Uninformed manager and directors: what can happen?

[sophiejo]

Thank you, leaseholder64, for your help yet again with starting a new topic.

I hope I'm not going to sound hysterical, but I am really scared. We have a weird situation in our share-of-freehold set-up: A very intellectually limited real-estate agent, uncouth and ugly to boot, was put in place as manager when the outgoing director retired. We had never had a manager before. This new manager soon surrounded himself with four directors, all of whom eat out of his hand. They are totally uninformed about the structure of our governance.

All of us, including yours truly, had much better things to do in the past ten years than keep an eye on what's happening in our company. I, however, woke up suddenly when I found that the manager had decided to institute cash calls, slush funds and reserve funds, and to insist that we are governed by the Landlord and Tenat Act 1987. I managed to head off the cash calls, etc.

Then, just recently, it began to worry me that I had not seen a full company account in years, and that there has not been an audit in all that time, although our Lease specifies that there must be an annual one. Two other members and I immediately applied for a section 476 (Companies Act) audit, which makes it compulsory to hold one.

Now this is where things turn very odd: The furious manager told everyone that I'm a fool, and that the audit will cost £3,000. Quite by accident, I came upon the chartered accountant who had told him that. I immediately challenged the latter, who said in a lengthy but primitive 'blind you with law' email text that section 476 audits cost much more than ordinary audits. I had some fun writing back to him, and sending him a little image of people rolling on the floor with laughter.

Then I reflected: our membership includes four investors in property, some with a sizeable portfolio. Two of them are directors. The manager has reduced their annual maintenance charges. (He manages their other properties too.) The above-mention chartered accountant (who advertises his services wildly, has no working company, but lists a dormant and a non-trading one) is very much one of them. Of out 20 flats, only three of us are owner occupiers. So there is not much cohension in the company to speak of. Having at first thought contemptuously of them as creeps and fools, I am now very soberly contemplating the possibility that the manager and the chartered accountant have in place a scheme to acquire our company's freehold, and to set themselves up as landlords. Or they are employed to do that by one or more of the property investor members of a company.

I might be mad, of course. But does any of you think the scenario I outlined can be brought off by a gang of small-time crooks like the ones I described? What would you do in my position? (I shall take on the chin whatever anyone thinks fit to say.

[leaseholder64]

Section 42 almost certainly applies to you. Section 42 of L&T 1987 is for your protection. If the lease doesn't allow for reserve funds, there is really no way you can be forced to contribute. If you are referring to L&T 1987 in general, yes you are largely bound by that Act.

"Slush funds" has no meaning in company or leasehold law, so I don't know what you mean, and, given the negative connotation in common usage, I cannot imagine the company used the term.

Most leases allow for balancing payments and for immediate calls for money, if the service charge payment on account was too small. Is that what you mean by cash calls?

It is not that section 476 audits are particularly expensive, but hat all audits to modern standards are very expensive. It is unusual for all but the largest companies to have audits these days, and flat management companies are unusual for their size in even having accounts checked by an accountant, at all.

The ICAEW guidelines are that conditions in leases requiring audits should be downgraded, unless the the lease is recent enough to have come under the new audit regime, as the non-audit check by an accountant, that one would normally get, are of a similar standards to audits at the time the leases were written, when it comes to older leases.

Note that, because of section 42, most of the money managed by the company does not belong to the company.

Please confirm that a criminal court has convicted the alleged "crooks".

It is difficult to tell whether the manager is abusing their power or simply doing their best to keep things running in the face of apathetic leaseholders, both absentee landlords and owner occupers.

[eagle2]

I am unsure what you are hoping to achieve.

In general terms, an audit and an accountant’s report of factual findings rarely assist a leaseholder.

The meaning of “audit” has changed since 1980 so the meaning of your lease depends whether or not it was drawn up before or after that date. If the former, your management company is entitled to interpret the meaning as an accountant’s report of factual findings on the service charge accounts.

An audit under s476 CA 2006 would only apply to the statutory accounts of a company and most management companies file dormant accounts. So confirmation that a company had no assets and no liabilities of its own is unhelpful and you are correct to say that such a statement should not cost anywhere near £3,000.

Even if yours is one of the rare management companies which includes service charge monies within its statutory accounts, I am not sure that you will benefit by seeking confirmation that assets and liabilities existed on one particular day of the year in the past. To that extent the cost would not appear to justify the means.

Why do you not ask to inspect the accounting records of the management company?

If the company is not complying with the lease or landlord & tenant legislation, you can apply to a Tribunal to determine the service charges which are payable.

If you wish to remove a managing agent or director(s) or accountant, your best option would be to seek an ordinary resolution at a general meeting of members. So seeking support from other members would be your best move initially.

[sophiejo]

Thanks, leaseholder64 and eagle2. I will write in more detail later, but I'm rushing off to work now (7.10am), so just two points:

1. Why do you both write as if my company is governed by the L&T Act? Our Lease was made under the Land Registration Rules 2003, and our Articles of Association under the Companies Act 1985. (That still applies to Articles written before 2007.)
2. What I want our audit to achieve is the confirmation that (i) we remain observant of the terms of our Lease, (ii) the company accounts show that there is no disparity between the company's takings (from our one source of funding: our amnnual contribution to the maintenance of the company's freehold property) and the company's bank balance.

[eagle2]

The management company should comply with all legislation, including the Landlord & Tenant Acts and Companies Acts so far as it relates to the Company

An audit under s476 CA 2006 will not consider whether or not the Company has observed the terms of the lease, it will only report on whether or not the statutory accounts have been drawn up correctly.

Whether or not turnover and the bank balance appear within the statutory accounts will determine whether or not they fall within the scope of an audit under s476 CA 2006.

The management company is likely to receive other income apart from service charge or maintenance contributions eg interest, administration fees etc.

You should have received service charge accounts with an accountant’s report of factual findings attached. That report requires the accountant to check and report whether the bank balance agreed or reconciled with the bank statement(s) for the account(s) in which the funds are held. Please read carefully the last sentence and consider the limitations of the report.

There is no legal requirement for service or maintenance charges to be paid into a bank account in the name of the management company and once again an audit under s476 CA 2006 will not assist you.

If you suspect that the management company is not complying with the terms of the lease, it is up to you to gather evidence and exercise your various rights as a leaseholder or as a member of the company.

[leaseholder64]

The company is a landlord and so is bound by all landlord and tenant legislation, not just that explicitly mentioned in the lease. Whilst it is possible to contract out of some legislation, that would have to be explicit. In any case, residential landlord and tenant law is generally for the protection of naive tenants, so it is not possible to contract out of it.

The legal status of companies is that, for most purposes, they are treated the same as natural persons (flesh and blood humans), so a company acting as a landlord is covered by the same landlord and tenant and health and safety law as a real, human person).

Incidentally, although I haven't researched this, I'm not convinced that a full audit would not extend to monies held in trust, such as client monies and service charge funds

However, if the lease references the 2003 Act, it most post-date it, and the requirement for an audit is valid, and will be expensive, because there will be no doubt that the requirement in the lease applies to the service charge monies. The Companies Act route would not be appropriate. There is no need to request an audit, and a failure to hold the audit would be something that could be taken up by any leaseholder, whether or not a member of the company. The cost may be a good reason for not trying to enforce that clause in the lease, and using your rights to inspect the actual documents showing costs may be a better approach.

[eagle2]

You would need to supply the exact wording of the lease regarding an audit but the directors of the management company would have the right to avoid a full audit on the grounds that it was disproportionate to the size of the property.

I disagree that the Landlord & Tenant legislation assumes that tenants are naïve, it goes some way towards protecting tenants from rogue landlords and their agents, sadly not far enough.

A company may also raise monies under the Companies Act by passing a resolution of members but that is not recommended, it creates problems and members would not have the same rights as leaseholders.

[sophiejo]

Hello, eagle2!

'An audit under s476 CA 2006 would only apply to the statutory accounts of a company and most management companies file dormant accounts. '

Secton 476 provides for the right of members to require audit. It is a right even when the company is exempt from the audit requirement as a 'small company', 'subsidiary' or 'dormant'. Our company cannot be 'dormant' because it has an annual income. Our Lease, however, requires an annual audit: It seems to me that our Lease trumps the audit exemption: It does not amount to an imposed statutory requirement; it is a choice offered.

'The account ... will be prepared and audited by a qualified accountant who shall certify the total amount of the said costs charges and expenses ... for the period to which the account relates and the proportionate amount due from the Lessee to the Company under the Lease.'

'A company may also raise monies under the Companies Act by passing a resolution of members'

There is no sign of this i our Articles or in our Lease. Does the above not refer only to trading companies?

'If you wish to remove a managing agent or director(s) or accountant, your best option would be to seek an ordinary resolution at a general meeting of members.'

Our peculiar situation is that are members are not AGM or GM attendees. I went for the first time last year since 2010. There were 4 members present and two directors. I was told that sometimes only 1 director turns up, and 0 members. Of our 20 members, 10 are investors/landlords, 3 resident owners, and the rest occasional residents. One could require that an extraordinary meeting be called, citing the proposal that the manager be turfed out, and inviting votes by mail/email. If the audit comes back with something that condemns the manager, that is what I shall do.

'If the company is not complying with the lease or landlord & tenant legislation, you can apply to a Tribunal to determine the service charges which are payable.'

No need at all. Our Lease binds everyone to the annual payment calcualted on the formula '17 x y/320', where 'y' is the amount estimated to be sufficient to meet the upcoming year's Company expenses. This includes all expense. This is a neat, house-keeping sort of formula. I like it. There has, however, been much misunderstanding and some skulduggery. The former manager/director had a set charge. It was low, the Company never had any money, and the property was rapidly on its way to tumbling down. We re Grade II listed, so English Heritage intervened (not with money), the director/manager resigned, and a hefty call for money to replace the roof was made. There is still a set charge. I am trying to make the manager cretin and the directors (also cretins, with the possible exception of one) understand that the 'y' in '17 x y/320' is an annually calculated amount, not a constant one.

The skulduggery comes in with the formula '12 x y/320'. That does not appear in the Lease. Its first use was innocent enough: the annual contributions of the basement flat owners was reduced to that amount, to make their sale more attractive. The current manager is giving this privileged formula out willy nilly to people whom he wants to cultivate. Both times, it is illegal, because our Lease has everyone pay the same amount, on the '17 x y/320' formula, on the basis that we all own 200 shares in the Company's property. I.e., the flat's square footage, its location, etc., do not come into the calculation.

leaseholder64:

'Incidentally, although I haven't researched this, I'm not convinced that a full audit would not extend to monies held in trust, such as client monies and service charge funds'.

We don't have such accounts. Our company account is very simple. It includes only the annual contributions of members to the maintenance of the Company's property. We do not have a service charge, nor any other charge, in the sense of the L&T Act.

'Most leases allow for balancing payments and for immediate calls for money, if the service charge payment on account was too small. Is that what you mean by cash calls?'

The way our manager uses /cash calls', also the way I see it used in discourses (not statutes), it means 'needed money for works'. 'Slush funds' are funds that can be used when and if need arises. Reserve funds (sinking funds) are never touched, but left in expectation of unforeseen major works. I see these terms used with regard to L&T Act leaseholders. They are not CA terms.

'Please confirm that a criminal court has convicted the alleged "crooks".'

Not yet.

Mine: 'Our Lease was made under the Land Registration Rules 2003.' Sorry, silly error. Our Lease was made under the Land Registration Act 1987, before the Company incorporated in 1993.

[leaseholder64]

What is the nature of the income? Service charge money is not income to the company as far as determining whether it is dormant. Most management companies for flats are dormant. The real point, though, was that leaseholders are generally interested in service charge money, which is not company money.

The lease wouldn't say anything about company based slinking funds.

If the company members are apathetic, there is very little you can do under company law. You can only really deal with it under landlord and tenant law. Apathetic flat management members is not at all unusual.

17 doesn't divide 320, and is certainly not 1/20th of it. I would assume all the leases have different proportions, so you will need all the leases to see what the correct position is. If all the leases say 17, you have defective leases and the FTT can reduce the proportion so that it does add to (320/320). Reducing the proportion for the basement flat is not simple!

I would beg to differ on service charges. Either someone has found a very big loophole in the law, or you do have service charges in the sense of variable amounts for insurance an upkeep.

At the moment, it looks like there is no provision for reserve/sinking funds. However, for further clarification, what does the lease say happens if y is found to be too high or too low, at the end of the year?

If there are no convictions, it is libel to call them crooks.

1987 is still after 1985. (Whilst L&T 1987 wouldn't have applied at the start of the lease, it will apply now.)

[leaseholder64]

The Land Registration Rules 1987 is a very short piece of legislation basically dealing with operation of the Land Registry. It says nothing about the contents or interpretation of leases.

[eagle2]

s476 CA 2006 specifically states that a member may require the company “to obtain an audit of its accounts for a financial year”. I have agreed already that you can obtain an audit of a dormant company but that would be pointless.
Your lease appears to have been drafted prior to 1980 and the report of factual findings appears to be sufficient.

I agree that if a Company raises monies by ordinary resolution, then it should be regarded as trading.

There is nothing unusual about members failing to attend general meetings, however they do have the right to attend or to appoint a proxy to attend on their behalf.
The purpose of an audit is not to condemn a manager, or indeed any person.


I recall your annual payments from a previous thread. The contributions do not add up to 100%.

[eagle2]

The management company is required to keep service charges to a reasonable level and as a leaseholder you can ask it to justify the reserve fund (including what you describe as a slush fund) contributions.

[sophiejo]

leaseholder64: '17 doesn't divide 320, and is certainly not 1/20th of it.' It seems you have misread our formula. This is how it is read: 17 multiplies the sum you get when you have worked out how how much money the company need for a year ('y') and divided it by 320.


'The Land Registration Rules 1987 is a very short piece of legislation basically dealing with operation of the Land Registry. It says nothing about the contents or interpretation of leases.' No. But you are in the wrong Act. The lease-regarding matter is in the Land Registration Act Act 1925:

'48 Registration of notice of lease

(1) Any lessee or other person entitled to or interested in a lease of registered land, where the term granted is not an overriding interest, may apply to the registrar to register notice of such lease in the prescribed manner, and when so registered, every proprietor and the persons deriving title under him shall be deemed to be affected with notice of such lease, as being an incumbrance on the registered land in respect of which the notice is entered.'

The final comment (following the comma) makes perfectly clear that people who derive title under the proprietor who registers a lease hold the same lease, just as we do in our company.

And please note: not all crooks have been convicted. A crook is just a person whose dealings are not striaght.

'Note that, because of section 42, most of the money managed by the company does not belong to the company.'

I shall read that section. But if the above is true, then section 42 does not apply to my company, because it is soecifically to the company that we pay our yearly contribution towards the maintenance of its property.

-------------------------------------------

eagle2, I think this jumps the gun: 'The management company is required to keep service charges to a reasonable level and as a leaseholder you can ask it to justify the reserve fund (including what you describe as a slush fund) contributions. ' First, you need an infrastructure that accommodates a reserve fund. But neither our Lease nor our Articles provides it.

'Your lease appears to have been drafted prior to 1980...'

No. The Lease cites '1987'.

'I recall your annual payments from a previous thread. The contributions do not add up to 100%'

Oh dear! Like leaseholder, you are misreading our payment formula. It is not in quest of 100% of anything. Rather, it is working out the amount that we shall each pay the company as its annual contribution. I should have explained this. And incidentally, I have no idea what 320 means, nor does anyone I've asked. Must find a mathematician!



Anyway, thank you both for your comments. I shall now find a comfy seat and watch how the cookie crumbles.

[Macromia]

Sophiejo:
Why are you bothering to ask questions when you have clearly already decided what the answers are, and won't listen to anything that is said if it disagrees with you?
Most of the matters raised in this thread have already been discussed, in detail, in your other threads and dispite pretty much all those who replied pointing out that you were completely misinterpreting most things and still acting as if there is no doubt that your understanding is correct (I think it might actually have been unanimous agreement that your interpretations and understanding were wrong).

You REALLY need to have a solicitor explain to you why your ideas about how things work in are wrong - cancel the audit you are after, pay for some time with a good solicitor who understands leasehold property law - and actually listen to what he/she says.
Unfortunately, when you are told that you are misinterpreting everything, you will probably just think that the solicitor is another 'crook' who is in on the conspiracy.

[josepha333]

What is the nature of the income? Service charge money is not income to the company as far as determining whether it is dormant. Most management companies for flats are dormant.

Sophiejo may not be fully aware of the position she finds herself in, however the advice given here is again from a Landlord's POV, not really surprising given consideration from whom it comes from. Presumably the nature of the income is Ground Rent from the OP, "share-of-freehold set-up", that would possibly remove the grey area of filing dormant accounts, that far too many continue to exploit.

I was of the opinion that where the company acts as Principal and not as Agent then dormant accounts should not be filed. Links available if required?

Sophiejo talks of S476 of CA2006 and replies talk of the requirements laid down in the lease and best practice under ICAEW, but it would appear that whoever is running the show did not adopt RICS and ARMA recommendations to split the elements required by Companies House from the Service Charge expenditure, as was carried out at our development in mid 2013 for yearend 2012.

So questions arise are separate Service Charge accounts issued to all leaseholders and statutory company accounts issued to all members? What does the lease state as to an audit of expenditure? What do the articles state as to the appointment of auditors and reports from at the AGM?

I see this as another case where whoever is running the show refers to either the lease or the articles for the company, but only the parts where they benefit and the leaseholders don't!