Service Charge when changing management companies due to RTM

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    With difficulty is the answer, the budget has probably been inflated to compensate. You are probably fortunate that no sinking fund exists because it is unlikely that there would be any bank balance remaining. I am even more persuaded that you should not pay anything more to the freeholder as it is extremely unlikely to be handed over to the RTM, which will need every penny to operate at all.


      So, I’ve been away and returned to a solicitors letter with legal fees and interest for the outstanding service charge.

      This service charge is for a period far beyond the period that the current management company will be managing our building.

      I previously had asked in writing for an updated estimate based on the date they would be handing over management to us and did not receive a reply.

      Where do I stand on this?

      Presumably a debt for services that won’t be carried out can’t be enforced?

      I was going to simply reply to the solicitor saying the above?


        Further to this I have now received correspondence from the currently agents shortly before handover stating

        That there will be no funds transferred to the new managing agents.
        There are a number of invoices unpaid (we know this totals at least £10k of arrears)
        They will be looking for reimbursement of funds
        or we can pay their suppliers directly.

        I feel as others have said it was prudent not to pay the latest service charge as it’s clear nothing would have been handed over and we would have covered other leaseholders arrears (which are greater than ours) in doing so.

        My understanding is that we are not responsible for the arrears prior to our RTM takeover. These are the responsibility of the freeholder and their agent up until the date of this RTM takeover.

        As a course of action we were going to pay the arrears to the new managing agent. Is this worth doing?

        We have been sent a legal letter on behalf of the current agents, with legal fees, but this makes no mention of clauses in our lease, does it need to? Can the current agent appoint a solicitor to recover service charges, I can see no mention of this in our lease?

        Thanks for further help.



          Your new agent should calculate how much is required until the end of the service charge year and charge you separately.

          It is up to the freeholder to pay all outstanding invoices and you should ask for proof of payment because if materials have been supplied they may belong to and may be removed by the contractor. You should not normally pay the suppliers directly without details of the contracts and the agreement of all parties.

          If you are not taking over the arrears, the freeholder can make charges up to the date of the handover only so I suggest that you ask the solicitor for details of the actual charges up to that date so that you can determine whether or not they are reasonable and payable. You should advise the solicitor that service charges are now being paid to the new agent and therefore the sums demanded by the freeholder are not payable.

          If you decide that the charges are unreasonable, I suggest that you invite the freeholder to apply to the FTT to determine whether or not they are reasonable and payable.


            Normally the RTM takes over management of the service charge after the handover date and makes demands on the flat owners to pay service charge contribution for the period going forwards.

            The old agent is responsible for the service charge period, before the handover date .



              To clarify this, if there are any outstanding arrears on the service charge account these should be covered by the freeholder. Who then can claim these arrears from leaseholders who were in arrears up until the rtm.

              We have on several occasions asked for the service charge to be adjusted by the current management company up until handover, as I’ve said before they’ve refused to this and reiterate that we should pay the full amount way beyond the date they will be managing.

              I am going to write to the solicitor who wrote the letter stating the following.

              we requested the amount due up until the rtm handover
              this was not provided by the management company
              we are now paying our service charges to the new management company, so do not need to pay this to your client
              the sum demanded by the your client (the management company) is not payable because it is unreasonable and includes for services they will no longer be providing
              we will only pay reasonable charges up until the handover date but understand these should be payable to the freeholder and not the management company, please can you provide details of these reasonable charges.

              Does this make sense?


                Yes, the freeholder is responsible for paying all the costs up to the date of the handover and recovering the charges from the leaseholders. I am assuming that there is a managing agent who is only acting on behalf of the freeholder, You are only responsible for paying those charges to the extent that they are reasonable.

                Your obligation to pay service charges after the handover date is to the RTM and you will pay the new agent on behalf of the RTM.

                The outgoing agent was trying to collect as much as it could prior to the handover but you were right to withhold the monies.



                  on that basis, can we ignore any threatened legal action by the current management company, because post handover they have no involvement with the freeholder and it is only the freeholder who can recover these arrears?


                    The freeholder can continue to employ an agent if it wishes but you will not be responsible for the cost after the handover.. Only the freeholder can take legal action for the recovery of charges up to the date of the handover and the charges are only payable to the extent that they are reasonable,


                      So the legal company who sent the letter would have to act on behalf of the freeholder and not the managing agent?


                        Originally posted by jazzythumper View Post
                        on this basis, can we ignore any threatened legal action by the current management company,
                        Yes - but don't ignore anything that you receive from a court if legal action is actually started - you will need to defend against any action taken (which has to be taken by the freeholder, but they might have the managing agent act for them).

                        Originally posted by jazzythumper View Post
                        So the legal company who sent the letter would have to act on behalf of the freeholder and not the managing agent?
                        Yes - unless your lease says otherwise.


                          Ok, so I sent a robust response to the legal letter based on points above, sent recorded / first class / email I know it has been received.
                          Since then nothing further.
                          We have since received an email from the old management company asking for as slightly reduced amount we owe them.
                          But do they now have any right to do this now that they are no longer managing the building?

                          I understood that it was only the freeholder who could recover any historical arrears before the rtm took over? I am thinking of just replying to them with the same response that was sent to their legal company since none of the points have been addressed?

                          I will probably just respond with something similar to them.
                          Maybe asking how they have been paying for everything for the past few years given that one flat is over £5k in arrears in service charges.
                          I wouldn't want to have been subsidising another leaseholder.
                          We have subsequently found out through companies house that the director of the cleaning company and fire safety company is the same as the old management company. Which is clearly how they've managed to cover the costs.




                            Hi. Split the facts and it would be good if advice is based on facts...

                            1. It is crystal clear in the 2002 Act that RTM companies do NOT take on responsibility for ANY arrears of SC owed for the period prior to the acquisition date. Of course this is leasehold and law often plays little part as who bothers to read it.

                            2. A landlord/agent cannot take service charge funds held on trust to pay off arrears for those who have not paid. irrespective of an RTM takeover. The lease sets out the apportionment per flatt and it would be an unusual lease that allowed those who have paid in full to have to pay more for those who failed to pay.

                            3.As for issuing a service charge demand, the lease will very likely say that the landlord/agent must estimate his costs for the COMING FINANCIAL YEAR and issue a charge on this basis. If the landlord/agent already knows that RTM is taking over part way into the coming year ahead then this is a material fact as the landlord/agent has no liability for any costs that would arise after RTM acquisition date. What right under the lease dose he have to demand more than for the period he remains liable?

                            4. Caselaw has determined that an estimated charge is payable even if by the time the court gets around to consider the matter the true cost was known to be less. This is leasehold and fairness does not apply. The question is whether the amount claimed for a whole year is LIABLE to be paid to an entity that already knows it does not have any landlord liabilities under the lease beyond X months of that year. I am not aware of caselaw on this but there are plenty of stories of landlords/agents holding back funds or suddenly claiming that £50K reserve fund in fact doesn't exist.

                            5. A service charge demand is not a random lump sum. The lease will set out the works and things that a landlord must do through the course of the lease accounting year and beyond. The demand is not a re-scattering of debts that have previously been demanded. So the costs to be incurred are future looking: a year's insurance, a year's ground maintenance, a year this and that and maybe a resreve portion for longer term futuristically. If thre landord klnows he does not have liability for a full year ahead, on what grounds is he demanding a full year per the lease? Because he can?

                            We acquired RTM many years back. We discovered the outgoing shower hadn't bothered to pursue debtors for years, just let debtors increase on the balance sheet. Presumably this worked because that agent did virtually all the work and breaking even on the money coming in and always had the option to go after the debtors. Boy did they scramble to try to get us (the RTMC) to pursue their debtors and we waved bye bye.

                            We got no funds handed over, naturally, but there was no reserve fund left anyway. We arranged for all the flats to pay their charges pro rata for the year into our client bank account from day one, ensuring we issued pro rata valid invoices in advance, keeping the annual charge the same as before so that the split was simple to understand.

                            The outgoing agent was made aware of this and knew it before they issued any service charge invoices for the year, and to be fair they did not try it on.

                            As already said, once RTM starts, the old agent has no power to claim costs on the RTMC's service charge going forward, or to bill the RTMC, so it isn't clear to me how the old agent would see it in their interest to pursue theoretical arrears to court at their own expense caused by them trying to charge for a period of liability under the lease they knew would not land on them.

                            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.


                              To reword item 2 in last post...

                              2. Arrears (debtors) and creditors are two separate beasts. If the soon to be gone agent failed to collect all charges owed up to handover, either they worked within their cashflow and did not incur costs beyond funds or incurred costs anyway thereby having creditors to pay. Those creditors by definition are for costs incurred prior to acquisition date. Nothing to do with the RTMC. Likewise the debtors. As already said the FH/agent needs to collect his debtors to pay off his creditors. Nothing to do with the RTMC. Obvious caper to demand more funds than needed for pro rata period up to acquisition date to pay existing creditors AND have option to go after the debtors too.

                              Arrears have nothing to do with calculations at handover. Arrears are the FH/agent's problem. Any AC demand going forward has nothing to do with arrears not collected. Those were demanded in previous year(s).

                              The lease sets out the apportionment per flat and it would be an unusual lease that allowed flats who paid in full to be demanded to pay more the next year to offset those who failed to pay in previous year(s).
                              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.


                                Thanks for the replies

                                My point on this was if each of the 4 leaseholders A,B,C & D pays say £1,000 per year, and the building service charge covers all the costs using £4,000 per year, if D hasn't paid for the last 5 years how has the managing agent been paying for everything as the service charge fund would be more than a years worth of costs in debt. Something doesn't add up.

                                I really want to see the accounts of the last 5 years for all services in order to understand how the managing agent has paid for everything. Do we have a right to see this with the departed managing company? Do I have a right to see this now that they are departed? Does the departed management company have to provide confirmation that they are seeking to recover the arrears from all three leaseholders? It would seem unfair to not, I am wary that the owner with the significant arrears is related to the freeholder. And that this is the reason they are in arrears.

                                Our new management company stated that they would have resigned from managing our building with the level of arrears because there would be no money to do anything including insuring the building. I question how the previous management company has been continuing to provide services in this situation.

                                There are three options for me.

                                1.The management company has paid for everything itself and is in debt.

                                2.The management company set up all the companies it used for cleaning / fire safety / maintenance etc. The amount we were charged is not anywhere near what the cost was to itself and was never out of pocket and is trying to claim this money back now.

                                3.The estimates of the service charges was too high and this arrears should be recovered and carried forward in the service charge fund. Or returned to leaseholders.

                                Perhaps there is no way of revealing exactly what has happened.




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