Block management emergencies occur every day across the country. These situations can require substantial expenditure from service charge funds, often outside the scope of the current year’s budget.
If there is no reserve fund or sinking fund available, this can create a significant challenge for property managers and leaseholders alike.
One potential solution is a cash call or levy.
What is a Cash Call or Levy?
In this context, a cash call or levy refers to a provision within the lease that allows the landlord to demand additional service charge contributions outside the approved annual budget. As always, the starting point is the wording of the lease itself.
If the lease provides for service charge to be paid on demand, there is generally no issue. The service charge becomes payable when demanded and, if additional funds are required, they can simply be requested from the leaseholders.
However, where the service charge mechanism requires an annual budget to be prepared and service charge contributions are payable solely by reference to that budget, it may not be possible to recover sums in excess of the amount budgeted for.
This can create real difficulties, as landlords may not be legally entitled to recover the cost of emergency works from leaseholders if those costs fall outside the service charge payment provisions of the lease for the year in question.
In some cases, the landlord may have to wait until the following service charge year, incorporate the expenditure into a future budget and only then seek recovery from leaseholders. This can cause significant delays to urgent works and place considerable financial pressure on landlords, management companies and RTM companies alike.
To address this issue, some leases contain a specific provision allowing the landlord or management company to levy an additional charge on leaseholders to raise the funds required for unforeseen expenditure.
It is important to remember that a cash call clause is not a universal solution. Even where a lease contains such a provision, the costs demanded must still be properly incurred and reasonably recoverable under the service charge provisions of the lease.
Do Not Forget Section 20
Even where the lease permits a cash call or levy, landlords and managing agents must still consider the consultation requirements under section 20 of the Landlord and Tenant Act 1985.
In emergency situations, it may be necessary to apply for dispensation from the consultation requirements pursuant to section 20ZA of the Act.
What if There is No Clause in the Lease?
If the lease does not contain a mechanism permitting the recovery of additional sums outside the budgeted service charge, the landlord may face significant difficulties in recovering those sums and any demand may be open to challenge.
As with most service charge issues, the answer will depend on the precise wording of the lease.
Final Thoughts
Cash call and levy provisions can be invaluable when unexpected expenditure arises. However, their availability and scope will depend entirely on the terms of the lease.
Always start by checking the lease. The ability to recover emergency expenditure can vary significantly depending on the service charge machinery and any express provisions relating to levies or additional contributions.
If you are unsure whether your lease permits a cash call or levy, we can review the lease and advise on the available options.