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

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  • leaseholder64
    replied
    The OP is out of time on S21 and S22, unfortunately.

    I don't think the two funds are considered different from the point of view of those sections.

    The issue of bad debts still comes down to the confusion between the bank account and the reserve account on the balance sheet.

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  • andydd
    replied
    Originally posted by Gordon999 View Post
    The "reserve fund" is unspent money collected from the service charges paid by leaseholders ( and this money is set aside for future maintenance of the building )
    There should not be any "bad debts" charged to the "reserve fund".
    Yes my thoughts too..I think the Service Charge fund and the reserve fund are separate entities, every LH will have to pay a service charge and funds may or may not be payable in advance and therefore build up as a fund, but not every lease allows a reserve fund and if it does it is built up to cover unforeseen large maintenance projects, IMO it cant be dipped into to recover debts or previous mistakes.

    Id certainly want to know what the bad debts and accounting mistakes are.

    Id assume S21 & S22 could be used to demand inspection of the Reserve fund accounts in the same way as standard Service Charge accounts.

    https://www.lease-advice.org/faq/how...eing-used-for/

    https://www.bradysolicitors.com/brad...d-expert-view/
    Holding funds in trust

    The recent case of Caribax v Hinde House Management Company [2015] UKUT 0234 (LC) reminds landlords of the importance of complying with S.42 of the Landlord and Tenant Act 1987 to hold reserve and sinking funds in trust. The reserve/sinking funds should be held in a separate bank account to the service charge monies.

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  • MrSoffit
    replied
    Assuming accounts were served - not clear here? - you'd expect to see the written off debtors amount under assets on the balance sheet for the year end before the period in which the reserves were reduced. or at least see that a similar sum was included in that total. If the debtors in that year were less it wouldn't make sense.

    If no accounts served, if a lessee requests a summary of costs in accordance with s21, LTA 1985, the landlord must provide the summary within one month of the request or within six months of the end of the accounting period in question, whichever is the later.

    ICAEW TECH 03/11 is a must read for lessees interested in how they should be informed about service charges. Find a free pdf to download by Googling the name.


    Check if the lease allows deficits on the income and expenditure account to be funded from a contingency fund or reserve. Usually, any net deficit or surplus is treated as an amount owed by or to lessees and must either be excess/balance charged if deficit or be credited against future service charges if surplus.

    A deficit should appear on the balance sheet as under assets as recoverable extra income, which should then be invoiced within a few weeks of the accounts being served.

    A surplus should appear on the balance sheet under liabilities (due refunding) which should then be credited within a few weeks of the accounts being served.

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  • leaseholder64
    replied
    The reserve fund, from an accounting point of view, is not money in the bank. It includes debts.

    When a service charge demand is issued, the reserve fund goes up as does accounts receivable.

    When a leaseholder pays their service charge, there is no change in the reserve fund value, but accounts receivable goes down and cash in the bank goes up.

    When it becomes apparent that the service charge will never be paid, the accountant must reflect that the organisation is in a worse position than it would have been if the debts was recoverable, and they do that by reducing the reserves. I can't remember whether the balancing transaction is to reduce accounts receivable, or whether it is to increase a bad debts account.

    You keep confusing the cash and bank figure, with the more technical concept of a reserve fund that the accountant is using. TECH 03/11 says accruals accounting should be used unless the lease forces otherwise, and this meaning of reserves is the result of using accruals accounting, rather than the cash accounting that small unincorporated business are allowed to use.

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  • Gordon999
    replied
    The "reserve fund" is unspent money collected from the service charges paid by leaseholders ( and this money is set aside for future maintenance of the building )
    There should not be any "bad debts" charged to the "reserve fund".

    Leave a comment:


  • leaseholder64
    replied
    I'd actually be most concerned about the reserves adjustment. I think the rest is the result of years of incompetent management, and then a new accountant trying to bring the accounts back into shape. The freeholder should be most worried all the expenditure over 18 months ago, which has not previously been reported to the leaseholder, and therefore may not have been chargeable to them, even though they benefited from it.

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  • leaseholder64
    replied
    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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  • Gordon999
    replied
    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" .

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  • leaseholder64
    replied
    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.

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  • tigerprawn
    replied
    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).

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  • leaseholder64
    replied
    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.

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  • leaseholder64
    replied
    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.

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  • tigerprawn
    replied
    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.

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  • MrSoffit
    replied
    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...

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  • leaseholder64
    replied
    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.

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