What are retained funds?
A retention of funds means when moneys are paid over on completion (or the date of purchase/sale) the final sum will be less the amount being retained by the chosen solicitor. The amount will be agreed by parties as well as the Terms and Conditions for the retention.
In what circumstances does a solicitor retain funds?
When purchasing a Leasehold property with Ground Rent and Service Charges, there are occasions where the solicitor acting for the purchaser will negotiate with the solicitor for the seller to retain funds. For example, the most common scenario is where the Service Charge Accounts for the end of the financial year have not been finalised, and the previous quarterly accounts show a deficit in funds is likely to occur.
What is a Service Charges deficit?
When a purchaser agrees to purchase a Leasehold property with Ground Rent and Service Charges, the date for completion often falls before the annual account is finalised for the Service Charges. This means that the Management Company provides an estimated account, based on the income and expenditure of the previous years. Sometimes this estimation will be incorrect and the Management Company will spend more than estimated, or in some cases they may spend less. If the Management spends more than predicted, when the accounts are finalised for the year, the deficit will be divided amongst the Leaseholders. This means that each of the Leaseholders will be required to pay their share of the deficit. Alternatively if there is a surplus in the Service Charges, this may be divided between the leaseholders, or simply deducted from the next year’s payments.
What happens when solicitors agree to retain funds?
When solicitors agree to retain funds they will draft a Special Conditions clause to be inserted into the contract. This Condition will contain details about which solicitor is responsible for holding the agreed sum, how the funds to be calculated and also when the funds are to be released. Often there will be a specified time limit for the funds retention. The solicitor responsible for holding the funds must hold them in an identifiable account which meets the Solicitors Accounts Rules (these can be examined on the Solicitors Regulation Authority webpage.) Once the terms have been met then the funds can be divided between the purchaser and the seller, if necessary and distributed to the correct parties in accordance with the agreement.
How does the retention of funds affect me?
If you are purchasing a property, the retention of funds should not directly affect you. The solicitor responsible for holding the funds will retain them until the finalised accounts are received. If there was a deficit in the Service Charge for the year, the solicitor will calculate the costs of the Service Charges from the date of purchase, which will be the sum which you as the purchaser owe. Depending on the terms of the Special Conditions, the payment for the Service Charge deficit can then be made. If there is no deficit, then the funds will be return to the seller.
If you are the seller, the retention of funds means that when the completion moneys are paid on the date of completion, they will be less the amount agreed for the retention. Normally, the solicitor responsible for retaining the funds will be responsible for receiving the final accounts and calculating the distribution of the moneys, although this may differ depending on the agreed Special Conditions. Once the accounts have been received, the solicitor will note whether there was a Service Charges deficit and if so, how much of this occurred during your ownership of the property. The solicitor will then calculate the sum which you owed during your ownership and this sum will be either paid directly to the Management Company, or the purchaser’s solicitor depending on the agreed Special Conditions. You will then receive the remainder due to you. If there is no deficit, then the total of the retained funds should be returned to you. Alternatively, if a surplus has been identified then you should receive payment for the surplus calculated during your ownership. Please contact your solicitor if you wish to find this out.
What is the purpose of the agreed retention of funds?
Solicitors acting for the purchaser will normally request retention of funds if the Management Company indicates there may be a Service Charge deficit for that year. By retaining funds, it means that the purchaser will not be required to pay moneys owed prior to their purchase and ownership of the property.