Question 1

Transferring a sinking fund

Accepted Answer

On the advice of our accountants our RMC, has this year produced separate accounts for the Service Charge and the Company. This has created a dilemma for the Company Board because we would like to hold a reserve fund in the Company’s account, rather than the Service Charge account: in order to avoid the long drawn out S20, Landlord and Tenant Act 1987, consultation process when responding to a crisis. The Board now proposes to place a resolution before the next AGM authorising a levy of £150/shareholder/year for the next 5 years. We would also propose reducing each leaseholder’s annual service charge to by the same amount – effectively transferring the Sinking Fund from the service charge account to the Company’s account. Is there any legal reason why we cannot do the above? The FPRA replies: The advice that you have received reflects the way in which legislation aimed to protect flat lessees from inefficient (or dishonest) freeholders and their managing agents has a detrimental effect on RMC’s like yourselves. This applies in particular the rules that require that the service charge money for each estate must be held in a separate bank account and to be held in trust, which would protect leaseholders funds, particularly if the managing agent runs into financial trouble. As to your proposed resolution, I would suggest that the Service Charge provisions in your leases make it difficult for money intended for use in ways envisaged by these provisions, to be treated as anything other than Service Charge funds and held in the same way. If all your sixteen lessees are content to follow your proposals, this would probably work very well. However, if one of them (or a future one) runs into financial trouble and you have to contemplate legal action to collect dues, such action would have to be based on the terms of the lease and the law, so there could be problems. You mention Section 20. However, that law governs the spending on the property and not the way in which you raise the money to meet the bills. Thus, if you have a project costing (for your 16 flats) £4,000 or more, the s20 procedure should be used. Recently, a legal decision means that if you propose to spend more that £4,000 in one year, the s20 rules apply. It is hoped that this change can be reversed.

Question 2

Transferring a sinking fund

Accepted Answer

On the advice of our accountants our RMC, has this year produced separate accounts for the Service Charge and the Company. This has created a dilemma for the Company Board because we would like to hold a reserve fund in the Company’s account, rather than the Service Charge account: in order to avoid the long drawn out S20, Landlord and Tenant Act 1987, consultation process when responding to a crisis. The Board now proposes to place a resolution before the next AGM authorising a levy of £150/shareholder/year for the next 5 years. We would also propose reducing each leaseholder’s annual service charge to by the same amount – effectively transferring the Sinking Fund from the service charge account to the Company’s account. Is there any legal reason why we cannot do the above? The FPRA replies: The advice that you have received reflects the way in which legislation aimed to protect flat lessees from inefficient (or dishonest) freeholders and their managing agents has a detrimental effect on RMC’s like yourselves. This applies in particular the rules that require that the service charge money for each estate must be held in a separate bank account and to be held in trust, which would protect leaseholders funds, particularly if the managing agent runs into financial trouble. As to your proposed resolution, I would suggest that the Service Charge provisions in your leases make it difficult for money intended for use in ways envisaged by these provisions, to be treated as anything other than Service Charge funds and held in the same way. If all your sixteen lessees are content to follow your proposals, this would probably work very well. However, if one of them (or a future one) runs into financial trouble and you have to contemplate legal action to collect dues, such action would have to be based on the terms of the lease and the law, so there could be problems. You mention Section 20. However, that law governs the spending on the property and not the way in which you raise the money to meet the bills. Thus, if you have a project costing (for your 16 flats) £4,000 or more, the s20 procedure should be used. Recently, a legal decision means that if you propose to spend more that £4,000 in one year, the s20 rules apply. It is hoped that this change can be reversed.

Transferring a sinking fund

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