Legal Q&A: Withholding service charge payments

Posted on August 24, 2018 by Guy Atkinson

Legal Q&A Withholding service charge payments

I live in a block of four flats with a share of the freehold. We manage the service charges ourselves. One leaseholder has refused to pay his service charges because the annual accounts have not been audited. Can he withhold payment?

There is no general legal obligation for annual service charge accounts to be prepared or audited by an accountant. Statute involves accountants in two circumstances, but the legislative requirements are rather indirect. Under section 21 of the Landlord and Tenant Act 1985 a leaseholder in a block of more than four dwellings may ask its landlord for a “written summary of relevant costs” certified by a qualified accountant. Under the Leasehold Reform Housing and Urban Development Act 1993, tenants may also carry out their own independent audit of service charge expenditure. However, neither statutory provision allows a leaseholder to withhold payment until after the accounts are checked.

Nevertheless, lease provisions will frequently require service charge accounts to be prepared by a professional, and this best practice is reinforced by professional guidance issued to managing agents. In many cases, the lease will require the landlord to provide a certificate from an accountant to certify its annual expenditure or the level of the service charge. Less commonly, the lease will also require the accounts to be audited. Whether these requirements are enforceable will largely turn on the precise wording of the service charge provision and the practice adopted over the years. For example, in the recent case of Clacy v Sanchez, the Upper Tribunal found that a requirement for a landlord to provide an accountant’s certificate was not a “condition precedent” to the leaseholders’ liability to pay. Moreover, since the leaseholders had not objected to the accounts for at least 19 years, they were precluded (or “estopped”) from disputing their charges on the basis that the annual service charge accounts were not certified.

Unless there are clear provisions in the lease requiring an audit, it is unlikely the leaseholder can object to the service charges on this basis.

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