Challenging service charges

John Mills, a technical consultant to ARMA, looks at some typical situations where things can go wrong for directors of resident management companies (hereafter RMCos) illustrated with cases that went to the First-tier Tribunal.

Directors of RMCos are in the position of having to wear two hats at the same time. They are directors of a limited company and so responsible to the shareholders; and responsible for the management of a block of flats and so have to comply with the leases granted to the lessees and landlord and tenant legislation. These two roles often cause confusion for directors and can lead to costly mistakes.

This article looks at some typical situations where things can go wrong illustrated with cases that went to the First-tier Tribunal. When the lessees of a small block of seven flats in Huntingdon took on self-management of their small block in 1990 it was admitted at the tribunal that ”nobody looked at any leases which were mostly held by banks. Although nobody seems to recall precisely how this came about, the decision was taken to apportion charges equally between flats”. Things went well for many years; the lessees met at their AGM and decided the budget for service charges at their AGM. But when major expenditure was needed for repairs one of the lessees, who was not one of the lessees when the company was formed, got his solicitor to check his lease. He found that his lease only required him to pay a 9.5% share of service costs, not one seventh. He took his case to the tribunal.

PAYMENTS ADJUSTED

The tribunal decided that the RMCo had no right to go against the leases and that the lessee was entitled to have his service charge was entitled to backdated adjustment for the last 10 years that he had been in residence. The moral is that no decision of the directors of a company or its shareholders can overturn the requirements of the leases.

Things also go wrong with annual statements of account for service charges.

This RMCo had brought a case to recover arrears. The lessee paid minimal interim service charges but had not paid any balancing deficits due for four years. The lease was quite specific about what was required for the annual service charge statement; one requirement was for certification as a fair summary by an accountant. The RMCo had agreed that to save costs certified accounts were not necessary.

The FTT found the actual service charges were reasonable but that the RMCo could not recover the shortfalls due because it had failed to follow the terms of the leases; no certification, no total of interim service charges, no indication of a positive or negative balance. So the FTT decided that there were no arrears owing until the annual service charge statements for those years had been correctly issued. The moral is that to satisfactorily demand service charges at a tribunal or court an RMCo has to show that it has produced annual statements of account for service charges in accordance with the leases.

In this next case an RMCo thought that producing annual accounts for the company audited by an independent auditor should suffice for the purposes of service charges.

The leases of this block in London provided for an annual payment in advance of £100 but at the end of each financial year any deficit could be demanded from leaseholders as a one-off payment by the RMCo serving a statement certified by a surveyor. Further it was possible to increase or decrease the £100 in advance if the new figure was also certified by a surveyor.

The RMCo of this block of 10 flats had never issued any surveyor’s certificates. Each year the service charge to be levied had been agreed by a resolution at a company meeting after looking at the company’s annual accounts.

VIGOROUSLY PURSUED

One lessee challenged the service charges demanded over a fiveyear period. Her claim was that no more than £100 per annum was payable. This was despite the facts that the lessee was a previous chair of the RMCo, had paid more than £100 per annum when she was the chair, and she had vigorously pursued other lessees for the service charges demanded by the RMCo when she was chair. A First-tier Tribunal had some sympathy with the RMCo and decided that the lessee and ex-chair of the RMCo should not be able to overturn what had happened because her actions had shown she agreed with what had been done.

The lessee appealed to the Lands Tribunal and it decided that the terms of the lease were paramount. So the service charge payable for each of the five years in question was £100.

The lessee then went on to argue that the RMCo was not in a position to retrospectively issue any surveyor’s certificates and so demand higher sums. The Lands Tribunal decided that this was possible; there was nothing in the leases that set a time limit on how long after each financial year the RMCo could issue the statement with a surveyor’s certificate. However if the RMCo did decide to do this one assumes that the 18-month’s rule would come into play; it would also be difficult to find a surveyor to certify accounts from several years ago.

The moral of this case is that just because an RMCo produces independently audited accounts of the company for Companies House, which include income and expenditure for service charges, does NOT mean that is sufficient to correctly demand service charges. The RMCo needs to comply with what the leases require for an annual statement of account for service charges. There is a clear difference between a service charge statement and a company statement of account; most leases do not require that a set of accounts in the format for Companies House is what is required for service charges.

CHALLENGED BY LESSEES

And what of expenditure on major works and the requirements to consult under Landlord and Tenant Law-S20 consultation? Reddings Court Management Company in Birmingham was challenged by lessees about major works to install security lighting. The RMCo’s evidence was that the matter had been agreed at a shareholder’s meeting. The FTT decided that this was not a good reason to fail to do what the law required and so the cost of works was limited to £250 per leaseholder.

The moral is that decisions taken by directors or shareholders of an RMCo, even if unanimous, cannot override Landlord and Tenant Legislation.

In summary as one tribunal put the matter so well (with the exceptionof the use of tenant for lessee):

“The Tribunal would draw the attention of the parties to the importance of a clear distinction being made between the operation of the leases and the role of tenants as tenants on the one hand, and the operation of the Management Company and the role of the tenants as shareholders on the other. The Tribunal is only concerned with the operation of the lease and therefore resolutions and minutes of the Company carry little if any weight.”

Cases quoted can be viewed on the website www.rpts.gov.uk

Bliss Mill, Chipping Norton. CAM/38UF/LSC/2008/0019

52 Russell Road, Moseley, Birmingham BIR/OOCH/LSC/2007/0050

4 Apsley Court, Aylesbury. CAM/11UB/2008/0019

And website www.landstribunal.gov.uk

Bhambari v Willow Court Management LRX/22/2007