Three Common Service Charge Issues That Can Become Legal Problems
A few months ago, I was instructed by a leaseholder’s solicitor to review the service charge accounts for a residential block they were acting on. What I found was not unusual, but it was significant. Every issue identified could have been spotted and resolved by the managing agent before it escalated into a legal matter. That is why it is worth sharing, because these are exactly the types of issues that property managers can avoid with the right processes in place.
The block consisted of 36 flats, and the service charge accounts had been prepared internally by the managing agent. At first glance, everything appeared straightforward, a short summary document showing what had come in and what had gone out over the year. However, there was no balance sheet, no reserve fund disclosure, and the accounts had been prepared on a cash basis rather than an accruals basis. These are not simply presentation choices, they go to the core of compliance and whether the accounts can stand up to scrutiny.
The first issue was the format of the accounts. ICAEW Technical Release 03/11 sets out how residential service charge accounts should be structured, including preparation on an accruals basis, the inclusion of an income and expenditure account, a balance sheet, and separate disclosure of reserve funds. The accounts I reviewed did not meet this standard, which immediately raised concerns around compliance, transparency, and how defensible they would be if challenged.
The second issue related to the reserve fund. There was a reference to a sinking fund balance within the summary document, but when I requested supporting bank statements, it became clear that the reserve fund was not held separately. Instead, it was held in the same account as the day-to-day service charge funds. The balance had fluctuated throughout the year in a way that suggested it had been used to cover short-term operating costs. Even where this is not intentional, it creates risk and can undermine confidence among leaseholders and directors.
The third issue involved a major works invoice that had been included in the current year’s accounts. On review, the work had actually been completed 22 months before the demand was issued. Under the Landlord and Tenant Act, costs must generally be demanded within 18 months. This meant the cost was potentially unrecoverable, which is a significant issue for both the managing agent and the client.
In total, there were 3 issues, all identified in less than 20 minutes. None of them were particularly complex, but all of them pointed to a lack of appropriate processes. The solicitor relied on these points in advising their client, and the managing agent then had to spend considerable time and resource responding to the queries raised.
This is not about criticising managing agents. Most are operating under significant pressure and are doing their best with limited resources. However, these are exactly the types of issues that can be prevented with the right structure, oversight, and support. More importantly, they are far easier to address at the start of an accounting year, rather than after a solicitor has become involved.
Service charge accounting does not need to be complicated, but it does need to be done properly. Getting the fundamentals right, including the correct format, clear segregation of funds, and accurate timing of costs, can prevent disputes, reduce risk, and ultimately save time.
If you need support with your service charge accounts, whether that is ensuring compliance, handling complex developments, or simply reducing the pressure on your team, we would be happy to help. Get in touch with Ruddocks & Co to discuss how we can support you.
Rohan Ruddock, Partner, Ruddocks & Co
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