Passing on large legal bill to leaseholders

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    Passing on large legal bill to leaseholders

    I am a leaseholder in a block of 26 flats but also a shareholder of the RMC. We bought just over a year ago but there was a long-standing litigation between one leaseholder and the RMC. That case has now been concluded with a tens of £thousands award of compensation to the claimant (the leaseholder). In addition, the award for costs against the RMC looks like it may run to well over £150k! (it was a long complex case).

    Whilst the case was brought against the RMC, which I understand as a shareholder my personal liability is limited to the value of my share (£240) the RMC’s legal fees and the compensation award has already been levied to leaseholders, with the prospect that the other parties legal costs, which if not reduced will result in another charge to leaseholders of around £5k each, bringing some leaseholders contribution to approaching £10k! Given the annual service charge is £1.2k you can see the issue.

    It seems somewhat perverse to have limited liability as a shareholder but seemingly unlimited liability as a leaseholder.

    What would be the situation for the RMC if it couldn’t/didn’t pass these costs on to the leaseholder?

    I think that you need to address the problems of the RMC first, it is clearly not being run effectively. You may need to remove the directors and or any managing agent. It is highly unlikely that the RMC will be able to pass on the costs to leaseholders who would be able to challenge those costs at the First Tier Tribunal. This is likely to have serious financial consequences for the RMC and a meeting of members should be requested urgently.

    The liability of leaseholders is supposed to be limited to reasonable amounts. Whilst the liability of a shareholder is in theory limited, the members will need to decide whether or not to rescue the company by making voluntary contributions or forming a new company.


      This can be a difficult area for RMCs. Generally they have no money of their own, but they may be obliged by the lease to take legal action. Often leases require the leaseholder forcing the freeholder to act to indemnify their legal costs, and often there is a provision to recover costs from defendant as long as the motions of requesting forfeiture are gone through, but the latter, in particular, is controversial, and is not as safe as it used to be, as the reasonableness of the costs can be challenged.

      They might be forced to take action for reasons other than a leaseholder enforcing a covenant against the lessor, e.g. because the company would commit a criminal offence if it didn't.

      There is also the problem in this country, that only the rich are effectively covered by civil law as the financial risks to ordinary people are too high for all but simple small claims cases.

      Most leases don't allow the service charge to be used to fund actual legal actions, so you could check the lease and consult a solicitor, the CAB, or Lease Advice as to whether the costs can be charged to the service charge.

      However, if they can't be charged to the service charge, the problem comes back to the company shareholders. Whilst they cannot be forced to bail the company out, the alternative is likely to be much worse in that the company goes bankrupt and the freehold is sold off. If the freehold has any real value, some subset of the leaseholders will have to find the money to buy it, or it will go to one of the big leaseholder milking companies. As such you end up with an acrimonious situation where some of the leaseholders have to find the money.

      If the directors have acted outside their powers, it may be possible for a new set of directors to direct the company to sue them, but the companies debts will need to be cleared first, and this will involve high risk court action with the risk of failing and incurring even more legal charges.

      It's a big problem for leaseholder enfranchisement that challenging what the company does with the service charge in the end still requires the leaseholders to pay up, as, in general, the company cannot be allowed to go bankrupt.

      Without specific details, we cannot tell whether the company would have ended up being the defendant in an action to force it to take the action it did, or whether it went about it in the safest way possible.


        It would help if more information about the litigation was provided in general terms. Why did the leaseholder take legal action against the RMC?

        In most cases, it would be preferable for leaseholders and the RMC to avoid expensive legal action and seek some compromise or alternative way of resolving a dispute.

        The directors of the RMC are not permitted to operate the Company when it does not appear to be in a position to pay its liabilities and therefore they have no option but to call a meeting of members and set out the limited number of options available to the members, which seem to be (1) liquidate the company and set up a new company to take over the rights and obligations under the lease (2) call for voluntary contributions from members

        Charging the leaseholders with service charges which are unreasonable and which are almost certainly not payable under the terms of the lease is not one of the options.


          Sorry, I missed that the leaseholder brought the case.

          I think rather more detail is needed as the real problem is the one that resulted in the compensation. In particular, did it relate to a management function, in which case it resulted from a failure to do things chargeable to the service charge, or was it something like consents.

          It's possible that if the company hadn't defended the action, its bankruptcy would have been inevitable anyway, so there is a difficult question of when to cut its losses.

          Such companies cannot afford to cave in at the first threat of legal action by a leaseholder, as the leaseholders could then walk all over them.

          The legal charges are still probably not chargeable to the leaseholders, but the reality is still that the members will probably still have to pay them.

          Note that in eagle's option (1). when liquidating the company, the liquidator would need to obtain full market value for the freehold from the new company, so, if it had any value, some or all of the debts would end up in the share subscription price to become a member of the new company. Again the leaseholders (with shareholder hats) would have to pay.

          Companies that are basically the same company stripped of the old debts are the sort of companies that get featured or rogue trader TV shows.


            The Leaseholders have to set up a RTM company to take over the service charge administration and let the RMC go into voluntary liquidation due to insolvency.


              That way the freehold gets sold to a leaseholder milking company.


                This whole thread is a case study of why the whole idea that - it is necessarily an advantage for groups of lessees to purchase the freehold, set up a company, and it's all great - is nonsense.

                These lessees would have been far better of with an old fashioned common-garden-variety of freeholder, who would have taken a massive personal hit.

                Lessees who thought it a good idea have been sold a lie in the long run, even (in most cases) with the worst of external rip-off-artist freeholders.


                  There is no need to overreact, leaseholders are always better off being free from rip off artist freeholders. We do not know the details of the dispute between the leaseholder and the RMC but it is rarely in either of their interests to be taking legal action against each other.


                    Originally posted by eagle2 View Post
                    There is no need to overreact, leaseholders are always better off being free from rip off artist freeholders. We do not know the details of the dispute between the leaseholder and the RMC but it is rarely in either of their interests to be taking legal action against each other.
                    Whilst it is inadvisable, the leaseholder in this case appears to have passed the point where he needs to make an appointment with the surgeon to amputate his gunshot damaged foot. It's possible the red fog got to him, or that he is able to weather the financial consequences.

                    The other side of this is it makes it almost impossible to follow the leaseholder options for redress when an RMC starts ignoring the law.


                      Again, we do not know the facts, but the RMC lost the case and presumably it was not complying with the lease, which is the number one priority. It should have realised much earlier that there was a possibility of losing and facing substantial costs and reached out to settle the matter. It has certainly not acted in the best interests of the other leaseholders. The solicitors involved also had a duty to warn the parties of the risks involved, all too often they allow a dispute to escalate out of control to the stage where the costs become more important than the actual dispute.


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