Can Property Management companies charge all residents for debt collection?

twopensioners

Is it normal for property management companies to charge their debt recovery costs to all residents on the estate?  (We have just received a copy of the property management income and expenditure account for 2020 & 2021, which includes a substantial figure for debt recovery costs).
Also, is it normal that management company accounts are not audited?  Our copy states that 'service charge accounts in accordance with International Standards on Auditing is not required under the terms of the lease'  and 'because the above procedures do not constitute either an audit or a review made in accordance with International Standards on Auditing (UK and Ireland) or International Standards on Review Engagements, we do not express any assurance on the service charge accounts other than making the factual statements set out'.  A translation in plain English would be much appreciated!

DullGreyGuy

Certainly ours have similar language at the beginning of the accounts and are unaudited. No idea as to what proportion of leases require the accounts to be audited or not. If the original lease is before 1980 it also changes things slightly as the International Standards of Auditing didnt exist at that point and therefore cannot have been the intent when the terms were drafted. 

Auditing is an expensive and indepth process that is supposed to give extra comfort that the numbers are accurate as an independent and appropriate qualified auditor has validated and tested the controls, assumptions etc that are operated. They are mandatory for companies with turnover of more than £10m, more than £5m assets or more than 50 employees and can take weeks (or months) with substantial bills - some north of £10m. Google the news about auditors however and you will find many raising questions on the quality of audits and how companies get a great set of accounts signed off and two weeks later are going bust (or Tesco having to admit errors overstating profits by £250m which PWC signed off)

Ultimately if they did have to be audited accounts then its you that would be paying for the auditor so a double edged sword if you did want to have them audited. 

Jonboy_1984

I would expect them to try and recover the debt collection costs from the individual leaseholders involved in the first instance, but to pass them to the whole estate, if unsuccessful for some reason as a running cost.

Someone else may have a better idea though of the legal position.

DullGreyGuy

Jonboy_1984 said:

I would expect them to try and recover the debt collection costs from the individual leaseholders involved in the first instance, but to pass them to the whole estate, if unsuccessful for some reason as a running cost.

Someone else may have a better idea though of the legal position.

I wasnt sure on the first question which is why I remained quiet on it but presumably if they've been unable to get repayment from the debtor this then gets into a situation of cancelling the lease in which case the returned asset should more than cover the debts.

user1977

Jonboy_1984 said:

I would expect them to try and recover the debt collection costs from the individual leaseholders involved in the first instance, but to pass them to the whole estate, if unsuccessful for some reason as a running cost.

I wouuld expect that to be the norm, yes. Ultimately the risk of somebody not paying ought to be that of (collectively) the owners in the estate, not the management company.

eddddy

Presumably the debt recovery relates to leaseholders who didn't pay their service charges and/or ground rent.

Normally, the leases allow the debt recovery costs to be charged to the specific leaseholder(s) who hasn't paid their service charge or ground rent.


So possible explanations include:

• A ) You have unusual leases which don't allow debt recovery costs to be charged to individual late payers. So the management company splits the costs across all leaseholders.

• B ) The management company instructed a debt recovery firm - and they chased leaseholders. But it later became clear (perhaps because of a tribunal hearing) that the management company were being unreasonable. So they cannot claim debt recovery costs from the late payers

Option B can be very frustrating. A management company can 'lose' at a tribunal hearing, but even so, then they can often add their costs to the service charges. i.e. Whether the management company win or lose, they're costs are covered.

 

twopensioners

Thanks.  Yes the debt recovery fee relates to household(s) where the annual service charge is not paid.  What puzzles us is that deeds to all properties on the estate have covenants stating any unpaid service charges will result in a charge on the property, to be claimed when the property is eventually sold.

user1977

twopensioners said:

Thanks.  Yes the debt recovery fee relates to household(s) where the annual service charge is not paid.  What puzzles us is that deeds to all properties on the estate have covenants stating any unpaid service charges will result in a charge on the property, to be claimed when the property is eventually sold.

But in the meantime, the managing agents are entitled to be paid. If they end up recovering money from the debtors, that should go back in the pot for everyone.

eddddy

user1977 said:

twopensioners said:

Thanks.  Yes the debt recovery fee relates to household(s) where the annual service charge is not paid.  What puzzles us is that deeds to all properties on the estate have covenants stating any unpaid service charges will result in a charge on the property, to be claimed when the property is eventually sold.

But in the meantime, the managing agents are entitled to be paid. If they end up recovering money from the debtors, that should go back in the pot for everyone.

I think there would have to be some explicit wording in the lease to allow that - I don't think it's allowed by default.

Debt collection charges would be an Administration Charge because:

"...'administration charge' means an amount payable by a tenant of a dwelling as part of or in addition to the rent which is payable, directly or indirectly...

...in respect of a failure by the tenant to make a payment by the due date to the landlord..."

Link: https://www.legislation.gov.uk/ukpga/2002/15/schedule/11

The OP hasn't failed to make any payment to the landlord, so the OP should not be charged an Administration Charge.


And the landlord can't simply say "Tenant A owes me an Administration Charge but hasn't paid, so I'm going to collect it from all the other tenants."

twopensioners

thanks very much for your comments - we have asked the management company for an explanation of the debt recovery fees

TripleH

Are they accounts for a 'limited company or a partnership' or a cash flow statement?

I wouldn't expect an audit to be required as mentioned above due to the expense.

Just because the accounts aren't audited (which can mean bug grr all) doesn't stop you asking questions of the figures.

Fees for debt collection are an acceptable business expense. Yes recovering them from those who owe the money is the best option, but if that is not possible then the entity that is owed the money should bear the cost. Maybe those residents who do pay should be helping the management company in recovering the debt where they can?

Besides it doesn't mean they cannot be charged on in future to the default parties on sale of the property. Yes the expenses have to be paid now but they can be invoiced on unless the management company is not on the ball.