Property Service Charges - Whose money is it?
Whether you live in a block of flats, an unadopted new housing development or lease a business unit on an industrial estate, your lease will usually require you to contribute towards the upkeep of cummunal areas. These contributions are usually called service charges.
Although the law seems pretty clear on the position that service charge monies are held on “trust”, it is fair to say this has been a revelation to many property managers, certainly over the last 5 years.
We regularly talk to property leaseholders and tenants whose landlords collect service charge monies but have not provided any form of account to them for years.aintenance and upkeep role is carried out by the landlord or freeholder themselves as they often view service charge collections as another aspect of their annual income from the development.
Over recent years, it has been encouraging to see a greater awareness and involvement of leaseholders in the management process and structure and thus taking back control of their money.
This movement, coupled with an increase in the number of institutional landlord organisations (that want to avoid the complication of management), has led to the popularity of the tripartite lease – the three parties being the landlord, the leaseholder and a separate entity – a residents management company (RMC).
The purpose of an RMC
They are formed to give leaseholders a degree of control of the management of their property, still with the obligations to the landlord but with the freedom to direct how they are fulfilled. They usually take the form of a Limited by Guarantee company because the use of this type of entity in this context is convenient as it provides a set structure, in which leaseholders can form a board of directors (or committee) and leaseholders can see where the various obligations lie.
Service Charge Accounts
Over recent years the subject of the way in which service charge funds are held and accounted for has been discussed extensively in the accounting profession and property management industry.Without exception, these Ltd. by guarantee companies must file annual accounts with Companies House and provide their leaseholders with a service charge statement (a breakdown of the expenditure and service charges for the year) within nine months and six months respectively There are strict criteria regarding the expenditure made (usually prescribed in the lease) and law exists to protect property leaseholders and their money.
Where so much inherent confusion exists around the ownership of the service charge money, it is easy to understand how service charge accounts have been incorrectly prepared in the past. Adding to this until recently has been many years of consultation and redrafting of new legislation by the government.
A change of government at the last election allowed the politicians the excuse to scrap the new legislation. The accounting profession and residential management industry bodies have now released guidance on the preparation of the annual accounts, service charge statements and assurance support services available to provide peace of mind to residents and landlords alike.
We have been advising for some time that the money transacted through the RMC bank account remains the property of the leaseholders and should not therefore be included in the company statutory accounts. The new guidance concurs with this view and also gives clarity on the requirement for audit, the content of service charge statements and the relative responsibilities of accountants to these entities.
So that’s all sorted then???
Unfortunately, for many tenants and leaseholders the lack of correctly prepared accounting information is the least of their worries.
Whilst the majority of RMCs are run adequately, the combination of a cut-throat property market and the existence of some unscrupulous developers has led to very poor service and unfairly high service charges for many.
In the more suspect of cases, developers engage associated or subsidiary property management companies to run the RMCs of their developments. Now, provided the agent provides a good service there is no problem with this arrangement. However, all too often this practice has led to a captive audience of tenants and agents taking their fees for granted.
The results can be rising service charges, poor response times for enquiries, terrible maintenance levels and ultimately disillusioned tenants and reduced property values.
It doesn't have to be this way. Residents have rights and can take action to take control over how their money is spent.vels and ultimately disillusioned tenants and reduced property values.
If you are concerned contact us
Friend & Grant Ltd. are experts in this area. We provide accurate and current advice regarding financial and tax compliance for property owners, managers and freeholders and advice regarding their rights and obligations. We also provide links to trusted agents and professionals.
We feel poor service has prevailed in this service sector on too wide a scale and for far too long. Because of this we have invested time and money in understanding the issues and have designed our services to support responsible agents and landlords and their residents.
We understand that rising service charges are a big concern to many and also that it can be exhausting trying to challenge the property managers about these (if you can get hold of them!)
We act for a considerable number of residential management companies providing the following services;
- preparation of annual service charge statements and statutory accounts
- attendance at AGMs to deliver the accounts and financial reviews
- provide advice and support to directors at board meetings
- prepare annual trust tax returns for interest receipts on service charge accounts
- advise property managers with guidance on best practice regarding service charge monies, systems and documentation
- provide assusrance reports, audits and formal Section 21 reports
Whether you own a property and are concerned about the level of service charges, are a director of an RMC and are unsure of your obligations or your RMC is still preparing annual accounts with service charge income as turnover please act now. Feel free to contact Andrew Grant on 01634 731390 orAndrew@friendandgrant.co.uk