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I am a Freeholder, why has my landlord sent me a Section 20B notice?

Reader’s E-mail:

Hi, We have a freehold property and the development it is on is managed by a management company, for which an annual fee is payable. Recent correspondence from the company indicated they would be seeking additional payments for unforeseen expenditure. Below is the latest response from them, does this make sense?

Message from Management Company: “Unfortunately the 2013 accounts have been held up at the moment but they are with the client, whom we require approval prior to issuing the documentation to residents. As a result of the developer handing over the directorship of the XXXXXXXX Management Company we are liaising with the new director who returns to holiday shortly. As a result of the time lapse between the conclusion of the accounts we were required to send a Section 20b notice in the interim period which is the letter you received. We do hope to have these accounts, and therefore the information you have requested, out to all residents as soon as we received them back from the client. If we can be of any further help please do not hesitate to contact us.”

Reply from Service Charge Dispute Guide

1. Section 20B is a clause in the Landlord and Tenant Act 1985 (LTA 1985), requiring that a landlord gives notice of service charge expenditure within 18 months of its being incurred.

2. The LTA 1985 provides a very specific definition of constitutes a ‘service charge’ and part of that definition is that it is paid by someone who holds a lease over something. The charge a freeholder pays to contribute towards the upkeep of an estate is not, under the terms of the legislation, a service charge. This is normally referred to an ‘estate charge’. Sections 18-30 of the LTA 1985 do not automatically apply. There are a different set of laws dealing with estate charges to freeholders. To the best of my knowledge there is no similar time limit for notification of expenditure to freeholder.

3. Typically estates will comprise both leasehold properties and freehold ones. It is common for managing agents/freeholder of an estate to write identical letters to leaseholders and to freeholders, rather than issue versions appropriate to each tenure type. There are worse mistakes that can be made, and whilst it may cause confusion to freehold residents, from a legal perspective there is generally little damage done by following this (defective) practice.

4. As a freeholder, the terms under which an estate charge must be paid will be set out in the purchase agreement for the freehold (‘freehold sales agreement’) property. A charge can only be raised for the items listed in the freehold sales agreement, and at the time and in the manner set out.

5. Sometimes, a freehold sales agreement will say something along the lines of ‘section 18-30 of the Landlord and Tenant Act 1985 will apply’. If there is such a clause, then a freeholder gets the same protection as a leaseholder paying a service charge. In this situation only would the requirement to issue a freeholder with a section 20b notice arise.

6. One thing freeholders should bear in mind, is that certain parts of a freehold sales agreement only apply to the person who originally signed the freehold sales agreement and not to the subsequent owners, unless those subsequent owners enter into a specific Deed of Covenant when they purchased the property. These are known as ‘Positive Covenants’ and estate charges are one of them. There are plenty of freeholders in England and Wales who pay estate charges when in fact they have no legal requirement to do so as they did not enter into a Deed of Covenant to agreeing to pay these charges when they purchased.

7. This is a complex area of law and we recommend that freeholders with concerns about estate charges should read their freehold sales agreements and seek competent legal advice.

Click on the link to read more Reader’s Questions and Answers on Freeholder Estate Charges