Section 20 for a RTM company

dw3305

I can see how Section 20 works where the building is managed by a freeholder who sends out a bill for every piece of work.  Fail to comply and the leaseholder pays only £250, the freeholder has to pay the whole bill for the work, the freeholder is out of pocket.  But what happens if a RTM company fails to comply, particularly one with a monthly charge fixed for a year, and reserves?
Firstly, a leaseholder may not even know until well after the event.  Can he then deduct the over-payment from his next monthly payment?  And if he does, and the company agrees it is in breach, should it not refund the over-payments to all the other leaseholders?  And as the work has already been paid for, the net effect is that the company's reserves are that much lower.  And, as the company is owned by the leaseholders, nothing has happened other than that they have paid less service charges now, and will have to pay more in future to restore the reserves to what they would have been.
While I don't think it changes the answer, the question arises in a block that is expensive to manage.  We employ managing agents, we issue detailed accounts, and the expectation is that you either serve as a director or accept what the directors decide.  Half the flats do participate, the other half seem more than content and really don't want to be bothered, and all would much prefer not to have the expense and rigmarole of Section 20 notices a couple of times a year.

eddddy

In general, the RTM company would probably do the s20 consultation, then collect the appropriate money from each leaseholder, and once they have all the money - they get the work done.


If after paying the money, a leaseholder decides that the RTM company hasn't complied with the s20 process, and the leaseholder feels they've been financially disadvantaged as a result...

• The leaseholder can take the RTM company to tribunal

• If the tribunal agrees with the leaseholder, it will order the RTM company to compensate the leaseholder - but the compensation generally cannot be taken from service charge funds. 

• But in general, RTM companies don't have any assets, so they'd have no funds to pay the compensation - so the RTM company would go bankrupt. (Unless perhaps some / all of the leaseholders volunteer to bale out the RTM company by giving it some cash.)

So realistically, a leaseholder would probably only challenge an s20 consultation before the money is paid and the work is started. As a successful challenge after the work was done would probably bankrupt the RTM company.



(However, if the RTM company is employing a managing agent, the managing agent would administer the s20 process. So if the agent messed up the s20 process, and a leaseholder won a claim against the RTM company as a result - I guess the RTM company would sue the managing agent for negligence, and use the damages to pay compensation to the leaseholder.)

dw3305

Thanks.  I think that boils down to what I was thinking.  Tactically I think we would fold before it got to the tribunal stage, refund everybody, call an EGM and take it from there.

This has actually arisen because the managing agents are advising us strongly that we should be doing a s20 (which they will charge us for), and will only not do it if we specifically instruct them.  On the one hand I'm quite impressed with their professionalism, but no grounds for pursuing them if we don't.

eddddy

dw3305 said:

Thanks.  I think that boils down to what I was thinking.  Tactically I think we would fold before it got to the tribunal stage, refund everybody, call an EGM and take it from there.

Just to clarify - do you mean refund everybody before the work starts?

If the work has started, you'll have to pay the builder - so you won't have enough money left to refund everyone.

(Legally, you can't use service charge funds or reserve funds or sinking funds to refund people because of a mistake by the RTM company.)




Edit to add...

And for example, let's say the roof is leaking and needs repairing - but one leaseholder keeps challenging your s20 consultation (rightly or wrongly).

Would you keep folding every time they challenged it?

How would the roof ever get fixed?

Then other leaseholders would potentially have grounds for a claim against you, because you haven't fixed the roof.

dw3305

I don't really know what I'm saying!

We've spent more than the limit in the past several times without s20 notices and had no problems.  We keep everyone informed of what is going on by issuing minutes of committee meetings, though I don't suppose that would count for anything if we were challenged.  In practice the sort of circumstances I can envisage giving rise to problems are a flat being sold and the new owner objecting, work that comes in way over budget because additional work is necessary, someone claiming that several jobs are a single project.  Most probably these would come to light after the company has committed to the work.  And what I'd envisage doing is telling all the other flat-owners that someone has withheld (or has threatened to withhold) £X, and we suggest that they do likewise, or that we will treat £X of their latest payment as a loan until things are resolved.

I'm surprised that telling all the other leaseholders to do the same as the complainant could be illegal, and if it's not it comes back to my original query, in that no-one gains anything.

eddddy

dw3305 said:

We've spent more than the limit in the past several times without s20 notices and had no problems.  

Essentially, you could say there are 2 ways of doing things:

1. Informally / Voluntarily
It sounds like this is what you're doing at the moment. You just agree terms with all the leaseholders - and they pay voluntarily. 

e.g. You say that some work needs doing - and it will cost £500 each, so can they each put £500 in the pot etc. (So no section 20 required etc)

You make it crystal clear that it is not a service charge payment - it is an informal arrangement outside the terms of the lease. 

That's great if everyone agrees to put their £500 in. But if one or more leaseholders refuses - you can't force them to pay.


2. Statutory approach
You have to follow all the legal processes - like doing section 20 consultations, ensuring that costs are 'reasonable' etc. And you might be challenged at a tribunal.

But doing it this way (as long as you do it properly) - you can enforce payment - e.g. by taking a leaseholder to court.

dw3305

We have done precisely what you suggest for the informal approach, for a job that wasn't strictly necessary or planned but people wanted done, but it was a bit of a pain.  Everyone agreed readily but someone forgot to pay, another couple hadn't really understood and had to be chased.  It took a while.

Our normal situation is more often that there is work costing £500 each and we have £1500 each in reserves.  We tell people what we are doing, how much it will cost, and that's that.  No additional charges to leaseholders.  If we started serving notices the general reaction would be irritation.  I'm just trying to establish whether we are actually vulnerable.  If we go ahead our reserves are reduced to £1000 a head.  If someone withholds £250 we tell everyone else to do the same.  Everyone has £250 more in their pocket and the company's reserves are £250 a head less.  At some time in the future monthly service charges will no doubt be higher than they otherwise would have been.