A client lives in a flat which is situated in a block of 23 long leasehold flats all of which are owner occupied.
The freehold is owned by a private limited company, the shareholders of which are limited to the 23 lessees and the directors of this company are four of my client’s neighbours. The same company acts as the management company.
All lessees are retirees.
Although my client’s lease lists the expenditure which can be incurred by the management company other non-listed expenditure is funded from the variable service charges.
Although it would seem that section 42 Landlord and Tenant Act 1987 applies to the variable service charges and listed expenditure which effectively pass through a statutory trust which I assume does not have to be registered, the lessor has registered a trust with the TRS and has issued trust accounts for the year ended 31 December and which incorporates for the past year all items of income including deposit account interest and all items of expenditure and a transfer from the management company of a significant balance of retained reserves.
Although the trust accounts disclose a surplus the tax charge is based only on the deposit interest received.
Further, although my client’s lease provides for the repayment of surplus charges the directors refuse to do so.
There is no provision within my client’s lease for the establishment of a sinking fund or to accrue funds for expenditure which is as yet unknown.
Previously service charge accounts were issued to the lessees but no longer and the directors have advised that they do not have to comply with the RICS Code of Practice 3rd edition despite a failure to follow the Code being a ground for the appointment of a manager by a Tribunal under section 24 Landlord and Tenant Act 1987.
Dormant company accounts have for many years been issued by the management company despite significant reserves having been amassed.
I would appreciate comments.
In the circumstances, I would advise making an Application to the First Tier Tribunal in England, or the Residential Property Tribunal in Wales to make a Determination on the matters in dispute and to determine the quantum of the service charges that are payable for each of the Service Charge periods.
The Lease terms define what can be done. If for example the Lease has no provision for accruing Reserve Funds for future major works, then the Management Company cannot collect funds for this purpose via the Service Charge Demands.
Further, Service Charge Demands are not due and payable if the Demands do not incorporate statements in accordance with sections 47 and 48 of the Landlord and Tenant Act 1985 regarding the name and address of the Landlord and the address for service of the Landlord, and further the demand must also include a “summary of leaseholders’ rights and obligations”. This includes details of such matters as a leaseholder’s right to apply to the Tribunal.
The law states that if the demand does not comply with either of these requirements, the leaseholder has a legal right not to pay unless and until the service charge is demanded in the proper manner.
Please note that the Laws in Wales differ from the Laws in England as to the form and content of the “Summaries” to be included with the Demands. The Welsh Summary is Bi-lingual and differs in certain respects. Use the wrong Summary in Wales for example means that the Demand is not due and payable !
Also, if Service Charges are defined as further or additional rent in the Lease then the Limitation Act limits the recovery to 6 years instead of 12 years.
There is a further limitation period of 18 months on recovery of Service Charges. Section 20B of the Landlord and Tenant Act 1985 states that a landlord cannot recover service charge costs that were incurred more than 18 months before he formally demands them. The exception to this rule is if he writes to the leaseholder within 18 months of incurring the costs informing them that he has incurred costs, the amount of them, and that they will be demanded in due course. Case law has indicated that costs are “incurred “when the landlord pays them or becomes liable to pay them; for instance, through receiving an invoice from a contractor or supplier.
If a landlord proposes to carry out works that will cost any one leaseholder more than £250, he is required to go through a consultation procedure under section 20 of the Landlord and Tenant Act 1985. This process involves providing leaseholders with notices allowing them to make observations on the proposals and sometimes to nominate a contractor from whom the landlord is to try to obtain an estimate. He also is required to notify leaseholders of the estimates.
The major works charge is still a service charge and, therefore, still has to comply with the requirement of reasonableness mentioned above.
The FTT and Wales LVT/RPT are supposed to be low cost resolution Tribunals. This is the case where the Tenant initiates the case.
However beware of contractual costs clauses in the Lease should the Landlord or Managing Agent invoke the process “in contemplation of Forfeiture” !
Regards
Mark
It is common that a Landlord company will appoint a separate Block Management Company to manage a development.
The Management Company collects the Ground Rent, Services Charges and Administration Charges and further receives fees for issuing various consents such as licences to assign leases, consents to keep pets, consents for internal alterations and whatever other consents may be required under the leases.
This results in the Landlord Company not trading and not receiving income itself. It is therefore dormant and can file Dormant Accounts.
You have described a situation in which the Landlord function and the Management function reside in the same Company. It appears to trade and accrue funds and presumably receives ground rent and fees for issuing consents. In this case then I cannot envision that it is a “ Dormant Company” entitled to file “Dormant Accounts” !
Regards
Mark
Your Client could potentially form an RTM Right to Manage Company with other Lessees on the Development and force a Management takeover.
They could either then manage this themselves or get a seperate Agent block management Company to manage the development.
It is usually a simple, quick statutory procedure backed up by the FTT/RPT Wales and the existing management company will have to hand over the money to the new RTM Company.
Regards
Mark
Many thanks for your much appreciated responses Mark. Have you ever come across financial statements for a trust made up to 31 December?
Yes, it is common for employee benefit trusts to be made up to the same accounting date as the employer company, so 31 December is quite usual. If applicable the trust tax return still has to cover the year to 5th April so that can make tax return preparation more complex than it otherwise need be.
In addition to the RICS code of practice 3 FRC/ICAEW has issued guidance on the preparation and audit of service charge accounts and any associated management company accounts (e.g. whether or not they are dormant) - this guidance is controversial and not universally accepted by practitioners and the whole area is a minefield…
Maxine
TC Citroen Wells
Many thanks for your much appreciated response Max. May I please enquire as the landlord refuses to repay excesses of monies collected over monies spent, demands contributions to a sinking fund when there is no provision within the lease so to do and collects contributions for future expenditure which is as yet unknown when there is no provision within the lease so to do such sums should be disclosed in the limited company’s annual accounts and subject to corporation tax?
There seem to be several areas of law at play here including trust, tax, landlord and tenant, and company law.
With respect to the landlord company, it must account separately for the service charge trust by way of trust accounts. The service charges are receipts but not turnover. The company accounts themselves should account for any transactions outside the service charge trust such as ground rent and fees for lease extensions - if there really are none then the company accounts will be dormant.
From a company law perspective, the shareholders (lessees) will have rights determined by the articles of association of the landlord company. Check the articles of association (they will be available on the Companies House website) to see what rights the shareholders have to remove and appoint directors. The directors of the company will usually by dint thereof be trustees of the trust. The company should be holding an annual general meeting which all the shareholders are entitled to attend -and vote at. Reappointment of directors (and adoption of the company accounts) should be dealt with at the AGM but it may be possible for a set proportion of the shareholders to requisition an extraordinary general meeting to be called between AGMs . This may be an available mechanism to change the director/trustees if there is general unhappiness with their conduct. obviously you would need to propose suitably informed (and willing and potentially professional) replacements but it may be cost effective way of achieving change/compliance with the lease terms.
As Sonia has noted, service charge receipts are not turnover and except for any bank deposit interest earned, are not taxable. These receipts are to reimburse common expenditure as determined by the lease. At any point in time there will lessees who have paid in advance on account (creditors) and those who may be in arrears (debtors). Also, where there is a sinking fund or reserve, until that money is spent, it is technically owed back to the lessees (creditor). Thus the company (to the extent that it is reflecting service charge receipts and expenditure) will have debtors and creditors shown in its balance sheet. That is one of the main areas of differing opinion i.e. should the company reflect these sums? Is it acting on its own account or as agent/trustee?
As to whether or not repayment of the sinking fund retention that may not be in accordance with the lease can be demanded? That is a legal question for the LVT or other relevant forum.
Maxine
TC Citroen Wells
Many thanks for your further response Maxine and for your response Sonia. I understand that all of the lessees are retirees and that some are elderly and are unlikely to appreciate the complexities of landlord and tenant legislation or understand the terms of their lease. It is therefore unlikely that support for change would be forthcoming. Am I correct in expecting the management company to issue service charge accounts in accordance with ICAEW Technical Release Tech 03/11 and financial statements for the limited company and which incorporate income raised from the shareholders rather than the lessees by the issue of demands for funds and that any surplus disclosed in the service charge accounts should, in accordance with the lease, be returned to the lessees and any surplus disclosed in the limited company’s financial statements should be disclosed as creditors ie due to the shareholders and not shown in reserves as per the decision in St Mary’s Mansions v Limegate Investment Co Ltd?