Service charge shortfalls: why does the seller's solicitor need to hold money back to cover a shortfall in our service charge?

Question: We are buying our first home, a leasehold flat.

Our solicitor told us about the service charge we’ll have to pay to the management company and says the seller’s solicitor will hold £750 from the sale proceeds in case there is a shortfall in the service charge.

Why would there be a shortfall — and why this “retention”?

Answer: Under the terms of most leases the landlord is required to provide certain services, and charges the lessees a service charge for so doing.

In your case, the fact that there may be a shortfall shows the service charge is collected in advance under the terms of the lease.

So, at the start of each new service charge period the management company will prepare a budget based on its anticipated expenditure in the forthcoming year. The estimated service charge is then paid by all the lessees.

The actual charge will be calculated at the end of the service charge period, when the accounts are finalised.

Any shortfall would be the difference between the estimated and the actual service charge. Your seller is liable for service charges during their period of ownership and so will be liable for any shortfall.

The retention of £750 can be used to cover any shortfall there may be after you have completed the purchase of the flat.

If there is no shortfall, or a shortfall of less than £750, then the retention or balance of it will be released to the seller.

These answers can only be a very brief commentary on the issues raised and should not be relied on as legal advice. No liability is accepted for such reliance. If you have similar issues, you should obtain advice from a solicitor.

If you have a question for Fiona McNulty, email legalsolutions@standard.co.uk or write to Legal Solutions, Homes & Property, Evening Standard, 2 Derry Street, W8 5EE. Questions cannot be answered individually, but we will try to feature them here.

Fiona McNulty is a solicitor specialising in residential property.