Rent, or Insurance. If you have any queries regarding the accounting system please speak with the Accounts Department.
Limited Companies
You will receive with the accounts a Statement of Account. If the account shows we have spent more than was estimated, your next service charge may well be adjusted to compensate this shortfall. If the accounts show that we have spent less than estimated then funds are set aside as a contingency for future maintenance.
I am being invoiced for an adjustment for a period prior to my ownership. Do I pay this?
As the current owner, you are now liable for making this payment. However your solicitor should have made arrangements to cover this contingency, usually by holding a small retention from the money due to the person who sold the property to you. In most leases there are provisions for the collection of a reserve or “sinking fund” as part of the annual estimate. The lease may well also state that this fund should be started from the second accounting year, thereby increasing the charge from the second year by the amount of the reserve.
Reserve Funds
The objective of a reserve fund is to offset the costs of non-annual major work such as decorating so that when this work is carried out there is not a massive increase in the service charge collection for that year. It is therefore forward spreading the costs of such work. As far as possible, we try to set the level of reserve fund collection so that very little extra payment – if any – is required when substantial building expenditure needs to be incurred.
All reserve funds and service charge receipts surplus to current requirements are allocated in a site specific bank account. The net interest earned is added to the reserve fund. Details of this are shown on your annual service charge account.
When you come to sell your property, you should tell your Estate Agent that reserve funds exist as this helps to allay fears that prospective purchases may have, that there will be substantial increases in service charges, particularly if the building is due for decoration.
Service Charge Payment
Service Charge payments are due in advance as defined in the lease. The reason why advance payment is stipulated is because the only source of money to pay the servicing of your building is the service charge fund itself. Therefore, if residents do not pay, there are funds to insure or service your building. It is our duty to collect the service charge when it is due. We carry out this duty by issuing the invoice for payment just before the due date and by issuing a reminder some 21 days after. If payment is not received then a final 7 day reminder is issued. After this time, we will then have no alternative but to take legal action to recover any outstanding amounts. The lease usually provides that the legal costs incurred are met by the resident concerned.
My last invoice showed a credit balance. Shall I deduct this from my next invoice?
No. The deduction will already have been made by the computer program in calculating the amount now due from you. Your invoice will always show as the bottom figure the amount due after allowing for all credits and debits.
Can I pay by instalments?
We regret that unless stated in the lease this method of payment is not possible.
