Sinking fund breach of covennat?

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    Sinking fund breach of covennat?

    The level of the sinking fund has never been agreed by the managing agent or the Directors at any AGM in respect of the accounting years ending December 2016 2017 2018 and 2019 as required by the Deeds of Covenant.
    THE FIFTH SCHEDULE
    10. To set aside(which setting aside shall be for the purpose of the Sixth schedule be deemed an item of expenditure incurred by the Lessor) such sums of money as the Lessors shall reasonably require to meet such future costs of the Lessor shall reasonably require to incur in replacing maintaining renewing and decorating those items which the Lessor herby covenants to replace maintain renew or decorate (such sums set aside to be a sinking fund).
    THE SIXTH SCHEDULE
    3.(A) In advance each year the amount which shall be reasonably estimated by the managing agents or the Lessor as the case may be of the Service Charge for the year
    (B) Any further sums as shall be required by way of an inteim charge during the course of the year
    6. (B) too great then the surplus so paid shall be carried forward by the Lessor and credited to the account of the lessees in computing the Service charge in succeeding accounting periods or in the Lessors discretion shall be transferred to the sinking fund.
    The current leaseholders now have a larger burden than they might have had if certain amounts had been paid into the sinking fund I have found specifically that “throughout the period 2016 to 2019 the sinking fund has not been properly administered by the managing agent or the directors.
    The decision of the Upper Tribunal (Lands Chamber) in Caribax Limited (and others) v Hinde House Management Company Limited [2015] UKUT 0234 (LC) turned on the interpretation of those parts of the lease concerning the use of a reserve fund.
    Under the lease the landlord was permitted to build up a reserve towards certain specified items of expenditure and that the reserves should be transferred to a “specially designated trust fund” complying with s42 (5) of the Landlord and Tenant Act 1987. The lease further provided that the cost of those specified items should be met first from the reserve/trust fund. In this case, whilst the landlord had built up reserves it had never established a “specially designated trust fund”.
    The First-tier Tribunal (Property Chamber) (“the Tribunal”) decided that where spending came within any of the relevant categories the landlord could not be required to first of all use the reserve fund.
    The Upper Tribunal reversed this decision on the basis that the Tribunal had basically permitted the landlord to take advantage of its own breach of covenant by not setting up the designated fund in the first place.
    Whilst there was no specific trust fund established, a reserve fund was apparent in the landlord’s accounts and therefore it was required to use that for repairs and maintenance before requesting further sums from tenants.
    Landlords should make sure that reserve funds are properly set up, in compliance with the lease, and held on trust as required by Section 42 of the 1987 Act.
    If there is a reserve fund revealed to be in existence- irrespective of whether it is held in a designated trust fund – landlords should think about meeting repair and maintenance expenditure from this fund before sending out demands for further contributions through the service charge.

    #2
    Directors should be making such decisions at board meetings, not at AGMs!

    The clause appears to an enabling one, not a mandating one.

    Given current interest rates the leaseholders are probably in a better financial position not having a trust fund. I happen to think that enough leaseholders are unable to budget that you need sinking funds, but at least one regular poster feels that reserve/sinking funds are a bad thing and leaseholders should budget for such expenditure, themselves.

    All the court case seems to be saying is that obvious, that money held in trust is held in trust even if it is not held in a nominated account. (The statute that would require such an account has never been commenced.)

    Comment


      #3
      Normally the managing agent would recommend the level of the sinking fund and he should be able to provide calculations in support. You have not explained what you mean by the fund not being properly administered but the Company (RMC ?) may have a claim against the agent. In theory the leaseholders have "benefitted" if they have paid lower contributions in the past so any larger burden now is the catching up process.

      Comment


        #4
        Thank you Eagle 2, the directors are running the show, they and the managing agent did not budget, plan or collect sinking funds monies nor pay their assign to let fees. We have decorating works coming up needing scaffolding and there are no monies and a flat with a damp problem. No monies in the pot so burden is more on the new leaseholders as they have to pay whilst directors paid nothing and just sold their flats.

        Comment


          #5
          LPE1., the standard solicitors' enquiries form asks about what is in sinking funds, so the cost to the new leaseholders, and the income to the departing directors, should have been reduced to reflect that there were no reserves.

          Comment


            #6
            The usual problem of a sinking fund is that it is not kept properly, it is raided for other purposes and it does not exist when it is needed.

            We do not know whether or not there were any discussions between the agent and the directors. Also we do not know the full terms of the lease, it appears that a sinking fund is permitted but it is not a requirement. We also do not know what has happened to any surpluses for each year, have these been retained by the Company or have they been credited back to leaseholders?

            There is no way of proving that the directors benefitted by having no sinking fund, in theory it would be easier to sell a flat with rather than without a sinking fund. It could be argued that leaseholders and potential buyers should be aware of the need to redecorate and carry out repairs and the lack of a sinking fund and should plan or act accordingly.

            This is not something which you should bring before a tribunal, which could not force the Company to operate a sinking fund and would most likely just recommend that a sinking fund is operated in future.

            You have other options, you can contact the other members and enquire if they agree with you, in which case, you could call a meeting of members to consider resolutions to remove or add directors and to require them to operate a sinking fund in future.

            Comment


              #7
              eagle2,

              That is what I thought, I though the fund was supposed to be put in place and monies paid for the cyclical repairs. now 5 years later we have nothing.

              Comment


                #8
                Monies were in the service charges bank account for a few years then the directors sold their flats and paid themselves back all the monies in the pot, also they never paid their assign to let fees and charged company expenses to the service charges.

                Comment


                  #9
                  It is highly unusual, but in theory the directors can make a decision to reduce the level of a sinking fund, in which case all leaseholders should be credited with their share of the reduction. If you have not received the benefit of the reduction, you may have a valid claim against the RMC, which may in turn may have a claim against the directors.

                  Assign to let fees will depend on the terms of the lease. The RMC could have taken the decision not to collect those fees from the directors but it should have declared the benefit to directors. There is nothing to stop the RMC from reversing that decision and charging the directors. Whether or not the RMC can recover monies from directors who have sold their flats and the costs involved need to be considered carefully.

                  I am not sure what you mean by "company expenses" but if they include Companies House filing fees etc, they are often charged as service charges in order for the RMC to claim dormancy status. Whether or not that is correct and whether or not a RMC is entitled to be dormant is a very long debate. The Tribunals tend to allow small amounts to be included in the service charge expenditure. If the amounts you are referring to are substantial, you may have a case for claiming that the service charges are unreasonable.

                  Comment


                    #10
                    With a typical lease, the trustees do not have any right to pay out the trust money to leaseholders for use for purposes not in the lease. Doing so is breach of trust.

                    Comment


                      #11
                      I think that they probably can depending on the wording of the lease. Typically, a lease gives the RMC the right to collect a sinking fund but it is not mandatory. It is up to the RMC to decide whether or not to call for contributions. The RMC may be able to change its mind and decide to operate a sinking fund no longer and transfer amounts back to the service charge fund. Again depending on the wording of the lease, the RMC may be able to credit the leaseholders with the surplus on the service charge account. Normally a credit would be applied against future service charges but the lease may permit the leaseholder to apply for a refund which would be paid out of trust money.

                      Comment


                        #12
                        Thank you Eagle2 yes the lease permits the monies to be credited to the service charge account or transferred to the sinking fund. What has happened is the monies have been paid back to the directors who have gone now. In my view the monies should have been left for new people coming in and put towards the sinking fund but instead the monies have been drawn and the service charge account closed.

                        Comment


                          #13
                          Have the directors paid themselves more than the credits on their service charge accounts? If they have, it is theft and a breach of trust, If they have only taken their share, then they may be entitled to a refund depending on the actual wording of the lease.

                          Comment


                            #14
                            Originally posted by eagle2 View Post
                            Have the directors paid themselves more than the credits on their service charge accounts? If they have, it is theft and a breach of trust, If they have only taken their share, then they may be entitled to a refund depending on the actual wording of the lease.
                            This is the important consideration I.M.O.
                            Also, if any money was refunded to leaseholders from the sinking fund account, it is likely that all leaseholders should have been given a share in line with the lease proportionment at the time the refund was actioned.

                            I would expect all leaseholders to have made contributions to the sinking fund each year in line with the proportions required by the leases, and would not expect this fund to be subdivided into separate sinking fund accounts for each property. If any major work is required for which funds from the sinking fund are to be used, a single amount from the sinking fund is credited against the service charge costs for the year in question, and then any remaining costs are split as required.

                            Usually a sinking fund would be passed on as a benefit to the new leaseholders when a lease is sold, but the amount of sinking fund would be expected to be taken into account in the sale price - so a flat in a property with a large sinking fund balance should be worth more than an identical flat with no sinking fund (representing the fact that, in the first case, the new leaseholder is less likely to be expected to pay high service charges for major works soon after buying the lease).

                            Comment


                              #15
                              It looks like there was a surplus on the service charge account, the RMC had the option under the 6th Schedule of the lease either to carry forward that surplus and offset it against future charges or transfer it to a sinking fund.

                              Repaying a surplus does not seem to be an option. So the directors appear to be in the wrong, they should have simply informed the purchaser that there was an existing credit on the service charge account relating to the apartment. The RMC will now have to collect all amounts due from the purchaser and will not have the benefit of a balance to offset against the debt.

                              The important point is whether or not the directors have paid themselves more than the credit balances on their accounts.

                              Comment

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