The 'No Cash Spiral' to decay in blocks of flats

If the property manager has not incurred expenditure, there will be an accounting surplus when the year-end service charge accounts are produced.

Why? There are two main reasons. First, on the income and expenditure page of the accounts, receivable income is calculated as the money demanded, not the money received. The difference, the “arrears”, shows on the balance sheet.

Secondly, because service charges are not for profit, the 1987 Landlord and Tenant Act requires you to credit (give back) this surplus to all the leasehold owners.

Giving back the surplus to owners (in proportion to their service charge percentages) will reduce the outstanding debt of those owners in arrears, and also result in a credit off the next demand due from those owners not in arrears - or possibly even a refund.

However, the problem is the service charge fund has no cash to give them. Now the people who did pay probably are now not due to pay their next demand, so there will be no more money coming in.

The whole cycle starts again - but this time the situation is worse. The building is bust - and as a consequence the property continues to deteriorate. Meanwhile, the leaseholders get disgruntled because vital maintenance work is not being carried out. The owners end up hating managing agents forever - which could mean a difficult ongoing working relationship.

There is only one way to stop such a scenario occurring: quite simply, make sure you collect the arrears quickly. To do this efficiently, consider seeking advice from service charge recovery specialists.

Otherwise, if the situation is not resolved, it could end up becoming much worse for the managing agent, leaseholders and everyone living in the building.

Mary-Anne Bowring is the Managing Director of the Ringley Group