We are leaseholders in a block and the issues we are currently battling are large and numerous and like many others, we find ourselves in a ‘David vs Goliath’ situation.
Our immediate issue is as follows: a resident noted a 60% increase in 2014 in the water bill vs. all previous years. The freeholder and managing agent ignored all requests to investigate so the resident followed up and after 3 years, Thames Water admitted to a mis-connection of a new water pipe meaning one part of the estate was being billed for all water used on site - whilst the additional water was also being billed to its end user. As such a £198,000 credit was paid back to the managing agent for distribution to those affected (i.e. those were were mischarged for 4 years) on 12th September 2018.
The Managing Agent initially agreed this would be credited back to the service charge accounts of those affected and would be used to fund the S20B costs they plan to charge us for overspends in 2015 and 2016. Not having received any word of this credit in 8 weeks, we followed up with the MA only to be told that they, in conjunction with the freeholder, had decided to pay the money into the sinking / reserve fund. The leaseholders are not at all agreeable to this since a) this would mean some have paid in substantially more into the fund than others b) the money was collected as part of the service charge and should therefore be returned to them in the same way (if the water bill had been underpaid, the MA would have demanded more money, not taken it from the reserve fund) and c) the reason they are keen to do this is because, without leaseholder consultation, the previous managing agents, spent over £300,000 out of the reserve fund.
For this reason there has been a monumental delay in issuing accounts - we have only just received those for 2015 and nothing for 16 or 17 has been published - whilst they have tried for 3 years to fudge the numbers.
Do you have any advice as to how we can approach this issue with them? Knowing there are huge section 20B bills coming is horrendous but being told they also plan to confiscate a refund of approx. £500 per flat is sickening. And, if they had listened to the initial concern about the water bill in 2015 the size of the error would have been much smaller.
I hope you are able to share some thoughts.
It is difficult to answer this question properly without reviewing your reader’s lease (and, in particular, the service charge mechanism in the lease). Some leases provide for separate water charges. I do not know if that is the case here.
In general, however, and with the caveat that I have not seen any of the papers, I would tend to agree with your reader, on the assumption that the water charges in question where paid by individual leaseholders as part of their routine service charges and not out of the reserve fund.
Where money is paid by one party to another due to a mistake of law or fact, the individual who made the payment may have a right to claim that money back, in restitution (subject to certain conditions being met).
In my view, it would not be open to the management company to simply take those sums, which belong and are properly owing to the leaseholders, and transfer them into the reserve fund.
The lease will specify the mechanism for recovering and calculating service charges, which will include how and when contributions towards the reserve fund should be collected, and demanded; and what types of expenditure the reserve fund is set up to cover.
Assuming the lease allows the landlord to maintain, and collect and demand contributions towards, a reserve fund, it may theoretically be possible for the landlord to demand contributions towards the reserve fund which are equal to the amount of the overpayment, so the two cancel each other out. However, requests for contributions towards any reserve fund must be reasonable: s.19(2) of the Landlord and Tenant Act 1985.
I would generally expect contributions towards a reserve fund to be based on an assessment of likely expenditure on substantial “non-routine” items (such as roof repairs or external redecorations), usually following a capital expenditure plan or planned preventative maintenance survey. The demands for additional contributions towards the reserve fund totalling £198,000 would require a concrete and reasoned explanation, and justification, e.g. by reference to additional works which are anticipated.
In principle, if there has been an overpayment of historic service charge, as there has here, the leaseholder’s claim in restitution for the overpayment may be set off against the leaseholder’s future liability (for rent or service charge) (Fuller v Happy Shopper Markets Ltd  1 WLR 1249). So, one option would be for your reader to simply deduct c.£500 from their next service charge bill, and explain to the freeholder (or its agent) why they are taking that course of action.
It may be more complicated if the amount is in fact credited, but then a demand is raised for a reserve fund contribution, of an equal sum. In that case, the safer course of action would be to pay the reserve fund contribution, making it clear that in making the payment the reader does not admit that the sum in question is payable and/or reasonable, and then submit an application to the First-tier Tribunal (Property Chamber) pursuant to s.27A of the 1985 Act.
Please treat the contents of this Q&A as food for thought, but don't take any action based on its contents unless you have taken legal advice.
The author cannot accept responsibility for any errors or inaccuracies, loss or damage unless we have given you, personally, specific advice relating to a matter about which you have given us full background details. You must also bear in mind that the contents of this Q&A are based on English Law, and because it contains archival material, that material is bound to go out of date (so please bear in mind the date this was written.) Please also remember that the law may be different in Wales.
Roger Hardwick, Partner at Brethertons