Question 1

Debt

Accepted Answer

Q: We have a leaseholder in our block with 'serious' debts over 3 possibly 4 years. The small management company who are also our freeholder are reluctant to disclose exactly how much the debt is and what charges are incurred by us for recovery. We understand this in the hands of their legal people. Questions are: At what point should a management company inform the leaseholders of outstanding debts, beyond say the year end? What are our rights regarding finding out the total of the debts and the charges outstanding? Do we have any course for actions ourselves if we are not content with the action of the Management Company? It should be noted that since the 500% increase in our flood insurance everyone (who is paying) pays by monthly installment over 10/12 months, therefore this debt on the ledger until the end of the year The FPRA responds: I will answer the first two questions first: (i) At what point should the management company inform the leaseholders of outstanding debts, beyond, say, the year end? (ii) What are the leaseholders’ rights, in terms of ascertaining the total debt and the charges outstanding? To summarise: (i) As a member/shareholder of the company, your member would have the right to receive the company’s annual accounts and reports for each financial year. Unless the company accounts are filed as dormant accounts (note that the new guidance – FRED50, which is still in draft form – advises against the filing of dormant accounts), those accounts and reports should contain information about the total level of debt, but it would not necessarily break that down on a flat by flat basis basis. The management company is under no other general legal obligation to provide your member with any information concerning outstanding service charge debts, so far as I can tell. There may be specific contractual rights (e.g. under the company’s articles of association) of which I am not aware. Even at the year end, the statement of account required to be served under the terms of the lease is limited to a list of the freeholder’s expenditure. (ii) Aside from the right, as a member, to receive the company’s annual accounts and reports for each financial year (which may not be of any assistance if the company files audited accounts), I cannot see that any one leaseholder has any obvious general right to insist on this information (the company’s articles of association may provide you with a right ... it is worth checking). You could argue that, as a beneficiary under a trust (which includes service charges) the leaseholders have an implied right to inspect the freeholder’s accounting records. It may also be possible to acquire the information your member seeks by serving a notice and following the procedure set down by s.22 of the Landlord & Tenant Act 1985, but I can’t guarantee it. A sufficient number of leaseholders may be able to exercise their right to a management audit; and a RTA could appoint of a surveyor under s.84 of the Housing Act 1996. In those circumstances, the auditor and surveyor respectively would probably have sufficient power to require the production of information concerning debtors and arrears. Data Protection The freeholder would not permitted to disclose any information which might identify the debtor (e.g. by producing copies of tenant account summaries). The Data Protection Act 1998 prohibits the “processing” (which includes disclosure) of “personal information” (any information which is capable of identifying an individual), unless one of the circumstances specified by Schedule 2 of the 1998 Act applies, e.g. the data subject consents, or the information is required for the performance of a contract to which the data subject is a party, or the processing is necessary for compliance with some other legal obligation. I can’t see that information concerning outstanding debts is required by the other leaseholders for the purpose of performing a contractual obligation to which the debtor is a party; nor can I think of a legal obligation on the part of the other leaseholders, which would necessitate the production of that information. Rights to Information, Under the Lease The service charge provisions in the lease leave a bit to be desired. The Landlord is required to produce an annual statement, certified by the auditors of the Landlord, certifying the Maintenance Charge for the preceding year. The Maintenance Charge is defined as “the aggregate amount in each year ... reasonably expended by the Landlord in the performance of its covenants and obligations hereunder”; so the obligation to provide an annual statement of account, is limited to providing a simple list of expenditure. There is no requirement to disclose a list of debtors of even the total amount of outstanding debt. I considered whether your member might benefit from the power to require the landlord take enforcement action against another leaseholder; or the right to the benefit of other tenant covenants, but I do not think they would assist. A leaseholder could require the Landlord to take enforcement action, without the Landlord disclosing any information about the debt to them and the benefit of other tenant covenants appears to be limited to covenants which “are intended to benefit the Flat or Tenant”. Seeing as the service charge is payable to the Landlord, in connection with an expenditure incurred by the Landlord (notwithstanding that the Landlord is a leaseholder owned Company), I think that is unlikely. This provision is more likely to relate to, for example, the covenant against causing a nuisance. Statutory Rights to Information, Belonging to Leaseholders It would be open to your member to serve a s.21 request for a written summary of costs (relating to the last accounting period), but, again, this would not necessarily include information about outstanding debtors. The summary is more a list of expenditure incurred by the Landlord, divided into different categories, although the summary should also specify the aggregate of any amounts received by the landlord down to the end of the accounting period in question, on account of service charges, and still standing to the credit of tenants at the end of that period. A s.21 notice can be followed by a s.22 request to inspect invoices, receipts, vouchers and other documents supporting the said summary. You may find that a request to inspect supporting documents provides your member with access with the information they need to establish the level of debt; however, if the Landlord decided to be difficult, they might say that that information does not fall within the scope of s.22, because it does not relate to the costs incurred by the Landlord. Rights to Information as a Company Member/Shareholder Every company must send a copy of its annual accounts and reports for each financial year to every member of the company, every holder of the company’s debentures, and every person who is entitled to receive notice of general meetings (section 423, CA 2006). In addition, a member of an unquoted company is entitled to be provided, on demand and without charge, with a copy of the company’s last annual accounts, the last directors’ report and the auditor’s report on those accounts (including the statement on that report) (section 431, CA 2006). Other than that, I cannot think of any general rights to information, which would assist your member. You should check any shareholder agreements between the company and the shareholders, as these may contain obligations on the company to disclose certain information to shareholders (for example, management accounts or other financial information). The articles of association should also be checked carefully for any disclosure obligations. Section 358 of the Companies Act 2006 (CA 2006) requires the company to keep members’ and minutes of members’ general meetings available for inspection at its registered office (or at a place specified in regulations made under section 1136 CA 2006 Act) for 10 years. Members of the company can inspect those resolutions and minutes free of charge and can require a copy for the fee prescribed by the Companies (Company Records) Regulations 2008 (SI 2008/3006). Inspection of company records by members who are not directors is governed by the articles, subject to certain statutory minimum rights. Model Article 50 of the model articles for private companies limited by shares provides that “except as provided by law or authorised by the directors or ordinary resolution of the company, no person is entitled to inspect any of the company’s accounting or other records or documents merely by virtue of being a shareholder”. Notice of a general meeting of a company must be sent to every member of the company (section 310, CA 2006). A company that is required under section 292 CA 2006 to circulate a resolution must send or submit to every eligible member a copy of the resolution and a copy of any accompanying statement (section 293, CA 2006). The statutory rights do not extend to copies of the board minutes and general financial records. A member does not have a right to inspect board minutes under CA 2006. However, you should review the company’s articles of association or other agreement between members (such as membership rules) which could provide for inspection of board minutes by members. Occasionally, articles will give wider rights of inspection, but even where they provide that books, wherein the proceedings of the company are recorded, may be inspected, a member has no right to inspect the minute book of the proceedings of directors (R v The Mariquita and New Granada Mining Company (1858) 1 Ellis and Ellis 289). However, in the event of legal proceedings (e.g. for unfair prejudice under section 994 CA 2006 or in a derivative action), the minutes and other records may be required to be disclosed under Civil Procedure Rules. A member will also be entitled to all the company documentation that is on file with Companies House as this is public information. Documents, records and registers which must be made available for inspection by members (in their capacity as members) under the 2006 Act include:

Register of, and index of, members (section 116(1)(a)).
Register of directors (section 162(5)).
Directors' long-term service contracts (section 188(5)).
Loans, quasi-loans to, and credit transactions with, directors or connected persons (sections 197(3)(b)(i), 198(4)(b)(i), 200(4)(b)(i), 201(4)(b)(i) and 203(3)(b)(i)).
Payments for loss of office (sections 217(3)(b)(i), 218(3)(b)(i) and 219(3)(b)(i)).
Directors' service contracts (section 229(1)).
Directors' indemnities (section 238(1)).
Register of secretaries (section 275(5)).
Records of resolutions and meetings (section 358(3)).
Contracts relating to purchase of own shares (sections 696(2)(b)(i), 699(2)(b)(i) and 702(6)).
Documents relating to purchase of own shares out of capital (section 720(4)).
Register of debenture holders (section 744(1)(a)).
Instruments creating charges and register of charges: England and Wales (section 877(4)(a)).
Instruments creating charges and register of charges: Scotland (section 892(4)(a))
Company records may be available for inspection in hard copy or electronic form (section 1135, 2006 Act).
Section 388(1) of the 2006 Act provides that accounting records (defined in section 386) must be available for inspection at all times by the officers of the company. Officer includes a director, manager or secretary (section 1173, 2006 Act).

Statutory Trust Service charge monies are held on trust by virtue of section 42 of the Landlord and Tenant Act 1987. It is established law that the beneficiaries must be allowed to inspect the trust accounts and all accounts relating to the trust (dating back to Clarke v Earl of Ormonde (1821) Jac. 108). That said, practically speaking; if the freeholder refuses, is your member really likely to go to the expense of issuing Court proceedings to enforce an ancient right of a beneficiary under a trust? I expect not. What Course of Action is Available to the Leaseholders? I would certainly want to know how the company is meeting the shortfall, arising in consequence of the arrears. If they are raiding the reserve fund for that purpose, that is likely to be unlawful (a breach of contract, and a breach of the statutory trust created by s.42 of the Landlord & Tenant Act 1987). I have alluded to some possible course of action above, with respect to the inspection of certain documents and the production of information: (a) Leaseholders representing two thirds of the flats in the block may request a management audit under Part V of the Leasehold Reform Housing & Urban Development Act 1993. The auditor can request sight of any documents reasonably required by him for the purpose of carrying out the audit (s.79(2)(b), 1993 Act). (b) If your member belongs to a recognised tenants association (under s.29, Landlord & Tenant Act 1985), that RTA could appoint a surveyor under s.84 of the Housing Act 1996. The surveyor must be afforded the opportunity to inspect documents, sight of which is necessary for the purposes of his functions (the functions for which he is appointed by the RTA). That would be sufficiently broad to cover information relating to debtors and arrears. If your member is really unhappy with the way the property is being managed, they could consider an application to appoint a manager, under Part II of the Landlord & Tenant Act 1987 (allowing substantial arrears to build up could be a breach of Part 21 of the RICS Code); or even the right to manage, if they have a sufficient number of leaseholders in support of the proposal (at least 50% of the flats in the block). This is a question which comes up a lot, but there are no obvious rights available to leaseholders, to assist with access to information about debtors (probably a deliberate policy, on the part of Parliament, on account of the sensitive and personal nature of the information).

Question 2

Debt

Accepted Answer

Q: We have a leaseholder in our block with 'serious' debts over 3 possibly 4 years. The small management company who are also our freeholder are reluctant to disclose exactly how much the debt is and what charges are incurred by us for recovery. We understand this in the hands of their legal people. Questions are: At what point should a management company inform the leaseholders of outstanding debts, beyond say the year end? What are our rights regarding finding out the total of the debts and the charges outstanding? Do we have any course for actions ourselves if we are not content with the action of the Management Company? It should be noted that since the 500% increase in our flood insurance everyone (who is paying) pays by monthly installment over 10/12 months, therefore this debt on the ledger until the end of the year The FPRA responds: I will answer the first two questions first: (i) At what point should the management company inform the leaseholders of outstanding debts, beyond, say, the year end? (ii) What are the leaseholders’ rights, in terms of ascertaining the total debt and the charges outstanding? To summarise: (i) As a member/shareholder of the company, your member would have the right to receive the company’s annual accounts and reports for each financial year. Unless the company accounts are filed as dormant accounts (note that the new guidance – FRED50, which is still in draft form – advises against the filing of dormant accounts), those accounts and reports should contain information about the total level of debt, but it would not necessarily break that down on a flat by flat basis basis. The management company is under no other general legal obligation to provide your member with any information concerning outstanding service charge debts, so far as I can tell. There may be specific contractual rights (e.g. under the company’s articles of association) of which I am not aware. Even at the year end, the statement of account required to be served under the terms of the lease is limited to a list of the freeholder’s expenditure. (ii) Aside from the right, as a member, to receive the company’s annual accounts and reports for each financial year (which may not be of any assistance if the company files audited accounts), I cannot see that any one leaseholder has any obvious general right to insist on this information (the company’s articles of association may provide you with a right ... it is worth checking). You could argue that, as a beneficiary under a trust (which includes service charges) the leaseholders have an implied right to inspect the freeholder’s accounting records. It may also be possible to acquire the information your member seeks by serving a notice and following the procedure set down by s.22 of the Landlord & Tenant Act 1985, but I can’t guarantee it. A sufficient number of leaseholders may be able to exercise their right to a management audit; and a RTA could appoint of a surveyor under s.84 of the Housing Act 1996. In those circumstances, the auditor and surveyor respectively would probably have sufficient power to require the production of information concerning debtors and arrears. Data Protection The freeholder would not permitted to disclose any information which might identify the debtor (e.g. by producing copies of tenant account summaries). The Data Protection Act 1998 prohibits the “processing” (which includes disclosure) of “personal information” (any information which is capable of identifying an individual), unless one of the circumstances specified by Schedule 2 of the 1998 Act applies, e.g. the data subject consents, or the information is required for the performance of a contract to which the data subject is a party, or the processing is necessary for compliance with some other legal obligation. I can’t see that information concerning outstanding debts is required by the other leaseholders for the purpose of performing a contractual obligation to which the debtor is a party; nor can I think of a legal obligation on the part of the other leaseholders, which would necessitate the production of that information. Rights to Information, Under the Lease The service charge provisions in the lease leave a bit to be desired. The Landlord is required to produce an annual statement, certified by the auditors of the Landlord, certifying the Maintenance Charge for the preceding year. The Maintenance Charge is defined as “the aggregate amount in each year ... reasonably expended by the Landlord in the performance of its covenants and obligations hereunder”; so the obligation to provide an annual statement of account, is limited to providing a simple list of expenditure. There is no requirement to disclose a list of debtors of even the total amount of outstanding debt. I considered whether your member might benefit from the power to require the landlord take enforcement action against another leaseholder; or the right to the benefit of other tenant covenants, but I do not think they would assist. A leaseholder could require the Landlord to take enforcement action, without the Landlord disclosing any information about the debt to them and the benefit of other tenant covenants appears to be limited to covenants which “are intended to benefit the Flat or Tenant”. Seeing as the service charge is payable to the Landlord, in connection with an expenditure incurred by the Landlord (notwithstanding that the Landlord is a leaseholder owned Company), I think that is unlikely. This provision is more likely to relate to, for example, the covenant against causing a nuisance. Statutory Rights to Information, Belonging to Leaseholders It would be open to your member to serve a s.21 request for a written summary of costs (relating to the last accounting period), but, again, this would not necessarily include information about outstanding debtors. The summary is more a list of expenditure incurred by the Landlord, divided into different categories, although the summary should also specify the aggregate of any amounts received by the landlord down to the end of the accounting period in question, on account of service charges, and still standing to the credit of tenants at the end of that period. A s.21 notice can be followed by a s.22 request to inspect invoices, receipts, vouchers and other documents supporting the said summary. You may find that a request to inspect supporting documents provides your member with access with the information they need to establish the level of debt; however, if the Landlord decided to be difficult, they might say that that information does not fall within the scope of s.22, because it does not relate to the costs incurred by the Landlord. Rights to Information as a Company Member/Shareholder Every company must send a copy of its annual accounts and reports for each financial year to every member of the company, every holder of the company’s debentures, and every person who is entitled to receive notice of general meetings (section 423, CA 2006). In addition, a member of an unquoted company is entitled to be provided, on demand and without charge, with a copy of the company’s last annual accounts, the last directors’ report and the auditor’s report on those accounts (including the statement on that report) (section 431, CA 2006). Other than that, I cannot think of any general rights to information, which would assist your member. You should check any shareholder agreements between the company and the shareholders, as these may contain obligations on the company to disclose certain information to shareholders (for example, management accounts or other financial information). The articles of association should also be checked carefully for any disclosure obligations. Section 358 of the Companies Act 2006 (CA 2006) requires the company to keep members’ and minutes of members’ general meetings available for inspection at its registered office (or at a place specified in regulations made under section 1136 CA 2006 Act) for 10 years. Members of the company can inspect those resolutions and minutes free of charge and can require a copy for the fee prescribed by the Companies (Company Records) Regulations 2008 (SI 2008/3006). Inspection of company records by members who are not directors is governed by the articles, subject to certain statutory minimum rights. Model Article 50 of the model articles for private companies limited by shares provides that “except as provided by law or authorised by the directors or ordinary resolution of the company, no person is entitled to inspect any of the company’s accounting or other records or documents merely by virtue of being a shareholder”. Notice of a general meeting of a company must be sent to every member of the company (section 310, CA 2006). A company that is required under section 292 CA 2006 to circulate a resolution must send or submit to every eligible member a copy of the resolution and a copy of any accompanying statement (section 293, CA 2006). The statutory rights do not extend to copies of the board minutes and general financial records. A member does not have a right to inspect board minutes under CA 2006. However, you should review the company’s articles of association or other agreement between members (such as membership rules) which could provide for inspection of board minutes by members. Occasionally, articles will give wider rights of inspection, but even where they provide that books, wherein the proceedings of the company are recorded, may be inspected, a member has no right to inspect the minute book of the proceedings of directors (R v The Mariquita and New Granada Mining Company (1858) 1 Ellis and Ellis 289). However, in the event of legal proceedings (e.g. for unfair prejudice under section 994 CA 2006 or in a derivative action), the minutes and other records may be required to be disclosed under Civil Procedure Rules. A member will also be entitled to all the company documentation that is on file with Companies House as this is public information. Documents, records and registers which must be made available for inspection by members (in their capacity as members) under the 2006 Act include:

Register of, and index of, members (section 116(1)(a)).
Register of directors (section 162(5)).
Directors' long-term service contracts (section 188(5)).
Loans, quasi-loans to, and credit transactions with, directors or connected persons (sections 197(3)(b)(i), 198(4)(b)(i), 200(4)(b)(i), 201(4)(b)(i) and 203(3)(b)(i)).
Payments for loss of office (sections 217(3)(b)(i), 218(3)(b)(i) and 219(3)(b)(i)).
Directors' service contracts (section 229(1)).
Directors' indemnities (section 238(1)).
Register of secretaries (section 275(5)).
Records of resolutions and meetings (section 358(3)).
Contracts relating to purchase of own shares (sections 696(2)(b)(i), 699(2)(b)(i) and 702(6)).
Documents relating to purchase of own shares out of capital (section 720(4)).
Register of debenture holders (section 744(1)(a)).
Instruments creating charges and register of charges: England and Wales (section 877(4)(a)).
Instruments creating charges and register of charges: Scotland (section 892(4)(a))
Company records may be available for inspection in hard copy or electronic form (section 1135, 2006 Act).
Section 388(1) of the 2006 Act provides that accounting records (defined in section 386) must be available for inspection at all times by the officers of the company. Officer includes a director, manager or secretary (section 1173, 2006 Act).

Statutory Trust Service charge monies are held on trust by virtue of section 42 of the Landlord and Tenant Act 1987. It is established law that the beneficiaries must be allowed to inspect the trust accounts and all accounts relating to the trust (dating back to Clarke v Earl of Ormonde (1821) Jac. 108). That said, practically speaking; if the freeholder refuses, is your member really likely to go to the expense of issuing Court proceedings to enforce an ancient right of a beneficiary under a trust? I expect not. What Course of Action is Available to the Leaseholders? I would certainly want to know how the company is meeting the shortfall, arising in consequence of the arrears. If they are raiding the reserve fund for that purpose, that is likely to be unlawful (a breach of contract, and a breach of the statutory trust created by s.42 of the Landlord & Tenant Act 1987). I have alluded to some possible course of action above, with respect to the inspection of certain documents and the production of information: (a) Leaseholders representing two thirds of the flats in the block may request a management audit under Part V of the Leasehold Reform Housing & Urban Development Act 1993. The auditor can request sight of any documents reasonably required by him for the purpose of carrying out the audit (s.79(2)(b), 1993 Act). (b) If your member belongs to a recognised tenants association (under s.29, Landlord & Tenant Act 1985), that RTA could appoint a surveyor under s.84 of the Housing Act 1996. The surveyor must be afforded the opportunity to inspect documents, sight of which is necessary for the purposes of his functions (the functions for which he is appointed by the RTA). That would be sufficiently broad to cover information relating to debtors and arrears. If your member is really unhappy with the way the property is being managed, they could consider an application to appoint a manager, under Part II of the Landlord & Tenant Act 1987 (allowing substantial arrears to build up could be a breach of Part 21 of the RICS Code); or even the right to manage, if they have a sufficient number of leaseholders in support of the proposal (at least 50% of the flats in the block). This is a question which comes up a lot, but there are no obvious rights available to leaseholders, to assist with access to information about debtors (probably a deliberate policy, on the part of Parliament, on account of the sensitive and personal nature of the information).

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