When you’re progressing an important property deal, whether a sale of a flat or a letting of commercial property, all can be ticking along nicely until the world of service charges are discovered.
This is usually through solicitors as they weed through legal information on the property, but it could be another party like a managing agent or even an on-the-ball purchaser or tenant.
They’re the sort of charges that appear straightforward at face value. So much is paid every year towards communal running costs, maybe a shared entrance way in a block of flats or a rear yard at a parade of retail shops.
However, problems can appear when you talk about actual hard-fast accounts in detail. Suddenly these can be lagging, which means that theoretically if the accounts aren’t ‘reconciled or ‘closed down’ then you could be hit with an additional charge.
Or looking forward, even if everything is up to date now, when you ask if there will be any future increases because you’re involved for example with an older building needing some ‘tlc’, then blank or generic answers can ring alarm bells.
Quite rightly, any new property interest does not want these nasty surprises. A tenant or purchaser doesn’t want sudden back-charges or hiked-up increases over the next few years.
All understandable, and in the ideal world this information should all be to hand. However in reality it often isn’t, for whatever reasons, and if you’re not careful things can get out of hand and exaggerated.
Suddenly a potential additional cost of a few hundred ponds can risk delaying things, or even aborting the sale or letting. Solicitors in particular can paint a doom-and-gloom picture of things, with unquantifiable costs and risks at hand, and although quite rightly they need to identify these worst-case scenario, in reality things should be placed in context and sensible decisions come to.
Therefore here are a few pointers to help resolve. Whether you’re a party in the midst of panic during a sale or letting process, or you’re being proactive and checking what may crop up, these nifty little pointers can save you a shed-load of costs and restless nights.
1. Understand Who Gets Hit
No matter what these extra service charges may be, you first need to appreciate who needs to pick up the bill.
If you compare it to a car, if you were buying a second-hand one you would obviously want to know what issues may arise in the future and although as a buyer you know that you’ll have to pay this in the future, this will hopefully be reflected in the purchase price.
If the seller says they are still trying to resolve some old repairs with the garage from last year, usually the current owner will need to cover these as it was under their ownership and benefit.
Therefore, with service charges, any new owner or occupier may be more okay with taking a hit on future charges, but will be more cautious on taking on previous ones because they were not at the property. Technically as a new owner though they will be taking on everything, the old and new, therefore as a separate matter they will want a contribution towards or see a reduction in the price and rent.
2. The Future Budget
Looking at the past is easy once you have the final accounts, as these are the definite answer – you just need to get hold of them, and even if they are still being completed, then hopefully the accountant or managing agent at a push can help wade through the figures and provide a rough idea of any nasty extra charges due, as you’re dealing with actual paid charges.
The future though can be more uncertain, as any budget can still be missing any nasty issues around the corner. So ask for any more planned maintenance and reports, and ideally quiz people to confirm in writing if anything else is expected.
3. Rights Versus Reality
On one side of the coin, you may well have rights for correct and timely service charge information, whether through your lease or sale contract, or through general legislation such as with residential properties.
That’s helpful to bang the drum and demand it, although in reality if it’s not there then there won’t be an easy or quick way to automatically provide this.
Therefore have a reality check, as the hassle and delays in arguing the case may simply not be worth it, and you may just have to think out the box and take a view on it, or offer to cover a potential additional cost.
4. Different Parties
Also remember that you may have different people involved in the service charge process. In addition to being different to maybe the entity who receives ground rent, there may be different people involved in representing the entity managing the service charge, for example a management company direct or a managing agent on their behalf.
So flush out who is the culprit early on, and if needs be have different ones to hand, for example one to formally chase, but another who may practically be managing and helping more.
5. Speaking With People
Once you begin to find out the reality of the service charges, remember that real people are involved with these and will be able to help you the most.
Formally, this may be through solicitors or sales and letting agents, and through stages like Replies to Enquiries and Management Packs where these issues begin to emerge.
However, this can then cause issues as they come to logger heads. It might therefore be worth picking up the phone to the other side to come to a sensible agreement and keep things moving, or with a helpful managing agent who has their finger on the pulse with the reality of what these service charges are.
6. Consider a Retention
When all else fails, and you’re left with uncertain additional charges and a proposed new owner or occupier panicking, then a practical solution can be for the seller to pay a retention.
This basically means paying some money into a separate account to be kept aside for a year or so until the service charges are known. If there are extra charges at that point, then these monies can be used to pay these, otherwise the money goes back to the purchaser.
So, it’s kind of money to guarantee, not all automatically ‘wasted’. And although as a seller you may be annoyed that you need to do this because of a separate party’s mistake and delay, it may well be worth biting your tongue and getting on with in order to stop the sale aborting or delaying, after all if there is a genuine extra charge then you would have had to pay that anyway.
7. Don’t Lose the Deal
As a final point, don’t miss the wood for the trees. In the frenzy of things unravelling regarding the service charge, make sure things don’t escalate and risk a sale or letting falling through.
Try and keep communication going, have a reality check, and do all you can like a retention above to keep things moving.
As a separate issue, you may be able to formally address the issues afterwards, but for the moment don’t lose thousands of pounds for the sake of a few hundred.
Calming the Service Charge Issues Down
So if you’re facing these crazy service charge issues during a sales or lettings process, first take a step back and identify what the true facts of the situation are.
It may well be unfair and wrong that current accounts are not up to date, and ridiculous that a person managing a shared block has no idea how costs could increase in future, although in the reality of day-to-day property management these can be unfortunately lagging.
However, all is not lost. Go through these pointers and begin to flesh out what the reality and worst-case scenario is, and if need be eat humble pie and do what you need to get the deal past the post.
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