MA continues to provide services but no Service Charge budget or demand issued

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    MA continues to provide services but no Service Charge budget or demand issued

    Hi all,

    At our development services are continuing, however, neither the MA or the directors of the RMC have provided any reasonable explanation of why, Service Charge accounts for 2019 or Service Charge budget and demand for 2021 have not been issued.

    When they have been asked, their reply was, "As is the case with everything at present the ongoing Covid restrictions and government guidelines means that things are taking longer to resolve and fulfill."

    Questions arising are, can the MA continue with services and spending money, that has to be, being paid for from the Reserve fund?

    Secondly can the MA continue paying himself £350 per month acting as caretaker, on top of the annual management fee, when no caretaker has previously been required?

    Thank you.

    #2
    The MA should only use the reserve fund for the specific purpose set out in the lease. There is nothing to stop the MA issuing service charge demands.
    If a caretaker is unnecessary, the expense is unreasonable and not payable.

    Comment


      #3
      Thanks for the reply eagle2.

      The lease states "Such sum as shall be considered by the Management Company to provide a reserve fund or funds for items of future expenditure to be or expected to be incurred at any times in connection with the maintained property."

      The lease states "The lessee shall pay to the Management Company the lessee's proportions of the relevant maintenance expenses in advance on 1 January and 1 July in every year throughout the term."

      It's not as if the caretaker carries out any work that is not also charged for separately, i.e., like removing items discarded from flats that requires taking to the skip or landscaping (however no grassed areas).

      In the absence of a budget and demand can an application to the FTT still be made under S27A of the L&TA 1985 to determine how much is payable?

      Comment


        #4
        Does the lease state that the reserve fund should be held separately to the service charge monies?
        The RICS code 7.5 states that the "intention of the reserve fund is to spread the costs of "use and occupation" as evenly as possible throughout the life of the lease to prevent penalising leaseholders who happen to be in occupation at a particular moment when major expenditure occurs"
        So the reserve fund should not be raided for other purposes. The usual reply is that it would be necessary to borrow monies otherwise but that does not apply if the MA is failing to send out demands.
        I would ask why it is necessary to have a caretaker.
        I would wait until a demand is received before applying to the FTT, there may be other items which you wish to challenge when you receive the demand.

        Comment


          #5
          Have you previously received details of how much is in the reserve fund? If so, I wouldn't worry too much about the lack of any demands or account statements - if these aren't provided it can only really work in your favour.

          I very much doubt that the courts would find that freeholders (or managing agents acting on their behalf) can effectively 'side-step' the requirement to provide details of expenditure within 18 months or the costs being incurred (Section 20B requirements) by taking money from reserve funds, even when the lease seems to give a lot of leeway on how the reserve fund can be spent.

          Whether the costs you mention are payable doesn't have to be challenged at this time. If you don't receive any demands for payment, accounts, or proper notification of costs that have been incurred within 18 months of them being incurred, then even costs that might otherwise have been considered reasonable might not be payable.

          As far as I am aware, how this applies when there is a reserve fund that the costs can be taken from hasn't been tested in the courts though - although, since I don't contribute to a reserve fund, it's not something I've looked at in any detail.


          I do agree that it's worth asking the managing agent to explain exactly what 'care taking' duties they perform.

          Comment


            #6
            Thank you both for the replies.

            The only reference to a reserve fund is that which is contained in post #3 which comes under Schedule 5 The Maintenance Expenses. The MA stated that both would be held in one account, but accounted for separately.

            For the previous 13 years no caretaker has been employed. I was informed the caretaker carries out the weekly testing of the fire alarm system, however, given that faults remained showing on the panel for more 8 weeks last year, I certainly question if this task is actually being carried out?

            I stated that I was willing to undertake the testing of the alarm system on a weekly basis.

            The caretaker does appear to be reporting faults, however, shouldn't the MA be carrying out monthly visits, included in the management fee?

            Can the amount paid in to the reserve fund be argued as being insufficient?

            Comment


              #7
              You can request details of how the reserve fund has been calculated. If you consider that it is insufficient, your best option is probably to put some of your own monies aside in case of need. You have greater flexibility then, especially if you wish to sell in the future.
              You can request a copy of the management agreement or a summary of the duties of the managing agent.
              You can also request to see the record of the testing of the alarm system. Did the agent respond to your offer to test the alarm system?

              Comment


                #8
                Originally posted by Macromia View Post

                I very much doubt that the courts would find that freeholders (or managing agents acting on their behalf) can effectively 'side-step' the requirement to provide details of expenditure within 18 months or the costs being incurred (Section 20B requirements) by taking money from reserve funds, even when the lease seems to give a lot of leeway on how the reserve fund can be spent.

                Whether the costs you mention are payable doesn't have to be challenged at this time. If you don't receive any demands for payment, accounts, or proper notification of costs that have been incurred within 18 months of them being incurred, then even costs that might otherwise have been considered reasonable might not be payable.

                As far as I am aware, how this applies when there is a reserve fund that the costs can be taken from hasn't been tested in the courts though - although, since I don't contribute to a reserve fund, it's not something I've looked at in any detail.


                .
                It is a very good point, s20B specifically refers to service charge expenditure being incurred more than 18 months prior to a demand for payment of a service charge being issued to the leaseholder. It is not always possible to match a specific demand with actual expenditure. Charging the reserve fund and over estimating service charges in advance are examples.

                Comment


                  #9
                  Originally posted by eagle2 View Post
                  Did the agent respond to your offer to test the alarm system?
                  Relations were quite different then but I was told the MA had put together a testing regime for the weekly fire alarm testing and were compiling an asset register. At that time the fire alarm panel could be accessed without the need to enter a code, therefore allowing faults to be identified, checked, reported for entry in the log book and then removed.

                  The MA then changed the fire panel code, stated it had been set to default, and had been changed to prevent tampering with the system.

                  Faults were then left showing on the panel for weeks, which wouln't be the case if weekly testing was being carried out.

                  Comment


                    #10
                    Originally posted by njs889333 View Post
                    Faults were then left showing on the panel for weeks, which wouln't be the case if weekly testing was being carried out.
                    If the managing agent claims that they, or a caretaker, make weekly visits this could be used as evidence that the charge for care taking is unreasonable - but you will need evidence to support this (e.g. photographs showing the date, preferably supported by signed statements from other leaseholders confirming that the error codes remain for weeks at a time).

                    The problem that you will find with arguing that costs are 'unreasonable' is that tribunals will generally give a lot of leeway to freeholders, and anything within what is considered to be a 'typical range' will be considered reasonable unless you can provide evidence that what is being charged for was either not done or was to a poor standard.
                    For example, having an independent accountant certify accounts is considered to be 'best practice' even for very small blocks with just a handful of invoices each year, because organisations that basically work for accountants advised on this. The cost is then inflated because accountants know that most freeholders will get it done regardless of what they charge because they aren't paying out of their own pocket, and even the higher end of the range of costs is considered 'reasonable' by tribunals because it is within the 'normal' range of charges. The flats in my block get charged nearly £80 per year each for a worthless piece of paper when it takes only 10 minutes to add up the 20 - 30 invoices that are paid out and calculate the percentages.

                    Comment


                      #11
                      Originally posted by Macromia View Post
                      The problem that you will find with arguing that costs are 'unreasonable' is that tribunals will generally give a lot of leeway to freeholders,.....
                      Thanks for the reply.

                      This is a triparte lease and the freeholder has no part in the management, collection of ground rent and nominates the block buildings insurer and agency only.

                      I would hope that in determining whether the cost is reasonable the tribunal would look at the cost of the caretaker being additional to the management fee, bringing the actual cost to over £325 per flat.

                      As stated in post #6 the cost charged for the caretaker doesn't stop the MA from charging additional sums for the work the caretaker does or doesn't do.

                      I would also expect a reduction in the management fee as having not received accounts for 2019 or the budget and demand for 2021.



                      Comment


                        #12
                        Originally posted by Macromia View Post

                        For example, having an independent accountant certify accounts is considered to be 'best practice' even for very small blocks with just a handful of invoices each year, because organisations that basically work for accountants advised on this. The cost is then inflated because accountants know that most freeholders will get it done regardless of what they charge because they aren't paying out of their own pocket, and even the higher end of the range of costs is considered 'reasonable' by tribunals because it is within the 'normal' range of charges. The flats in my block get charged nearly £80 per year each for a worthless piece of paper when it takes only 10 minutes to add up the 20 - 30 invoices that are paid out and calculate the percentages.
                        Using an external accountant must be better than allowing freeholders and agents to prepare accounts themselves. There seem to be 2 issues, 1 leaseholders are not made aware of adjustments made by the accountants and 2 leaseholders expect too much, they seem to expect a full audit ie every single invoice to be examined and the accountant to decide whether or not the expenditure is reasonable and payable, The accountant only examines a small sample of invoices and he is incapable of deciding whether or not the work has been carried out and whether or not the price was reasonable. If somebody was carrying out a complete audit, the cost would be much higher than £80 per leaseholder.

                        Comment


                          #13
                          Originally posted by eagle2 View Post
                          Using an external accountant must be better than allowing freeholders and agents to prepare accounts themselves.
                          That very much depends on how complicated the accounts are.

                          When no more than 20 - 30 invoices are paid out each year (which includes quarterly invoices from the managing agents, at least four for electricity, and 12 for monthly 'cleaning', then that £80 is quite literally throwing money away unnecessarily.

                          It takes me 10 minutes (at most) to check the totals on all the invoices against the completely inadequate 'accounts' that are certified each year once I've had the invoices provided.


                          I suspect that it's pretty similar for most small blocks.

                          Comment


                            #14
                            The problem is that much of the accountant's work will be the same regardless of how many units are involved so I agree that for a small block, the charge is disproportionately high. There is likely to be half a day's work preparing and checking a set of service charge accounts, completing a checklist and obtaining a signed letter of indemnity from the directors to protect the accountant before a single invoice has been considered. It is very unusual for the FTT to disallow part of the accountancy charge, so I would concentrate on other expenditure. I agree that leaseholders should inspect invoices at the end of each year.

                            Comment


                              #15
                              Originally posted by njs889333 View Post
                              This is a triparte lease and the freeholder has no part in the management, collection of ground rent and nominates the block buildings insurer and agency only.
                              So, where I referred to 'freeholder' treat it as referring to freeholder and RMC (the managing agent will seemingly be working under the instruction of both in your case).


                              Originally posted by njs889333 View Post
                              I would hope that in determining whether the cost is reasonable the tribunal would look at the cost of the caretaker being additional to the management fee, bringing the actual cost to over £325 per flat.

                              As stated in post #6 the cost charged for the caretaker doesn't stop the MA from charging additional sums for the work the caretaker does or doesn't do.

                              I would also expect a reduction in the management fee as having not received accounts for 2019 or the budget and demand for 2021.
                              A tribunal would look at what the managing agents say they do, and what they say the caretaker does, and will make a judgement on whether both roles are allowed for under the terms of your lease, whether the work said to be carried out is necessary, and whether it is reasonable to have a caretaker employed separately.
                              It may also be considered reasonable for additional charges to be made for work that either the caretaker or managing agent carry out, as well work that another contractor is brought in for - even if you think that the caretaker should do it. It depends what is in their job descriptions.

                              To argue against these costs properly you need to know what work each role supposedly involves, and be able to argue that the amount, or quality of the work doesn't justify the costs.

                              You are unlikely to get any significant reduction in management fees simply because you haven't received end of year accounts or an advanced budget, as the argument would likely be that the work had been carried out even though you haven't received them - unless you can use this as part of showing that the managing agents have been doing the absolute minimum.





                              Originally posted by eagle2 View Post
                              The problem is that much of the accountant's work will be the same regardless of how many units are involved so I agree that for a small block, the charge is disproportionately high. There is likely to be half a day's work preparing and checking a set of service charge accounts, completing a checklist and obtaining a signed letter of indemnity from the directors to protect the accountant before a single invoice has been considered. It is very unusual for the FTT to disallow part of the accountancy charge, so I would concentrate on other expenditure. I agree that leaseholders should inspect invoices at the end of each year.
                              Yes, FTTs will almost always allow whatever accountancy fees a freeholder demands - largely because supposed 'best practice' is to have an independent accountant certify all accounts. That is a problem and needs to change. So called 'best practice' like this is heavily influenced by organisations that are working more for accountants than for leaseholders.
                              In small blocks having certified accounts really is of no benefit at all, and does nothing more than add to annual service charge costs (in my case it adds about 10% to the average annual service charge, and I'm not exaggerating when I say that it takes me less than 15 minutes to carry out a full check of all invoices, including checking whether the costs are actually payable under the terms of the lease. The certified accounts I currently receive don't even meet the requirements given in the lease.

                              Comment

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