Can a Director of the Management Company charge a fee through the Service charge for preparing accounts ?

Reader’s E-mail:

My housing development has recently purchased the freehold of the estate. We have formed a management co who will actually own the freehold and the 18 home owners will have an equal share in the company. We have appointed three directors. All the directors are home owners . The management company is a not for profit company and there is no provision for directors salaries .

One of our directors have decided he wants to charge £1800 plus vat pa to keep records of the payments he is making to our service providers before it is submitted to accountants at the end of the year . Our leases do not make any provision for payments to the management co / directors . It should be noted the director in question is not a qualified accounts person and as he is a house owner and director I believe there is a conflict . If I have a disputed regarding his accounting, I have no redress . If we used an independent book keeper qualified / insured for this job we would be protected and the process would be independent  No other directors charge for their day to day services in running the development.

My understanding of the landlord and tenant act is the landlord cannot make a profit and the services provided should be handed over at face value.

Reply from Service Charge Dispute Guide

1. There are many different types of Leases in England.

2. More often than not Leases cover this issue by reference to a management fee payable to the ‘Landlord’. Now that you have collectively purchased the freehold any references to the Landlord in your Lease now means the management company.

3. Typically Leases in England will also set out what kinds of cost may be included in the management fee which is payable as part of the Service Charge.

4. A Landlord does not have the ‘authority to charge’ for something not listed in a Lease.

5. The law does not set out a separate list of what a Landlord may or may not charge for, or indeed prescribe the qualifications a person must have in order to carry out book keeping functions.

6. What the law does though say is Service Charges (and this includes the management fee element) are only payable to the extent that they are ‘reasonably incurred’. To read more about this see our article about Section 19 (1) (a) of the Landlord and Tenant Act 1985.

7. If you felt that the amount which the Director wanted to charge was too high, or the quality of the work he undertook was poor, you could challenge the cost under Section 19 of the Landlord and Tenant Act 1985 by applying to the First Tier Tribunal (FTT). The FTT would assess such a case on the basis of the ‘facts’ of your individual situation.

8. When Courts or Tribunals decide whose costs may be included in Service Charge they do so with the reference to what it says in the individual Lease or Leases concerned. The main thing a Court or Tribunal is likely to want to consider is whether the Lease makes any specific distinction between the costs incurred directly by the Landlord (or a direct employee of the Landlord) and those costs which are incurred by persons or organisations separate to the Landlord but engaged to provide services.

9. Sometimes Leases require that an ‘independent’ person prepares the accounts. If your Lease makes no distinction of this kind in respect of whose costs may be included in management fee element of the Service Charge, then it is unlikely that a Court or Tribunal would disallow the costs simply because the costs were those of a Director rather than an independent accountant.

10. Another aspect to this issue relates to the Management Company’s ‘constitution’ – the Articles of Association. If you do not already have a copy of this you should visit the Companies House website and download a copy, it will cost you £2. The Articles of Association may have something to say about Director’s remuneration. Moreover, it should set out what rights shareholders of the Company have in respect of decision making and removing Directors.

11. These kinds of disputes are best sorted out by the residents talking to each and reaching an agreement. Legal action in this respect rarely brings about a lasting and satisfactory conclusion.

12. There are substantive issues about the process of running a Management Company which need to be discussed in detail. How much work does the Director actually do? Can the work be shared out more to reduce the burden on one individual? There is, as you suggest, a governance issue and the normal logic is that there are benefits to separating out the tasks of deciding how to spend money and the task of accounting for that expenditure. This creates a system of ‘checks and balances’, reduces the potential for fraud, and this issue should considered by the shareholders of the Management Company as part of the good and proper management of the company.

Click on the link to read more Reader’s Questions and Answers on Administration Charges and Legal Costs