We are buying a leasehold flat and have to pay a service charge. Why then would there be a shortfall and who is expected to cover this?
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.
https://www.homesandproperty.co.uk/property-news/legal-qa/why-would-there-be-a-shortfall-in-our-service-charge-and-why-does-the-sellers-solicitor-need-to-hold-a132911.html