Q&A - Reserve Fund for Major Works 

There is also a suggestion that Directors Meetings will no longer be reported to Shareholders presumably because of a wish by the Directors
that there should be a lack of openness and transparency.

The main concern is whether Shareholders can be forced to contribute to a major works reserve fund where there is not 100% security. The recent Co Op bond fiasco is in mind. In our case part of the reserve fund is in Barclay's current account and £60000 in a one year account with a lesser
Bank. All funds are in the name of the Managing Agents in trust for all Shareholders and no part attributable to any specific Shareholder. There
seems doubt about compensation under FSCS. There is always the alternative route of a levy. Can the Directors force an unsafe route?

RESPONSE

A reserve fund under a lease is established for the purposes of meeting recurring expenditure such as periodic redecoration of the exterior and common parts of the building in which the flats are situated so as to even out annual service costs.  This can be contrasted with a sinking fund which provides for expenditure which might only be incurred once or twice during a lengthy lease term, for example when replacing the roof.  In both cases a landlord is not entitled to set up, operate and demand monies for payments into these funds unless the lease specifically provides for it to do so, or where the landlord and/or tenants have agreed that such funds should be run for the mutual benefit of all concerned.  A well drafted lease will explain how much the landlord is entitled to demand from each tenant in respect of either or both of these funds in any particular year.  Further, for residential service charges where the Landlord and Tenant Act 1985 applies, firstly the sums demanded must be reasonable having regard to all the circumstances of each particular case and, secondly, the monies must be held on trust for the tenants (in the shares to which they have contributed).

There is a danger that, if the sinking or reserve funds are not held as trust money or at least identified as being money held in an account for a specific purpose, and a landlord becomes bankrupt or a company is put into liquidation or dissolved, the fund in question could form part of the landlord’s bankrupt or insolvent assets.  The tenants may then find it difficult to recover the same because they would have to prove in the bankruptcy or liquidation that they were entitled to recover the fund.  There would of course be no guarantee that they would rank in priority and they may simply be entitled to take a dividend of so many pence in the pound as unsecured creditors.  Consequently it should be ensured that the funds concerned are held in a separate designated bank account and identified as being a reserve or sinking fund for the particular building, as the case may be.  Any professional landlord properly acting would not have any objection to the funds being held in this way.

The Financial Compensation Scheme limits the government guarantee to £85,000 per deposit-taking institution (or £170,000 where there are two account holders in respect of the account concerned) so provided the sums held in the account do not exceed the £85,000 limit, then this should not be a problem.  If they do exceed this limit, then there is obviously a risk, albeit low, that any monies over and above the limit might be lost if the institution became insolvent.  In these circumstances the solution may be to open multiple accounts for different deposit-taking institutions, up to the £85,000 limit per account.  This could of course be practically unwieldy particularly if the risk of a run on a particular bank concerned, and the need to rely on the Scheme, is seen to be quite low.  Alternatively, consideration could be given to placing the monies into an account held by a building society, if this is seen to be a less risky deposit-taking institution.

As far as the concern about the lack of proper consultation on re-appointment is concerned, where an individual tenant contribution under the agreement is to exceed £250, consultation is mandatory regardless of how long the agreement is to run (or how long the works under that agreement will take).  It is unlikely that any contract to be renewed with a managing agent would last less than one year.  A managing agent will normally act for a landlord for each accounting year (which runs for a period of at least a year) even if the individual contribution per tenant for the managing agent’s work does not exceed £250.  Depending on the circumstances of the case, if there is no written evidence that the managing agent was appointed for a fixed three year term period and/or has agreed to an extension of that period or a new period of only 364 days (in respect of which you will need to seek copies of the relevant agreements), then you could argue that in reality, the decision to appoint the managing agents for a further period of 364 days is an extension of the original agreement.  This could be regarded as being for three years, 364 days so the consultation provisions should apply.  Pursuing this argument with the landlord may persuade it to agree to consult because it will appreciate that if successful, then it will not be able to recover from each tenant more than £100 per year towards the sum claimed under that agreement.  So, for example, if the managing agent’s fees per tenant for rent and service charge collection exceeded £100 then the landlord would have to pay the difference.

David Wadsworth, Dispute Resolution Team at Piper Smith Watton LLP 

The Companies Act 2006 requires companies to keep members’ resolutions and minutes of members’ general meetings available for inspection at its registered office, so shareholders have the legal right to review these documents. Shareholders’ statutory rights to information end there and do not extend to copies of the board minutes. So, unless your company’s constitution - the Articles of Association - or a shareholders’ agreement specifies otherwise, you do not have the right as a shareholder to copies of board minutes. It is worth checking the Articles (and any shareholders’ agreement) to find out where you stand – you can download a copy (for a small charge) from Companies House online. Please note that shareholders’ agreements are private documents and are not usually available for public inspection.

Directors of a company are able to attend board meetings and view board minutes and other company documentation. So, if your company’s Articles do not give all shareholders the express right to inspect board minutes, is there any way you, or any of the other tenant shareholders can be appointed as directors to the company under its constitution? You might be able to access the information that way, but you will not be able to then pass it on to the other shareholders without board consent.

If this is not a possibility, as shareholders of the company, if you follow a particular procedure and are able to get the required number of shareholders to agree at a shareholder meeting, you may be able to go about changing your company’s Articles to expressly grant this right to shareholders to access board minutes. If this is a route you want to take, it is important that the specific procedures are followed to comply with company law and your company’s constitution, so you should obtain company law advice specific to your circumstances to ensure you achieve your aims in a correct and lawful way.

Michelle Davenport, Company/ Commercial Team at Piper Smith Watton LLP