Failure to issue Service Charge Estimates/Statements

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    Failure to issue Service Charge Estimates/Statements



    We are a self-managing residents association responsible for the management of a block of 24 flats.

    We collect a monthly service charge from the residents/shareholders and this has always been done by standing orders which residents complete when they take on ownership of one of the flats.

    Now, we've always operated according to our company articles of association etc. with a managing committee, elected directors, AGMs, minutes and financial reports etc. etc. however, while we have always made full disclosure of our finances we have never in twenty years of operation issued service charge estimates and/or statements.

    It has never been raised as an issue because as a collective, I suppose, there is an element of trust and we've always kept the service charge as low as we could (£70 per month including an average 20% contribution to our reserve fund) so our operation has been without contention.

    However, due to a legal case we now understand now that this is Section 20 breach of the landlord act.

    It has been suggested that this oversight can be corrected retrospectively. Certainly, though it may not be our call to make, we do not feel that we have abused anyone's material rights.

    Yes, it is in our lease that we should have done this, but it is also in our lease for example that residents are obliged to decorate their flats at least every two and half years and yet we don't enforce that.

    Any thoughts, input would be greatly appreciated.


    SJRA




    #2
    You need to follow the lease exactly from now on.
    I cannot see what you can correct retrospectively.

    Disobeying the rules is great until it isn't.

    You also appear to be blurring the service charge with the Company. They are completely separate things with separate accounts.

    What else are you not doing:

    Is reserve fund kept in trust?
    Are you allowed to maintain a reserve fund?
    What is the reserve fund for?
    Does the lease actually specify monthly payments?

    It is not a matter of abusing anyone's "material rights" - "material rights" are routinely abused precisely via operation of the correct process (because the law is a mess) - but all you need is one lessee to stop playing ball, and you will all be stuffed.

    The Company articles which you mention are mostly irrelevant. The lease is what matters.

    Comment


      #3
      Thank you that, AndrewDod ...

      I'm popping out now and hope to answer your additional questions soon.

      SJRA

      Comment


        #4
        Neither the 1985, nor the 1987 section 20s say anything about statements. Statements are best practice, and may be required by the lease.

        The 1985 section 20 may refer to estimates, but they are not estimates for the general service charge, but for a particular job of work costing more than £250 per leaseholder.

        Whilst you cannot reasonably set your £70 a month without creating estimates, and it is best practice to supply those to the leaseholders, there is, to the best of my knowledge, no law mandating them unless your lease requires them. They are normally called budgets.

        As others have noted, you give the impression that you are failing to comply with section 42 of the 1987 Act, and have, incorrectly treated the service charges as belonging to the company.

        Please search out and read the RICS Residential Service Charge Guide, currently at its third edition. This has a legal status analogous to that of the Highway Code.

        Comment


          #5
          AndrewDod ...


          Just some background: we are a limited company registered with Companies House formed to purchase the freehold of our complex and manage affairs of the building directly. The 24 shareholders of company are the 24 residents.

          The service charge is set by the shareholders and is collected monthly each resident being required to make payment by a standing order with their.

          The funds go in to the Association's income account with an amount being transferred to feed our outgoings accounts for regular payments to our insurance, cleaning, gardening, lighting, water and maintenance providers.

          Any surplus occuring in each month goes to our reserve account.

          The reserve fund is maintained to meet specific one-off maintenance costs as opposed to the day to day. 2018/19 for example we are projected to replace two porch awnings.

          What we spend and how we spend it is determined by discussion of the shareholders at our AGMs an indication of likely costs having been set out.

          The process of inviting tenders for our one-off projects is handled by the management committee. It is our practise to seek at least three bids and in recent tenders we've actually sourced five bids.

          Our lease specifies the percentage by which 'maintenance rent' is applied. In our case being just over 4 pc per flat owner.

          It is an annual charge which is collected by monthly payments.

          Now in terms of estimates, statements etc. here's how the lease stipulates things should go ...

          "In giving his certificate of the costs providing for the above matters the Chartered Surveyor shall in every year include in his calculation not only the cost of current maintenance repairs and service charges to the building and curtilage thereof but also retention funds to provide (a) for periodic recurring items such as outside painting (and drain maintenance) and (b) a reserve for structural repairs to the building ... with a view to ensuring so far as possible that the burden of the Maintenance Rent payable by each tenant shall fall evenly in every year."

          Not that this may be relevant but ours is a block of flats with a very established residency. At least two thirds have been present for between fifteen and twenty years and year on, year out, our requirements really don't change that much. That is to say that to scan across the minutes of all our AGMs there's not much much by way of contention.

          We're not prone, for example, to sudden spikes of expenditure and in the history of the company it has been necessary just once to raise additional funding from the resident/shareholders (2003 Roof replacement). Otherwise, our reserves our sufficient and nor are they over maintained.

          I personally have been acting as the company's hon treasurer for the last three years and my first priority was to address the issue of the service charge which had stood still for SIXTEEN years meaning that we had got to a point of meeting our daily costs only by subsidy from the reserve and while not been able it to replenish it.

          I'm not sure you need to know all this, but discussion of an increase of the service charge went out with the AGM notice. All the directors had been briefed and and a quorum of shareholders endorsed a step-change in the service charge which has enabled us to catch up with much forestalled expenditure.

          So, all in all, we feel we are doing a good job by our shareholders but now it seems as we in fact legally deficient.


          Leaseholder64 ... I have spent a good bit of time in the company RICS code recently and still I can't see entirely where we've gone wrong.

          Perhaps our association is too familial. To draw an analogy, Grandma leaves out the shopping money for her grand-daughter each Friday and when she gets back from the supermarket sometimes she says 'well, it was a bit more expensive this week and I'll take a bit more out of the caddy' etc, etc.

          It never gets to the point of Granny saying, 'Well how much more? Where's the receipt? Let's have a look!' and each year we always produce a financial statement prepared by accountants and presented to our AGM.

          SJRA

          Comment


            #6
            It sounds like you may well be able to convince the tribunal that no harm was done by failing to follow L&T 1985 S20, and they may grant you retrospective permission to waive the historic failures to follow the proper process, given that your general meetings may have achieved a similar effect. You might still have to pay the tribunal fees of the complainant, and that may will not be allowable form the service charge.

            This assumes that the expenditure was reasonable and within the powers under the lease to recover it as service charges. An AGM majority does not override a valid accusation of breach of the lease from even just one leaseholder.

            You ertr obviously not obeying the clause you quoted if you were regularly running down the reserve fund. I presume you also failed to use chartered surveyor.

            I'm going to guess that the income and outgoing accounts really mean savings and current bank accounts. Current legislation doesn't say anything about these, but your management accounts should indicate that this money belongs to the service charge fund and not the company. Best practice is to use a separate bank account for any money that stays there for any length of time and tell the bank that it is in trust for the service charges, not the company's money.

            The management accounts should include cumulative expenditure, during the year, on each category of expenditure that the lease identifies. It should have figures representing what should be left over from the annual payment, and should be in the reserve fund, and balancing entries for actual cash and bank accounts, and for unpaid charges.

            You cannot insist on the use of standing orders or on monthly payments, unless the lease insists on them.

            If it only specifies annual payments, monthly payments in arrears will create a debt from the leaseholder for the rest of the full annual amount. If they are in advance, they will be a debt to the leaseholders.

            You are very luck not to have been taken over by buy to let landlords.

            Comment


              #7
              We are actually the claimant in this case.

              It started out as a simple case of arrears which we ended up pursuing via the county court.

              Due to the massive cuts in the judicial service it has taken us over a year and a half to even get a hearing which only resulted in the case been handed over to the property chamber.

              From all that I've read I think the best option for us might be to withdraw our case and set to getting our house and our systems in order.


              CLARIFICATIONS:

              The service charges funds a held between two separate accounts and a third account holds the reserve.

              I probably didn't explain it well, but when I talk about the use of the reserve funds they are not used for day to day maintenance. The lease specifies 'structural repairs' and this year we are about to replace two porch awnings.

              Comment


                #8
                I've found some consoling information in a Deed of Variation which was applied to our lease in 1991:

                1. The requirement for a chartered surveyor is replaced ... 'in substitution for a Charter Surveyor the Lessor shall be entitled to appoint a firm of Chartered Accountants to give the certificate ... and it is hereby declared the lessor has the discretion for itself to cary out the other duties of the Charterered Surveyor contained in the Lease.'

                2. The deed of variation also sets out the schedule of 'maintenance rent' payments ... ' and the Lessee may pay the maintenance rent by twelve monthly payments in advance but only by a bankers order ...'.

                3. The Lessee (formerly the tenant) shall become forthwith a member of {Mod - name removed} Residents Association Limited by purchase of of one ordinary share.


                Comment


                  #9
                  A certified accountant has no idea what building work needs doing, and are not experts on how much it will cost. They should not have been given charge of the budgets.

                  Assuming the name of the company is correct (and it should be removed, as it will identify you), the statutory accounts are seriously wrong, as they show the reserve fund as an asset of the company. It should not be. There is a grey area as to whether the money should show up as balancing transactions on the income and expenditure account, but it should never appear on the balance sheet.

                  If the certified accountant did these, lock them in a room with a copy of ICAEW TECH 03/11. https://www.icaew.com/-/media/corpor...nts.ashx?la=en

                  Comment


                    #10
                    Thank you for that leaseholder64. I hear what you say and this point has been emphasised strongly by you, but I am confused in as far if the reserve does not belong to the company then who does it belong to. The flatowners, presumably, but then they are the company.

                    I can't entirely see the conflict but I suppose it is analogous to a BHS/Maxwell scenario of the pension fund being raided to shore up operational losses.

                    (last post soft-deleted to de-identified the company name)

                    Comment


                      #11
                      Originally posted by SELLL124 View Post
                      (last post soft-deleted to de-identified the company name)
                      Post reinstated and edited, though you might want to re-think your User ID?
                      I also post as Mars_Mug when not moderating

                      Comment


                        #12
                        The reserve fund (and the prepaid service charges, but not the money obtained from the ground rent, is owned by a discretionary trust:

                        a)on trust to defray costs incurred in connection with the matters for which the relevant service charges were payable (whether incurred by himself or by any other person), and

                        (b)subject to that, on trust for the persons who are the contributing tenants for the time being [F5, or the person who is the sole contributing tenant for the time being

                        with the freeholder as trustee.

                        https://www.legislation.gov.uk/ukpga/1987/31/section/42

                        Comment


                          #13

                          Some people may remember this post from almost two years ago.

                          We launched a County Court action to recoup missed service charge payments. Was referred to the FTT and rejected because our demands were out of the time limit. End of that story.

                          However, the resident/shareholder started a counterclaim and it has taken till now for that to come to a hearing (March 6th).

                          Throughout this case the tenant has made accusations of mismanagement, corruption, criminality, harassment and robbery.

                          Last year he wrote a 6,000 word letter/rant to all the other resident/shareholder before the management company's AGM.

                          We had no requests or queries from any of the resident/shareholders who were aware of the history, but for the sake of openness we brought it up for discussion. Outcome was no one felt there was a case to answer and their main concern was how this person continued to withhold the service charge.

                          All that went into the minutes.

                          A couple of months later to everyone he sends another 6, 000 word letter repeating the original slanders and falsehoods and adding a whole new list of list of grievances (but omitting the directors in his mailing).

                          Again, his letter was flatly ignored by all those who received it.

                          Now, in his submission to a final counterclaim, once again he slings all the same mud as before. Pretty well most of it directly at me in name.

                          By March 6th, the legal case will be at an end.

                          However, in all probability he will continue with this campaign and I need to know how he can be legally restrained.












                          Comment


                            #14
                            I am afraid that the simple fact of that matter is (based on all we have heard) that you (in the broader sense of the freeholder company) HAVE been negligent, albeit perhaps not in all the senses of his rant. At the very least you have fundamentally disobeyed the lease, and have failed to pursue service charge debts with any degree of efficiency, and have incurred costs which are now not recoverable - a fundamental problem. These are pretty fundamental problems. If any lessee (including but not limited to the rogue one) were to take it down an "Appointment of a manager" route (to kick you out) they would almost certainly be successful.

                            I think you have to re-orientate your position. It is not a matter of "how he can be legally restrained". Rather it is a matter of you effectively implementing the lease. You cannot restrain someone from asserting their perceived (and in this case probably actual) rights.

                            Comment


                              #15
                              Have you put your own house in order yet? The leaseholder appears to have some valid points and he will continue to make them until you do.

                              Comment

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