Twelve years of an equal split, and an invoice from 2022
Amber Court is a 24-flat Victorian conversion in a single block. Clause 4 of the lease apportions the service charge 'in proportion to the rateable value of each flat as at 31 March 1990', but the conversion from a hotel was never rated and no schedule survives. For twelve years costs have simply been split equally. Flats 1 and 2 were one unit until 2019 and are the largest in the block. In March the new owner of both flats writes demanding a refund, on the basis that her two flats should carry 2/26ths of a 26-unit schedule rather than 2/24ths. The same interim demand includes £6,400 of drain repairs invoiced to the block in November 2022 and recharged for the first time this year, plus £310 of interest. She has withheld the entire £1,890 demand and threatened the First-tier Tribunal.
1. The demand includes the 2022 drain invoice and £310 of interest. What is your position on each, and what do you do before the leaseholder applies to the tribunal?
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Separate the two issues in your reply and in the ledger.
The 2022 drain invoice. Section 20B(1) of the Landlord and Tenant Act 1985 provides that costs incurred more than 18 months before a demand is served are not recoverable through it unless, within that 18-month window, the landlord gave the tenant written notice that the costs had been incurred and that they would be recovered. So the first question is factual: was a s20B(2) notice served in 2022–23, and does the year-end summary for that period show the item? If not, the £6,400 is irrecoverable, and it cannot be rescued by:
- relabelling it a 'reserve adjustment' or 'prior-year balancing charge' (the tribunal looks at substance, not the line heading);
- carrying it into next year's budget as an estimate, because a barred historic cost is not a future cost.
The interest. Interest is only recoverable if the lease provides for it, only on sums properly due, only from the date and at the rate the lease specifies, and only if any notice precondition has been met. If the lease is silent, or if the £6,400 was never due, the £310 falls away with it.
Before the tribunal. Do not wait to be taken there. Correct the demand, credit the £6,400 and the interest, and write a short letter that itemises what has been credited and why. Admit the arithmetic and timing error clearly (a tribunal will find it anyway, and candour protects costs). Do not concede anything on apportionment - that is a separate dispute and should be identified as such.
2. How should the apportionment dispute itself be resolved, and what should the block do while it is unresolved?
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The lease governs, not the practice - but the practice is not irrelevant. Clause 4 is a formula, and a twelve-year equal split is evidence of how the parties have behaved rather than a variation of the lease. Equally, the new owner's 2/26ths theory is an assumption: it presumes a 26-unit schedule existed and that her flats each retained a separate rateable value after the 2019 merger.
Work through the facts first:
- Did the 2019 merger create a new lease with its own stated proportion? If so, that governs.
- Can the hotel-era rating be recovered from the deeds, old rent demands, the Valuation Office or other leases in the block?
- If no formula can be applied, the route is section 27A of the Landlord and Tenant Act 1985: the First-tier Tribunal may vary the lease on the application of the landlord or any tenant where the apportionment is unreasonable or the lease does not make satisfactory provision for it. The tribunal will usually adopt a just and equitable basis - commonly floor area, sometimes weighted for exclusive use or benefit - and a variation will affect all the leases, so all 24 leaseholders have an interest and should be told.
While it is unresolved: keep applying the existing method, keep the disputed element visible in the accounts, and do not unilaterally switch methods or refund (that creates both a precedent and a shortfall). Tell the leaseholder in writing that she may apply to the tribunal herself, and explain the costs risk. A negotiated deed of variation re-apportioning prospectively from next year is usually cheaper and calmer than litigation.
3. The freeholder instructs you to add the £6,400 back into next year's budget as a 'reserve adjustment', to serve a forfeiture notice, and to defend any tribunal claim on the basis of the twelve-year practice. Advise.
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Decline all three, in writing, with reasons, and record the advice on the block file.
'Reserve adjustment'. Repackaging a time-barred cost is a misdescription of a future estimate. It exposes the whole year's charge to challenge, invites a finding that the landlord's management was unreasonable, and puts you personally at risk under your professional body's conduct rules on misleading conduct. If the freeholder wishes to bear the £6,400 itself, that is a legitimate decision - but it cannot be recovered from leaseholders.
Forfeiture. Forfeiture for a disputed service charge is high risk. Under section 167 of the Commonhold and Leasehold Reform Act 2002 a landlord cannot forfeit for breach of covenant (including non-payment) without a relevant determination that a breach has occurred, and relief from forfeiture is readily granted where the sums are genuinely disputed. The leaseholder's lender must be considered, the costs of a failed claim are unlikely to be recoverable, and the reputational and complaint risk is substantial.
Defending on practice. The twelve-year history is worth running, but as a fallback and a reasonableness argument - not as a substitute for construing the lease. Presenting it as the primary defence invites the tribunal to find the landlord had no proper basis for the apportionment at all.
Then advise the freeholder of the s27A route and of the option to negotiate. If the client insists on the misdescription or the forfeiture, escalate internally and consider whether you can properly continue to act on those instructions.