NOT ALWAYS A SMALL ISSUE; RTM COMPANIES AND ACCOUNTING FOR UNCOMMITTED SERVICE CHARGES.

Section 94 of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) provides that where the right to manage premises is to be acquired by a RTM company the landlord, or its managing agent, must make to the RTM company a payment equal to the amount of any accrued uncommitted service charges held by him on the acquisition date.

Gateway Property Holdings Ltd v Westwood (Colchester) RTM Co Ltd [2016] UKUT 489 (LC), decided on the 3rd November 2016, ended up in the Upper Tribunal over a quarterly management charge of only £820. It was common ground that one quarter’s charge had been wrongly paid from the reserve fund to the landlord’s managing agent after acquisition of the freehold by the RTM company in 2015. In correspondence, however, there had been reference to a need to account for a wrongly charged £820 from “2014” The issue on appeal was simply whether the FTT had been right to order a second sum of £820 should be added back into the uncommitted service charges. The UT decided that the reference to 2014 had been a typographic error and so allowed the appeal.

A dispute over so small an amount must be regarded as unusual, although, given how often the accounting practices of landlords and managing agents seem to fall short of the ideal, it is perhaps surprising that Gateway v Westwood is one of a relatively small number of cases in which the operation of s.94 has fallen to be considered.

One of the reasons is likely to be the restrictive reading of s.94 in the leading case on the section, OM Ltd v New River Head RTM Co Ltd [2010] UKUT 394 (LC) ; [2011] 1 E.G.L.R. 97. In that case post-acquisition by the RTM Company, the tenants had secured determinations under s.27A of the 1985 Act reducing service charges paid to the previous landlord by a total of £121,742.39 and it had been the repayment of that sum (and accrued interest) which the RTM Company had sought by way of an order under s.94 (3). The matter was further complicated by the former landlord’s not having collected all the service charges it should have collected from all of the tenants. Judge Mole QC decided, in effect, that s.94 was not an appropriate mechanism by which such sums might be recovered; he held:

(1) The purpose of the legislation is strictly limited; its words suggest an intention to achieve the transfer to the right to manage company of the assets and powers needed for it to be an effective management company from the date of acquisition, leaving alone existing rights and relationships before the date of acquisition

(2) Section 94 operates so as to require the relevant person in s.94(1) (i.e. the former landlord or managing agent) to hand over to the RTM company whatever money was held on the acquisition date i.e. whatever money was either in one or more of the bank accounts set up by relevant person or, as contemplated by s.94(2)(b), in any investment which represented such sums.

(3) The words of s.94(1) were deliberately limited and “The natural meaning of those words is that what has to be paid is what the landlord or manager has actually got; not what he was entitled to have but failed to get or had at one stage but does not have now.” Quite how broad the words “held by him” are to be interpreted should be determined on a case-by-case basis. Judge Mole QC went on to comment: “I would have little hesitation in deciding that such charges were “held by him” within the section in a case where a manager had for his own reasons, dishonest or not, decided to put the service charges in cash in a box under his bed.”

(4) The sums had to have been paid “by way of” service charges in accordance with s.94(2)(a); it is immaterial  whether the charges were in fact justifiable and/or reasonable service charges.

(5) Section 97(5) makes it clear that payment of service charges to the RTM company in respect of costs incurred before the date of acquisition is neither required nor permitted by s.97(4).

(4) The charges must also be “uncommitted” service charges, so if they had been committed to a particular management debt or function, they would be outside the scope of s.94.

(5) Section 94(2)(b) could not be construed as as containing a power to award interest, rather the section made it plain that Parliament only intended interest that had actually accrued on the investments referred to to be transferred to the RTM company. There was no inherent power to award interest.

As OM Ltd v New River Head RTM Co Ltd demonstrates the sums an RTM company may wish to recover by way of overpaid service charges will not always be as relatively insignificant as they were in Gateway Property Holdings Ltd. However the recovery of advance service charges which have subsequently been held to be unreasonable under s.19 of the 1985 Act is problematic enough even when the landlord has not become a former landlord because in Knapper v Francis [2017] UKUT 3 (LC) it was held by the Deputy President that under s.19(2), which provides:

” Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.”

the latter part of the sub-section did not confer any substantive power on the FTT to order repayment to leaseholders. The result is that where service charge monies have been spent, even where they have subsequently been held to have been unreasonable, the route by which they might be recoverable by either individual leaseholders or an RTM company following the acquisition of the freehold is far from clear.