The importance of good record-keeping

Having set up their own Right to Manage Company under the Commonhold & Leasehold Reform Act 2002, acquiring the management of the block because of unsatisfactory site conditions and fee levels, and having appointed a new managing agent to assist with this and the ongoing management, the leaseholders’ attention turned to the historical service charge levels that had been levied upon them by the landlord and former agents.

Their attempt to understand such charges was not helped by the lack of accounting information provided upon handover of management. This included a past failure to serve proper accounts and a subsequent failure to serve any form of notice under Section 20B of the Landlord & Tenant Act 1985 advising of any likely cost levels. As a result, the leaseholders via their new agents made an application to the Leasehold Valuation Tribunal (now the First-tier Tribunal) for a determination on the reasonableness of the service charges they had been billed for a seven-year period from 2004 to 2010 when the RTM Company took over.

During the proceedings, directions were amended eight times due to non-compliance by the landlord and their agents, being predominantly due to poor record keeping and being unable to substantiate their position. The Tribunal directed that accounts were to be produced along with supporting invoices and documentation for review by the leaseholders. Unfortunately the information provided to leaseholders was sporadic, unclear and bore little resemblance to the figures included in the accounts. In some cases, documentation was missing entirely or related to completely different properties.

When delivering their 30-page decision after the final hearing, the Tribunal commented that “…it is no excuse that the records of monies held in trust on behalf of lessees have simply been lost…the failure of the Respondents to produce reconcilable accounts and invoices for the years in dispute points, in the Tribunal’s view, to a general failure to effectively control the management of the accounting procedure…”

The end result for the leaseholders was an award from the Tribunal that disallowed part of the service charge expenditure for these years by a total of approximately £185,000. The Tribunal also awarded costs, as well as making a Section 20C order preventing the landlord from charging their costs to the service charge. The leaseholders are currently progressing with the landlord and former agents the application of this award to their individual accounts, and the site is on the road to recovery.

This case well highlights the importance, and obligations, laid upon both landlords and agents in ensuring that all service charge record-keeping, accounting practices and services themselves are undertaken responsibly and accurately. Likewise for leaseholders to chase up their landlord and managing agents for a reconciliation of yearly service charge expenditure.

Leaseholders have the legal right to challenge, whether justified or not, the reasonableness of what they are being charged, so being able to properly evidence the basis of any such charges is a vital aspect of good management practice.