Leaseholders who pay variable service charges have the right to a management audit under s76 of the Leasehold Reform Housing and Urban Development Act and qualification is by not less than two thirds of leaseholders acting together. Individual leaseholders also have the right where they are the only property or one of two.
Under the Act, the auditor must satisfy certain statutory requirements:
- Be “suitably qualified” as a qualified Accountant by virtue of membership to the following: the Institute of Chartered Accountants, the Association of Certified Accountants or any other body of accountants recognised by the Secretary of State or
- A qualified Surveyor by virtue of being a fellow or associate of the Royal Institution of Chartered Surveyors, the Incorporated Society of Valuers & Auctioneers (amalgamated with the RICS in 2000), the Architects and Surveyors Institute (which merged with the Charted Institute of Buildings in 2003, becoming known as the Faculty of Architecture and Surveying) or as prescribed in regulations made by the Secretary of State.
What the Auditor must not be is a leaseholder of the premises, or an officer, partner, agent or employee of the landlord.
Examples of areas the Auditor could examine include:
- How far the landlord is meeting his obligations under the lease (and the law);
- What procedures and contract the landlord has for carrying out repairs and maintenance works such as a) how the works are specified and managed, b) what arrangements are there for competitive pricing? c) how the work is recorded and d) how invoices are checked and authorised for payment;
- Existing service contracts (for example lift maintenance or gardening) and their suitability and relevant to present needs, the costs and the means of pricing including whether they are tested by competition;
- The landlords financial systems, particularly how and where the tenants’ service charge money is held, that its trust fund is clearly established (where this applies) and what happens to the interest;
- The general state and condition of the common parts of the building, or estate, to check, for example, on matters of maintenance and contracted services; the cleanliness or the proper functioning of equipment.
For the purposes of an audit the auditor has a statutory right under s79 of the 1993 Act to require the landlord:
- To supply him with the summary of relevant costs referred to in s21 of the 1985 Landlord and Tenant Act on which the service charge is based;
- To afford him reasonable facilities for inspecting and copying accounts, receipts and other documents supporting the summary, or any other document “sight of which is reasonably required by him for the purpose of carrying out the audit”;
- To allow an inspection of any common parts comprised in the relevant premises or appurtenant property.
With all this information the auditor can provide the tenants with an informed professional judgement as to whether the landlord is actually providing the services that they are paying for.
Some landlords however may be reluctant to fully comply with an auditors’ or surveyors’ wish to examine his accounts on grounds of confidentiality.
There are no provisions in the legislation providing a landlord or managing agent any right of embargo or partial compliance arising from confidentiality of accounts, nor is there any provision for the court to be able to order disclosure of information to be subject to the blanking out of particular confidential matters.
The legislation gives no defence to the landlord in this area.
Commencing the Process
In order to begin the process, and under the 1993 Act, a s80 Notice must be served on the landlord stating:
- The full name of all the qualifying tenants on whose behalf it is served and the address of the flats of which they are qualifying tenants;
- The name address of the auditor;
- Any documents which the landlord is required to supply to the auditor or to afford him access to inspect and copy;
- The date on which the auditor proposes to carry out an inspection (not less than 1 month or more than 2 months from the date of the notice);
- The notice must be signed by all of the tenants;
The landlord must comply with the notice within 1 month or serve a counter notice setting out his objections, or proposing an alternative date for the inspection.
Where the landlord fails to comply or provides objections, the auditor may apply to the court for an order.
The application to the court must be made no sooner than 2 months and not later than 4 months after the serving of the s80 Notice.
GETTING A NEW AGENT OR CHANGING THE CURRENT ONE
When you interview prospective agents, you must ask questions. For example:
- What arrangements does the agent have for general maintenance inspections?
- How are minor repairs responded to and in what timescale?
- How are service charge monies collected and what are the agent’s banking arrangements – what arrangements are made regarding interest?
- How are contractors chosen?
- What arrangements are to be provided for emergency out-of-hours callouts?
- What commissions would the agent be entitled to receive from any contracts arising out of the services to you? A good agent should declare all such commissions to you.
- The agent chosen may provide a draft contract or the management company’s solicitor may draw one up; alternatively, the Royal Institution of Chartered Surveyors have produced two standard contracts, one for purpose built blocks of flats and one for other properties. The Association of Residential Managing Agents also provides guidance to its members on drafting a suitable contract. Always seek independent legal advice before entering into the contract.
- What period of notice is required in the management agreement? If there is no agreement or period in the agreement, what period would suit matters best?
- What is the current financial position for your scheme? Is the service charge account in deficit or credit?
- Are there large outstanding arrears that will make it difficult for any agent to provide services? If you are not sure, ask the current agent.
- Is the current agent owed any unpaid management fees that will be disputed?
- What documents will be handed over to the new agent so that management can continue smoothly? Draw up a list of what you require or ask the new agent to propose a list