Reserve Fund - thousands spent behind our backs - what can we do?

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    Reserve Fund - thousands spent behind our backs - what can we do?

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    Hi all - we noticed the balance of our reserve fund had dwindled to virtually zero. finally we got a breakdown from the Managing Agent as above.

    all withdrawals (shown with red arrows) - none of us (4 leaseholders) had any idea were happening. Note also that two of these appear to be the Freeholder paying off some sort of (his) debt (I am guessing on tenants that absconded from his flats (he owns 2 of 6)) - but in all cases we were not informed.

    anyone able to suggest a way forwards? - surely it looks like fraud as we shouldn't be paying his debts - but we are stuck as to what actually to do about it. Going to solicitors etc is scary due to potential costs etc.

    The Management Agent is employed by the Freeholder and seems disinclined to engage with us on this or any matter other than fullfilling their obligations to look at the paperwork.

    thanks very much,
    Oli.

    #2
    I'm not entirely sure how things work when some of the leases are shorthold, but writing off doesn't actually mean any money has changed hands. The reserves are not just what is in the bank, but also the excess of what is owed to by others over what is owed to others. Writing off the debt means that you have little hope of recovering the debt, so you an no longer consider the amount payable as an asset. In the case of a long lease, there should never be a need for write off, as the debt should be recoverable when the lease is next assigned ("sold"), from the proceeds of the sale. However, as noted, I don't know how it works if some flats are let directly at a low or zero premium.

    The error correction also needs serious explanation.

    If this is the first anyone has heard of them, the other items are definitely not payable, as the cost was incurred more than eighteen months ago, and not notified within that time. http://www.legislation.gov.uk/ukpga/1985/70/section/20B

    Comment


      #3
      The uncollected deficit collected from the reserve looks llke sloppy accounting. I assume it reflects the common, but questionable, practice of funding current year costs, from the reserves, because some people have failed to pay the current year's service charge. I suspect this is usually a breach of trust, but is often the only way of meeting the obligations under the lease.

      If so, I'd say it is sloppy accounting, because it should not affect the reserves, as it really should be accounted for as debt owed to the reserves. In double entry book keeping, the £949 taken from the bank, should be balanced out by a £949 increase in the debtors.

      Comment


        #4
        The write off may well be the result of the previous use of the dodgy practice of using other people's reserve contributions to cover non-payers. In general, money should not be spent until it has been collected, if that is at all possible, although, in reality, there are some things that must be spent in the short term, e.g. health and safety measures, and leaseholders can force the freeholder to fulfil obligations that also require immediate expenditure.

        Comment


          #5
          thank you .....but - what to do about it? - are we entitled to any kind of receipts / paperwork by law or anything like that? - isn't the freeholder required by law to seek permission to spend (one of the leaseholders here thinks that's the case for anything about £250) ...so ultimately is our only recourse the law, or can we force the hand of the Management Agency somehow?

          Comment


            #6
            FTT application for a determination IIWY.

            Comment


              #7
              If your service charge demand didn't come with a summary of your right to obtain accounts and inspect receipts, nothing is payable at all until it is reissued with the proper version of that summary!

              That summary tells you you can request summary accounts for the last completed year, and once you have it, you can request to view the receipts, etc., that support it.

              If you challenge it with the FTT, they will probably insist on this information, probably going back up to twelve years.

              There is a good chance the freeholder will not honour the FTT decision, in which case you either sue them in the County/Small Claims Court, or wait till they try to sue you for non-payment, then present the decision in your defence. The Courts defer to the FTT on all matters of reasonableness and payability of service charges.

              Comment


                #8
                Hi, let's start with the chocolate fireguard legal stuff...

                Section 42 of the Landlord and Tenant Act1987 creates a statutory trust for service charge funds, which must be banked in a clearly identified client account. See also the Service Charges Contributions (Authorised Investments Order 1988 (SI 1988/1284 (amended by the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 (SI 2001/3649).

                A reserve fund is just another element of service charge and must be used for the purposes collected. Even if not clearly stated it as to precise purpose, the service charge could not be used for paying the landlord's personal debts or losses, other than for what is permitted in the leases of those being asked to pay it. A service charge collected from leaseholders under their lease for costs arising in their development would not be used for covering shortfall of non-leaseholder tenant liabilities to the same landlord, say for rent arrears or for deposit scheme failings.

                Misuse of trust funds is a breach of trust. The question of criminality would need a copper's judgement.

                Next you need to consider how freehold managing agents handle reserve funds. Forget the nice theory that the fund is held in a separate bank account earning interest until needed. It is often just a handy way of having enough money to spend on overbudget spending on annual costs - allowed even by the RICs code tho supposed to be a temporray raid only - and the notion of an annual budget is anyway a farce in leasehold.

                A chartered accountant of many years once admitted to me that his profession knew well that when they do reports of factual findings for annual service charge accounts, all they really do is make the paper figures add up, they have no idea if actual money exists in a pooled bank account because they don't see any bank statements. This means that a 'reserve fund' might be all on paper, not in bank notes.

                Seeing an "opening error" of £2415 deducted from O/B of £4747 would not pass unquestioned in normal accounting. On the other hand, a bad debtor write off removing another £3K means an actual loss of assets to the service charge account, but I can see nowhere that landlords cannot write off bad debtors this way. You have to understand that the balance sheet will show debtors as an asset, and the Income statement is calculated on what was demanded not what was received, so the first casualty of debtor 'assets' on the balance sheet is the figure that claims to show a reserve fund. In reality the debtors have the reserve fund in their bank accounts. Once written off they have taken the reserve fund, innit.

                If your lease does not allow them to collect a reserve fund, I would talk to your neighbours and stop paying into it. Better to have the money in your bank account until you get a demand, as will now happen now anyway.

                I doubt the copper mentioned above will be interested.

                Go for RTM? (Apologies for spelling, I'm developing a new language).

                PS. The grab of £949 for an annual deficit is not allowed. They should issue an excess charge or balancing charge invoice but either way you all pay that deficit so hey ho.
                Last edited by MrSoffit; 14-01-2020, 12:58 PM. Reason: Writing gibberish...
                Do not read my offerings, based purely on my research or experience as a lessee, as legal advice. If you need legal advice please see a solicitor.

                Comment


                  #9
                  very appreciative of these responses - it'll take some time for me to digist.

                  I'm not sure about any "do not pay" type ideas though - it is wrapped into our Service Charge, and the Management Agents apply fines immediately if we do not pay. If we don't then probably we can never sell our flats (as they have disputes hanging over them) and it might also affect our chances of getting the RTM I have been told.

                  Comment


                    #10
                    Originally posted by MrSoffit View Post
                    which must be banked in a clearly identified client account. See also the Service Charges Contributions (Authorised Investments Order 1988 (SI 1988/1284 (amended by the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 (SI 2001/3649).
                    This is not the law. The authorised investments order adds additional options. Currently any investment appropriate for a trust can be used, which basically means one must take into account the risk and nature of fund. The Act says orders may specify additional investments, and the order says "may", not "must".

                    The note on section 42A, the part of the Act requiring a designated account, is "Ss. 42A, 42B inserted (26.7.2002 for E. for specified purposes, 1.1.2003 for W. for specified purposes and otherwise prosp.) by Commonhold and Leasehold Reform Act 2002 (c. 15), s. 156(1); S.I. 2002/1912, art. 2(c) (subject to Sch. 2); S.I. 2002/3012, art. 2(c) (subject to Sch. 2)". Prosp. means prospective, which means the legislation is on the books, but not in effect. The specified purposes are the creating of secondary legislation, which means that statutory instruments can be drafted and approved, in preparation for the commencement of the legislation.

                    There are a few important places where this has happened in leasehold law.

                    In this case, I think it is because an anti-regulation government decided that self regulation, under the RICS code, was enough.

                    Comment


                      #11
                      Note that bad debts can be written back onto the accounts if they actually get repaid. The reason for writing them off is to show that the organisation's financial state is weaker than it might have seemed, not to indicate that they are no longer being chased.

                      Comment


                        #12
                        may I just ask if the Freeholder is required (as in we can actually enforce it somehow) to justify these debt write-offs? - i.e. are we entitled to some paperwork (though as he has his own company he can just write his own receipts).

                        Comment


                          #13
                          The issue you should be worrying about is what caused the debt, and why it wasn't recovered, and still not recoverable. The write off doesn't represent any payment at the time of the write off, and without the write off, it would make it appear that the service charge fund has access to more money than is really the case.

                          If there is reasonable doubt about the ability to recover the debt, accounting practice would require it to be written off.

                          As a leaseholder, you have no right to see records that relates to years before the last completed year. Although some would disagree, I also believe you have no right to records that might indicate that identifiable individuals had debts or were late payers.

                          The only way you can force access to that information is via the FTT or the courts. I believe the FTT cannot force its presentation, but will assume the worst if it is not provided. They are likely to rule out any charges for anything within, up to the last, twelve years, for which the freeholder doesn't hand over supporting paperwork.

                          Comment


                            #14
                            If you cannot see any receipts to explain the "bad debtor write off" and it does not look like a payment for maintenance work on the building , I would suggest you file a report at a larger police station of "suspected fraud" .

                            Comment


                              #15
                              A bad debts write off won't have receipts; in the context of service charge, it will have unpaid service charge demands. It will, ultimately, be the lack of in payments on the bank statement that evidence it.

                              Again, I repeat, that no money changes hands when the write off occurs, and that the write off is documenting a situation that arose some time before the accounting transaction to write it off was created. A write off is not even waiving a debt; it is simply saying that that it is likely that the debt will never be repaid.

                              A debt write off can't really happen unless the expenditure that the debt should have covered has been properly documented.

                              The only time there would be fraud is if the freeholder colluded with the debtor, or was, himself, the debtor and deliberately chose not to pursue the debt. I guess there can be slightly complex cases if the debt was owed by another of the freeholder's companies, that went bankrupt, in that there could be conflicts of interest in terms of who got paid and who didn't, immediately before they went bankrupt.

                              The write off might be the end result of fraud, but it is not itself the fraud, so, if you are looking for fraud the paperwork immediately surrounding the debts is not where you need to look.

                              As a general point accounts are supposed to help investors and trading partners, but, in reality, the accounts profession seems to be about constructing them in a way that provides as little real information as possible, and, in this case, there doesn't even seem to be a complete standards set of accounts.
                              Last edited by leaseholder64; 15-01-2020, 01:39 AM. Reason: Typo.

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