Service charges paid via RMC. Any point in a Landlord &Tenant Act or Lease Agreement

[LEAFY211]

The Management Company via its Managing Agent, have started demanding monies through the company, which would normally be collected via service charges (repairs, bills, major works etc). There is no limit on how much the demands can be for - £5 or £500,000.
The premises: Two grade 2 listed buildings form the freehold property, the main block of 24 apartments and my annex building of 2 apartments.
RMC: The residents management company (freeholder) was set up in readiness for the first occupation of the premises and all 26 property leaseholders are shareholders and own an equal share.
Leases: The 24 leases in the main block are the same and the 2 leases in the annex are the same.
The main block pays significantly higher service charges than the annex. The main block service charges include all reparation of the building that is the responsibility of the freeholder, plus lift, lightening equipment, communal heating and lighting, fire alarms, security system etc.
The annex building service charges are much lower as they dont have any of the costs of the main block such as lift, cleaning, communal lighting and heating etc However the leaseholders of the annex are personally responsible for reparation costs to their building (split 50/50 between the two flats), they get no help with those costs from the service charges pot.
Both buildings pay varying % costs toward the external communal costs (nothing related to either building) such as carpark, carpark gate, external security lights, rubbish, pest control etc - ie items of expenditure that benefit leaseholders in both buildings.
The Memorandum and Articles of Association state the Directors can demand money from shareholders to put in funds, for the carrying out of their duties (which of course, includes the management of the premises). This means each shareholder contributes an equal amount to these funds being demanded.
However, this results in those whose leasehold agreement demands a lower % contribution to service charges (in the annex building) contributing much more than they would contribute to service charges via their lease. The result would be they are thus contributing to the costs of the main block. And this fully contravenes the explicit exclusion in the lease for the annex building.
It also makes all laws protecting leaseholders from rogue landlords redundant. No need for section 20, no opportunity to scrutinise spending via section 21/22 etc.
As the vast majority of leaseholders are in the main block, they would gain through paying less costs through the shareholder fund mechanism, as they will be subsidised by the annex building leaseholders/shareholders paying more (more than their leasehold agreement dictates).
I understand the concept that a leaseholder and shareholder, even if the same person, are two different entities. However, i am very keen to know if there is any route for addressing this, what seems to me, glaring loophole.

[eagle2]

Will you please supply some additional information eg what exactly is being charged to shareholders? Usually, it is only the company administration costs and the amounts involved are quite small. Are you saying that the management fees are not dealt with under the terms of the lease? If that is the case, you would be able to apply to the FTT to amend the terms of the lease. Is there a reserve fund? If so, it should be separated between the main building and the annex.

[Macromia]

The Memorandum and Articles of Association state the Directors can demand money from shareholders to put in funds, for the carrying out of their duties (which of course, includes the management of the premises). This means each shareholder contributes an equal amount to these funds being demanded.

It is probably a good thing that the articles include this, as it means that company costs can be recovered (for example, if the directors need to pay for legal advise which benefits all leaseholders, or the majority of leaseholders, or other costs that are not covered by the leases).

It does, however, seem like the directors are incorrectly using this to circumvent the terms of the leases, and potentially leasehold law requirements.
Whether the company articles allow all costs, including service charge costs, to be collected as 'company costs' is one consideration. Whether this would mean that the terms of the leases, and other leasehold laws, can be ignored is another. I think I have seen case law where the company has been allowed to collect what would otherwise be service charge costs through the company.

[Macromia]

Morshead Mansions Ltd v Di Marco - England & Wales Court of Appeal 2008.

This case seems to have decided that, if the company articles allow payments to be demanded from shareholders, sums that might be used to pay for costs that would otherwise be charged for via the service charge terms in the lease, can instead be demanded from shareholders.
This doesn't seem to mean that what is required for service charges can be calculated each year, and then demanded from shareholders rather than from leaseholders, but does seem to allow the company to charge amounts that they say might be used for any of the costs the company might have to pay (including both costs that might otherwise come under service charges and costs that the leases don't allow to be collected via the service charges).
It does seem to be something of a loophole.

https://nearlylegal.co.uk/2008/12/wh...ervice-charge/

[eagle2]

There seem to be some clear distinctions with the Morshead case, Here we are told that service charges are being charged as company charges, We have not been told that members have passed a resolution permitting the Company to raise charges to members, The Memorandum of Association should set a limit on the amount which a member is required to pay,

On the face of it, there does not appear to be a loophole and there is no evidence of widespread raising of company charges instead of service charges,

We need some further information but on the face of it, there appears to be no reason why you cannot refuse to pay the charges.

[vmart]

It would seem to me based on the Morshead case, the company can demand sums from the shareholders per the Articles and you arguably cannot refuse to pay these charges. There is a distinction between the landlord and tenant relationship and the relationship of shareholders and the company.

It would be interesting to know the position if not all lessees were shareholders of the company. In this instance non-members could not be required to contribute funds to the company so presumably the company would still need to raise service-charge demands.

I wonder if there is a way to 'give back' your share in the company. You perhaps would not want to do this but it may be an option if funds demanded by the company are excessive. Furthermore, as this apparently circumvents the usual protections afforded to lessees in respect of service charges, it appears a worrying scenario. I suspect we shall see more freehold companies adopt this approach to the detriment of leaseholders possibly.

[eagle2]

An RMC is a limited company which means that the liability of its members is limited, usually to a nominal amount specified within its Memorandum of Association. So an RMC cannot normally raise additional company charges without specific approval from its members and it cannot raise unlimited amounts of monies, otherwise it ceases to be a limited company.

In the Morshead case, the members passed a resolution authorising the Company to raise additional company charges, primarily a reserve fund which was not permitted by the lease. As an alternative, the leaseholders could have sought to amend the terms of the lease.

The case was way back in 2008 and there is nothing to suggest that other RMCs are attempting to charge significant amounts as company charges since that case. Freeholders do not usually have the option because leaseholders are not normally members of the freeholder company.

Here I can only repeat that we need further information. We are told that the Company can raise unlimited demands from its members and that it may determine whether to raise demands either as service charges against leaseholders or as company charges against its members. That is unreasonable and is not normally permissible. I doubt that any requirement for someone to become and remain a member of such a company would have any validity. In addition, there would be nothing to prevent the members of the company passing a resolution to amend the Memorandum and Articles of Association.

[Gordon999]

On estates with different type of buildings, the service charge account should be calculated from into "estate charge for external grounds and car parking " plus "main block maintenance charge" OR estate charge plus "annex building maintenance charge" .

[LEAFY211]

Thank you all hugely for your extremely interesting contributions. Im so sorry about the delay in my response and also for my war and peace excerpt below, in response to each point (which i hope makes sense).

The two most relevant company objects are:
- To provide services of every description in relation to the Estate and to maintain, repair, renew, redecorate, repaint, clean, construct, alter and add to the Estate and to arrange for the supply to it of services and amenities and the maintenance of the same and the cultivation, maintenance, landscaping and planting of any land, gardens and grounds comprised in the Estate and to enter into contracts with builders, tenants, contractors and others and to employ appropriate staff and managing or other agents whatsoever in relation thereto.
-To establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs, and other expenses incurred In the implementation of the Company’s objects and to require the Members of the Company to contribute towards such reserves or funds at such times, in such amounts and in such manner as the Company may think fit and to invest and deal in and with such moneys not immediately required in such manner as may from time to time be determined.

The monies collected have been used to pay for bills, not any have been for a sinking fund to date. Though I believe once the Directors understand that is the correct route to follow, they will demand money for various 'funds'.
Additional information:
The freehold company has been listed as dormant with HMRC for 5/6 years
The funds have been collected by tenant demands so far (.. again as soon as the Directors learn how they should be doing it, they will demand via company docs)
The funds have been deposited in the leaseholders service charge account so far (.. again as soon as the Directors learn how they should be doing it, they will likely deposit in a company account)

Response to Eagle2
So far what has been charged via shareholder funds
1. To pay for the legal fees for a leaseholders adverse possession (not in my building) - which the company lost, so both sets of legal fees had to be settled £27K).
2. Survey of one building (not my building)
3. Repairs to roof of one building (not my building)
4. Excess funds collected have been used for general repairs/maintenance
5. Most of the windows in the other building need replacing. The Chairman sent a note out to all leaseholders advising the funds for the window repairs/replacements would be demanded via shareholders. And then, only if necessary, will section 20 be invoked.
This is clearly the route the two Directors plan to take for ‘service charge’ costs going forward.
6. Company administration costs are correctly charged through service charges
7. There are service charge reserve funds, which although are not kept or accounted for separately, are relatively easy to calculate based on the annual inspection of invoices and supporting documents I have to do to reconcile my own accounts (no annual reconciliation of my service charge account which is different to the other building, is against my lease agreement, but Im already aware of that point)
Note: My lease explicitly excludes me contributing to costs which relate solely to the other building.

Response to Macromia
Indeed they are circumventing lease agreements. Plus as mentioned, I am having to pay more towards costs that I would do through the lease, so the two Directors themselves gain £ (albeit not large amounts)
Morshead Mansions v Di Marco, is indeed a similar case, though Im not aware the leases were varied (not sure if that would make any difference).
Seemingly a huge loophole! 😊

Response to Eagle
I understand at an EGM meeting (before I owned my flat) the question was put forward whether to pay for the survey from shareholder funds or leaseholder funds. I havent seen any minutes, but the AGM has usually a max of 6 leaseholders and 2 Directors (out of 26 flats), and they would have all been from the other building and without any doubt at all, they would not have had explained that they lose all their rights as leaseholders and their money is not held in trust etc, if they go down the shareholder payment route.
Im not clear what you mean about widespread raising of company charges instead of service charges?
It has become the preferred route for these Directors to demand funds for what would normally be paid for from service charges (those items mentioned, which have been charged to shareholders, are listed in the leasehold agreement clearly as being recoupable through service charges).
And what difference would it make if they did it 10 times or 100 times, in 1 year or 10 years?
Response to vmart
All the lessees are shareholders and have to be so, as far as I can work out. 1 share per apartment.
Response to eagle2
I would so love it to be the case that the company cant ask for unlimited money!
In the Morshead case – I didn’t catch on that they were raising money for a reserve fund which wasn’t permitted in their lease. That would be very pertinent as the items my Directors are paying for are clearly allowable in the lease to be recharged through service charges.
I did hear a ‘News On The Block’ seminar, where one of the lawyers presenting, mentioned very briefly, that monies for works were often now being collected through shareholders rather than leaseholders. Which I guess for those blocks where all the leases are the same, its less of an issue. But still a worrying trend as the money no longer belongs to the leaseholders if collected through shareholder status.
Regarding changing the MemArt, as 24 (in the other building) out of the 26 shareholders stand to gain to benefit (albeit slightly) from the other 2 shareholders contributing to the costs of the other building, then they are unlikely to want to go to the expense of changing anything, or voting against such a gifthorse.

Response to Gordon999
I agree totally and, oh so many times, have asked that the accounts are separated (which would even make the managing agents job easier). But it is refused, with the excuse of it being too tricky.
Sadly the Chairman has a limited skill in maths (which he has demonstrated time and time again in his emails), so probably doesn’t understand how easy that would be. In addition, he tries to keep things non-transparent so that his mistakes and lack of understanding don’t become blatant to everyone. Apathy of the other shareholders/leaseholders allows this to continue unfortunately.

It seems like the most crazy situation open to such abuse, it just doesnt make sense it can be so simple to ignore so many laws put in place for leaseholders.

[eagle2]

The Memorandum of Association will state that the liability of the members is limited and it is often fixed at say £1. If the RMC wishes to raise monies via the members instead of via service charges, it would need a special resolution on each occasion. It would then be up to the members to reject the proposals because they would lose their rights as leaseholders. You would also be able to refuse to pay the charge if it relates to another building to which you are not required to contribute,

[LEAFY211]

thanks again Eagle2. The liability for company debt is indeed £1. But for the funds they are allow to create, under any guise by the look of things, seems to be unlimited according to the Memart. They would name the fund something vague - eg management fund - and then there is no tracking what that money is spent on (as far as I can see). So money could easily be spent on the other building, without the knowledge of any shareholder/leaseholder. As the majority of shareholders are in the other building (24 vs 2) and would stand to gain financially if I am paying equal to all costs via the shareholder fund, i cant see them objecting too much.
Im finding it difficult to believe that im not missing something obvious to protect against this situation ..

[eagle2]

No, the Company is not allowed to make demands in excess of £1 from its members without a formal meeting of members and a special resolution passed by 75% of those voting. It would need to serve a notice of the meeting to each member and it would need to explain precisely why it requires the monies.

It can charge amounts to leaseholders in accordance with the lease.

[LEAFY211]

ahh interesting. Maybe that then explains why the management company took a year to give me my share certificate, after they had received the documentation (title deeds etc) following my inheritance of my flat. (That broke the terms of the Memart, which stated one month - but thats another matter altogether). Of course this meant I wasnt allowed to attend any meetings, or indeed even be made aware of any during that time .. which covered the period of some of these demands.
75% majority, would I assume be 75% of those present at the meeting or who have provided a proxy vote (though as no agenda has ever been sent out with any details on what is being voted on, I have never been clear how its possible to vote by proxy!).
Plus, as the turn out for any company meetings is minimal, it would be relatively easy for them to get 75% to vote in favour (especially as the voters wouldnt be made aware of the fact the money then belongs to the company and they have no leaseholder protection on how it is used etc .. )
So .. in the Memart where it states the following, it seems that they could simply say they want £5,000 for a 'Repairs' fund. And then spend all my contribution on the other building.
-To establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs, and other expenses incurred In the implementation of the Company’s objects and to require the Members of the Company to contribute towards such reserves or funds at such times, in such amounts and in such manner as the Company may think fit and to invest and deal in and with such moneys not immediately required in such manner as may from time to time be determined.
Crazy
And that hasnt even started me with the monies demanded (under threat of legal action) to pay for debt already incurred by the company, which I believe isnt allowed!
Oh gosh .. and so it goes on :-)

[Starlane]

Morshead Mansions Ltd v Di Marco - England & Wales Court of Appeal 2008.

This case seems to have decided that, if the company articles allow payments to be demanded from shareholders, sums that might be used to pay for costs that would otherwise be charged for via the service charge terms in the lease, can instead be demanded from shareholders.
This doesn't seem to mean that what is required for service charges can be calculated each year, and then demanded from shareholders rather than from leaseholders, but does seem to allow the company to charge amounts that they say might be used for any of the costs the company might have to pay (including both costs that might otherwise come under service charges and costs that the leases don't allow to be collected via the service charges).
It does seem to be something of a loophole.

https://nearlylegal.co.uk/2008/12/wh...ervice-charge/

In this case the MOA allowed the recovery of company costs from members NOT all MOA's allow this or leases.