A recent Upper Tribunal (Lands Chamber) decision involving a residential service charge dispute, brought into focus whether or not the factual findings report certified by the Chartered Accountant was sufficient to satisfy the terms of the lease.
The lease set out how the service charge was to be calculated and paid and that the liability of the lessee under the provisions of the lease “shall be certified by a Chartered Accountant to be appointed by the Lessor”.
The service charge accounts were certified by the managing agent and contained a report headed “Accountant’s report of factual findings”. The report recorded that an audit of the service charge accounts was not required under the terms of the lease and stated the specified procedures which were carried out by the accountant in order to provide a report of factual findings.
The procedures carried out were described as follows: –
“(1) We obtained the service charge accounts and checked whether the figures in the accounts were extracted correctly from the accounting records maintained by or on behalf of the managing agents
“(2) We checked, based on a sample, whether entries in the accounting records were supported by receipts, other documents or evidence that we inspected”
The report continued that, because the procedures undertaken did not constitute either an audit or a review in accordance with International Standards, the accountant did not express any assurance on the service charge accounts other than making the factual statements on the work performed.
The accountant’s report of factual findings did not refer to the liability of any individual lessee. However, the certificate contemplated by the lease was a bespoke document for each lessee showing their individual liability. Martin Rodger QC, the Deputy President of the Upper Tribunal (Lands Chamber), stated that “what is missing is an account, certified by a Chartered Accountant, stating the individual lessee’s share of the total expenditure, the payments made on account and the resulting shortfall or surplus”.
The ICAEW Technical Release Residential Service Charge Accounts (TECH 03/11) recognises the primacy of the lease. Paragraph 2.8 of TECH 03/11 states that: “the service charge statement should include any certificates, statements and signatures that are required by the lease and care should be taken to ensure that any certificates or statements follow the exact terminology used in the lease.”
There has been a longstanding view that accountants would not normally review every lease, nor check the accuracy of each individual lessee’s share of the costs; the amounts paid and their liability, because the time costs would be excessive. However, this decision highlights that the accountant may need to incur those costs in order to follow the exact terminology of the lease.