Service Charge Retentions – do we really need them?

A question asked by many Sellers is why should I have to leave a deposit on Completion with my Solicitor to act as a Service Charge Retention? In order to review the reasons it will help if I clarify the basis upon which most Service Charges are collected.

The Freeholder is usually responsible for insuring the building, maintaining the structure and decorating/maintaining the common parts & exterior. In order to fund these works the Freeholder will estimate the annual expenditure, divide this between the number of flats in the block and collect this Service Charge during the year. At the end of the year, final accounts are produced showing the actual expenditure compared to the amount collected. Invariably, the Freeholder will have either spent more or less than has been collected. If they have spent more, then they will ask for the difference from each of the flat owners. If they have spent less, then the additional sums collected will usually be credited to the Sinking Fund. This is similar to a savings account for expenditure that does not occur annually such as the redecoration costs. The use of the Sinking Fund will ensure that future Service Charge bills are limited so that when the redecoration does occur, rather than having to find 100% of those costs in that financial year, some, if not all of those costs will be paid from the Sinking Fund.

So why do we need a Service Charge Retention?
During the sales process, the Freeholder or their managing agent will provide a Sales Information Pack (the most common of which are replies to the Leasehold Property Enquiries form) in which they are asked whether there is likely to be an overspend in the current financial year. The standard lazy reply is that they do not know and recommend a Service Charge Retention.

As the Service Charge is property based, the Buyer becomes responsible for paying any existing bills or future debits so many Buyers will want this retention in place so that if there is a demand for more money for the financial year in which the property is sold, then they have easy access to be reimbursed from the Seller for the duration of the Seller’s ownership.

That is the simple answer, but do we really need a Service Charge Retention? If the Buyer or the Solicitor look at the past Service Charge accounts, they will be able to see whether any extra payments have been required in the last 3 years. Often, the Freeholder regularly collects more than is spent and therefore each flat owner as overpaid on the Service Charges. If there is a pattern of overpayment, then I see no reason for the retention. Indeed, if the Seller is continually overpaying on the Service Charge, then if the Buyer wants a Service Charge Retention, I would ask that the Buyer also matches the requested retention so that any overpayment for the current financial year will be reimbursed to the Seller. Do also note that it is not the practice to seek any refund of the monies paid into the Sinking Fund so any Buyer will have the benefit of that savings account when that is used towards the next major item of expenditure by the Freeholder.

Do not agree to a Service Charge Retention just because the Buyer asks for one, look at the accounts, if there is no justifiable reason for one then reject it or ensure that the Buyer matches the monies being left with your Solicitor.
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*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*