Accounting for RMC

[SHill]

Thank you really helpful

The year end for the accounts is 31 December. If leaseholders pay the Service Charge demand for Dec - March (due on 25 December) in January which is likely, will the arrears for this payment be recorded in the "service Charges due from tenants" or other debtors and will that income be accounted for in the next years accounts?

If the last quarter service charges were not paid until January by all the leaseholders the worse case scenario for "service charges due from tenants" in any event would only be £2,831.24 so the £11,002 recorded still raises some questions but it would be useful to know what the position is for the accounting.

[SHill]

You have said the amount under "Creditors" should not normally exceed one month’s expenditure which is around £900 because at worst there can only be temporary cash flow problems depending when the service charge expenditure is actually payable.
If service charge is collected quarterly and in advance could the Directors argue they had to loan money to cover a quarter rather one month. Even if they did argue this it would still be only approx £3,000 not £14,000 but just want to make sure I have the correct information to back up my point.

[SHill]

In relation to the allocation for Capex (capital expenditure) plan £1,140 the Appointed Managers has explained the sum is a budget and will obtain two estimates before proceeding with the lower estimate. I have never heard of this allocation before, are there specialist companies for this and what is their remit ?
She has also included a reserve fund of £3,000 which the Tribunal have already authorised in the Management Order. I will just have to ensure the Directors are removed before her appointment expires.

[eagle2]

If service charges have been demanded on 25 December, any unpaid amounts would normally be included under “service charges due from tenants”.
If the demands relate to income for the following year, the credit would normally be included under creditors.
I say normally because I have known some accountants to exclude both items from the accounts. To be certain, you should ask specifically if the service charge arrears include the demands issued on 25 December.
Income and expenditure will always relate to the actual year, so the demands issued on 25 December 2020 would be recorded as income in 2021.
If service charges are payable in advance and paid on time, there should be no need for a directors’ loan until the year end and only then if actual expenditure exceeded the budget. Your accounts indicate that there was a surplus so no loans should have been necessary unless there was very high expenditure incurred at the beginning of the year, in which case the loan could have been repaid at the latest when the charges for September were collected.
£14,000 represents approximately 15 months expenditure and there should never be any need for the RMC to borrow that amount of money.
It is extremely unusual to have a capex plan and a reserve fund, indeed the RICS code recommends that separate funds should not be maintained when the same leaseholders contribute to them. I recommend that you ask the manager exactly what purpose she intends for both plans and when she intends to spend the monies. Until you replace the directors, you do not want large sums to accumulate and you need some assurance that the directors will be paying their contributions.

[SHill]

..... Can reserve funds be used by the Appointed Manager to cover shortfalls due to other leaseholder arrears or use the monies in the reserve fund for the enforcement of leaseholders arrears. I fear that if I pay into a reserve fund this money will be used to enforce the Directors misconduct and I do not feel this should be a cost at my expense.

[SHill]

Capex Plan she has quoted for the report

Capital Expenditure Budget and Building Condition Reports

When setting service charges, reserve funds or budgets; a landlord, managing agent or individual property owner needs a clear understanding of the condition of their premises and accurate projected building repair and maintenance costs.

Advice that helps you plan and budget for the cost of future maintenance and major works that may be required, or that may arise in compliance with lease or statutory obligations.

Report specifically designed to help property owners or managing agents make sensible provisions, and set budgets and plans for the future maintenance of a building.

A guide for property managers when setting service charges and reserve fund contributions, so they can be balanced evenly over a number of years to try and avoid (as far as possible) large one-off service charge demands for foreseeable expenditure on major planned maintenance work.

The CAPEX reports are often set over a 10 year period, but longer timescales can be used. Property manager clients feel more secure knowing that provision has been made for future major repair costs.

[SHill]

The service charge accounts have still not been finalised for 2018, 2019 or 2020. While they are not finalised or signed I suppose this gives the Directors a get out of jail free card because they cannot be questioned on them.
What is the law relating to the service charge accounts? Is it only Best Practise to finalise them within 6 months of year end or is there any more regulation for this sort of scenario.
The Directors ignore S.21 & S22 LTA 1985 Notices for the leaseholders right to inspect accounts, the accountant says he is instructed by Directors.

[eagle2]

ok the Capex plan is simply a report which will be prepared by the manager in order to calculate how much she requires for a reserve fund. If she is only appointed for a 2 or 3 year period and a reserve fund is not permitted afterwards, it is an unnecessary expense. I recommend that you ask her to prepare specific proposals for actual expenditure during her time as a manager,
You are right to be wary, we have seen "reserve funds" used for other purposes. I recommend that you ask the manager if she intends to hold the reserve fund in a separate bank client account and use it for only specific purposes (repairs).
The legislation is weak at best and s20b LTA 1985 in theory allows the RMC to claim only expenditure incurred within the last 18 months which could be relevant but enforcing it seems to be next to impossible. s21 and s22 are ignored regularly and the accountant is right, he is instructed by the directors (or the RMC) and you do not have the right to see those instructions even though you are asked to pay for the service.

[Macromia]

Is it only Best Practise to finalise them within 6 months of year end or is there any more regulation for this sort of scenario.

Best practise is to finalise accounts within 6 months because this prevents any costs falling outside the 18 month limit set in Landlord & Tenants Act 1985, section 20B (as long as the leaseholders are actually informed of the costs once the accounts have been finalised).

If leaseholders are not notified of actual costs within 18 months of them being incurred/paid the costs are not recoverable, unless the costs are below any amount that has already been demanded as advanced payment.

[SHill]

Can you remind me, is it too late to send a s21 & s.22 Notice for yr end 31 December 2019 accounts.
Is there a statutory timeline between sending the s.21 Notice and s.22 Notice?

Can a S.21& S 22 Notice be sent if no service charges were demanded in 2020.
Could the Directors claim the 2020 expenses are debtors to the RMC and claim from shareholder.

[Macromia]

A section 21 request for a summary of service charge accounts can be made for the previous service charge year. Once made, the freeholder (or RMC) is required to provide the summary within 1 month of the request, or within six months of the end of the service charge year (whichever is later).

After you have received a summary of the accounts you have six months in which to make a section 22 request for sight of the supporting invoices.


There is, however, no time limit on requesting accounts, or sight of invoices, without any legal obligation for them to be produced. All freeholders, RMCs, managing agents, etc. should be willing to produce proper accounts and invoices supporting any money demanded from leaseholders. Not producing these when requested will not be seen favourably if a dispute later ends up in a court or tribunal.

[SHill]

Thank you

When you say "A section 21 request for a summary of service charge accounts can be made for the previous service charge year". If service charges were not demanded in 2020 can a Section 21 Notice be sent? The Appointed manager will be demanding payments for this year.

Can the Section 21 be sent to the Landlord if there is a Manager appointed from 22 May 2020. It is the Landlord who still retains all the service charge information because the Directors are refusing to hand anything over to the Appointed Manger.

[eagle2]

s20B is unclear at best, a Tribunal will take into account that a leaseholder ought to be aware that works are being carried out or services are being provided and therefore ought to pay the cost. A leaseholder also has the difficulty of proving exactly when he/.she was charged which is not as easy as it seems when estimated amounts are paid on account and there is a surplus at the end of the year.

[eagle2]

I can see no benefit to a s21 request other than it is necessary before making a s22 request. The legislation is unclear and the Government funded Lease-Advice provide a template for making a request but that does not even include the accounting period. I can only assume that if you applied today, it would relate to the 2020 accounts and the manager would have until 30 June to reply, that being 6 months after the end of the accounting period.

[eagle2]

I think that your best option is to apply to the FTT to determine the reasonableness of the charges for 2018 and 2019. If you dispute all the charges initially due to lack of information, you can seek a direction that the directors provide all available documentation in order to narrow down the issues.