Service charge apportionments and retentions
Service charges are property-based so when a leasehold property is sold (or a freehold property which is subject to common areas), the purchaser becomes responsible for the service charge accounts, including any existing or future debits or credits which may relate to the seller’s period of ownership.
It is standard practice for the seller and purchaser to arrange for the outstanding service charge balances to be paid on completion of the sale, and also agree a “retention”. This is a sum of money set aside by the seller to pay any service charges relating to their period of ownership but which are invoiced after the property has been sold.
Apportioning service charges on completion
Normally, the seller will pay the following charges on completion of the sale:
1. All of the unpaid annual and major works service charges relating to previous financial years; and
2. A share of the estimated annual service charges for the current financial year. This is calculated by dividing the estimated charge by 365 days and multiplying it by the number of days in the financial year that the seller owned the property.
Example of how to apportion the current year’s estimated charge:
2017/18 estimated annual service charge: £1000
Property sold: 2 February 2018
£1000.00 ÷ 365 days x 307 days (days from 1st April 2017 to 1 February 2018) = £841.10 which the seller pays. The purchaser pays the rest (£158.90)
When apportioning the current year’s estimated service charge between sellers and purchasers, it’s important to understand the management company’s billing cycle. The financial year runs from 1st April to the following 31st March, and invoices for annual service charges are issued every September i.e. six months into the financial year. The invoice combines the estimated service charges for the current financial year and the actual adjustment for the previous year (this will either be a credit or debit, depending on whether the actual charges were higher or lower than the estimate).
Depending on the completion date, the estimate for the current year’s annual service charge may or may not have already been invoiced. If the estimate hasn’t been invoiced yet, a retention should be negotiated.
Retentions
It is advised to include the following in the retention:
– A sum to cover any annual service charges which you’ve only received an estimated invoice for.
– If you have not received an estimated invoice yet for the current financial year, you’ll need to include a sum to cover your share of the costs for this year. One way of calculating this is to take an average of the last three years’ service charges, then divide this figure by 365 days, and then multiply it by the number of days in the financial year that the seller owned the property.
– Any major works that have been undertaken where a seller has received a section 20 consultation notice but has not received an invoice yet.
– You may wish to apply a small percentage increase to the figures outlined above.
– A seller may also want to consider getting the purchaser’s agreement to refund them with any credits relating to their period of ownership but which are applied to the account after they have sold the property.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice; the firm does not specialise in ecclesiastical law. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
If you need a solicitor to act for you who specialises in leasehold properties, who are Conveyancing Quality Accredited and on the panels for all residential mortgage lenders, please call us on 0207 183 0084 choosing option 1, or email us on property@olaleslie.com for a fixed fee conveyancing quotation; we are always happy to assist.
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Ayesha Yunus, Senior Partner
Ola Leslie Solicitors LLP
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