Directors of block sell assets to themselves undervalue and evade fair share of annual service charge!

by Readers Question

A month ago

Directors of block sell assets to themselves undervalue and evade fair share of annual service charge!

Make Text Bigger
Directors of block sell assets to themselves undervalue and evade fair share of annual service charge!

I have an unusual situation which I wonder if any anyone else on Property 118 has previous experience of or has advice on?

I own a two bedroom mansion flat in West London which I bought nearly twenty years ago, it has been rented out for most of that time and as I live overseas it makes it impossible for me to be on the Board, which consists currently of five members, all flat owners.

The mansion block is divided into several smaller sub blocks each adjoined and running the entire length of one side of the street and containing about 140 flats ranging from basement level to third floor.

At the time I bought my flat the Board was considering the sale of half the common areas in the basement of each sub block. These common areas could only be useful to the owner of an adjacent basement flat or raised ground floor flat as they were considered too small to be a separate dwelling, or at least that is the story the Board maintained.

Ostensibly this was to raise money to renovate the other common areas. I expressed interest to the managing agent to buy the common area for sale in my particular sub block, but my neighbour had an inside track being the Chairman of the Board. He used the managing agent to stonewall me and eventually bought the available common area, for a ridiculously low price which the Board had set, and also the adjoining basement flat which he joined together to create a much larger flat. Most flats are about 100SM in size, but extended basement or raised ground floor flats are easily 150SM. Some loft voids were also sold to owners of top floor flats virtually doubling them in size to 200SM, with no respective increase in their share of the annual service charge.

Unsurprisingly, most of the Board members themselves conveniently ended up owning a piece of the basement common areas for sale.

Apart from the travesty of selling these areas cheaply to themselves, they would be worth a fortune today and could have been converted into small apartments which would bring in a good rent to support the annual service charge, they also left their share of the service charge unchanged. The deed for each flat states the percentage of the annual service charge each individual flat must pay, usually ranging from 0.6 to 0.75 % of the total annual service charge. The argument is that as the Deed never returns to the Leaseholder then they are set in stone and cannot be changed.

Currently four out of the five Board members owns an extended flat and the service charge goes up by about 3% every year.

I find it unconscionable that Board members decide on how to spend everyone elses service charge payments when four out of five of them are partially getting a free ride by having a reduced annual service charge for themselves. One board member even owns a massive flat of easily 200SM which he created by purchasing two small flats originally designated as being for maintenance staff and so listed as not having to contribute to the annual service charge and then joining it up to a cheaply sold off common area.

He makes zero service charge contributions yet has the largest flat in the block and sits on the board deciding how to spend the money contributed by all the other owners.

I would like these board members to step up and change the situation for the common good of all owners by coughing up an increased and fairer share of the annual service charge for all the extended flats.

I think this could be done by the Board passing a special resolution to impose an increased service charge on extended flats. If not retroactively then surely this could be done at least every time one of these flats changes ownership.

I have consulted a solicitor specialist in director fraud who says nothing can be done about the sold off common areas, but regarding the service charge states my legal options will cost 20 to 30k and are
1, Application for a Declaration.
2, Derivative Action.
3, Minority Shareholders Action

I have asked the company secretary to ask the Chairman to contact me by email, as his email is not listed, but only a business address, but of course have not heard anything from him. I am considering writing to him but first thought I would ask if anyone on Property 118 has an opinion of how to gently persuade the Board to be fair and increase the service charges for the extended flats?

If there is no communication from the Chairman then I am considering writing to the owners of all the other flats. Obviously this will make me deeply unpopular with the Board members. All the details of sales are public records on the Land Registry website, the Local Authority planning Dept website and the Companies House website which has all the annual financial statements of the Mansion block ownership Company, of which each flat owner owns a share.

I suspect that hardly any of the other owners of non extended flats are aware of this situation and feel the non communication from the Chairman is indicative of him having something to hide and so an aversion to bringing this subject into the open.

Although the Board members involved are clearly shameless I do believe they would not particularly like this situation to be publicised to the other leaseholders in particular or it to be general knowledge locally in neighbourhood where they live.

Any advice greatly appreciated.

Alan

Comments

Neil Patterson

A month ago

Dear Alan,

I am not an expert in this area and hopefully others will be able to add some assistance.

However, I have been researching the Leasehold Advisory Service and the alternative dispute resolution section is interesting as most avenues seem to end in First-tier Tribunal

See >> https://www.lease-advice.org/advice-guide/application-first-tier-tribunal-property-chamber/#23

"Alternative Dispute Resolution

Where appropriate the Tribunal should seek to bring to the parties’ attention the availability of any appropriate alternative procedure for the resolution of the dispute which may include mediation and if the parties wish the Tribunal should seek to facilitate the use of the procedure.

Tribunal hearings are open to the public and their decisions can be seen at the Tribunal offices. LEASE provides a schedule of decisions with access to the full text of the determination. Tribunals can determine a wide range of disputes, including:

disputes about the terms and price of buying the freehold or extending a lease;
disputes about the liability to pay, and reasonableness of, a service charge, an administration charge, or an estate management scheme charge;
disputes relating to building insurance;
whether it would be appropriate to appoint a new manager in a block of flats;
whether a residential long lease (primarily of flats) should be varied;
disputes relating to the right to manage;
alleged breaches of a lease prior to a landlord serving a notice under Section 146 of the Law of Property Act 1925; and
whether a dispensation should be granted in respect of the consultation requirements under Section 20 of the Landlord and Tenant Act 1985."

Robert Dean

A month ago

Section 19 of the Landlord & Tenant Act 1985 says that service charges are only payable to the extent they are "reasonable". On the face of things, the situation you have described is entirely unreasonable. The First Tier Tribunal exists to adjudicate on such matters and is designed to be a low-cost dispute resolution service.

I would write to the manco and say that you consider the apportionment of charges, part which constitutes their "zero" contribution, as unreasonable. On that basis you are making an application to the FTT for determination of your liability. If the FTT find in your favour, you could tell the other leaseholders and they can use your judgement to get their contribution changed. Alternatively, a group of you could band together and make a joint application.

I dont think that you will get anywhere withe sale of the communal areas but it sounds like there has not been transparency in this process to say the least! I would avoid committing to spending thousands of pounds with solicitors for no real prospect of a meaningful outcome.

LEASE can give you lots of good free advice over the phone.

Bristol Resident

A month ago

Thank you Neil and Robert for bringing to my attention LEASE and FTT, I will contact them and give an update when I know more.

PATRICIA SIMPSON

A month ago

Well what a mess. As a previous member said you can go to the First Tier Tribunal and make an application for the unfairness of the directors. you can make a case for unfair practices on their part. LEASE offer legal advice for a small charge.
Service charge is based usually on Square Footage and that should be in lease. If the directors buy additional space then they have to pay the additional service charge.

If you need advice contact Amanda Michaels of Bright Willis in Birmingham She owns her own company and is legally qualified to help you

Bristol Resident

A month ago

Reply to the comment left by PATRICIA SIMPSON at 16/10/2017 - 21:59
Thanks Patricia, I will contact Amanda to get an opinion of where my case may go.

Rob Crawford

A month ago

Hi Alan, I would ask the Chairman for a copy of the Articles of Association or Constitution & Rules. At some point these documents will have been agree to and voted in by the members. It will prescribe how the board of Directors behave and will always include a clause that prevents the directors from benefiting from such "opportunities". It will also describe what to do if you wish to propose a vote of no confidence etc. If it is a Ltd Company then the Articles of Association will be available from Companies House. Remember, however, that these Board roles are often voluntary, time consuming and unpaid and sometimes deserving of the odd perk!

Bristol Resident

A month ago

Hi Rob,
The Board members have to sign a statement entitled "Rules on conflicts of interest for directors of xxxxx Ltd" which explains all the situations of a conflict of interest. I would say they are contravening this document every day.

Also the Articles of Association state in one paragraph as below,
"If a Director has an interest in a matter to be discussed by the Board, the Board may (by a simple majority vote and with the Director(s) with the interest voting) exclude that Director from the Board’s discussions, and eventual vote, on the business in which that Director has an interest. In addition, a notice must be included in the Company’s annual report and accounts each year to the following effect: “The current Board rules on conflicts of interests relating to directors are available on request from the Company Secretary.”

This ought to exclude four out of five board members from voting on any proposal to change the proportions of service charge per flat to something more fair as these four members have a conflict of interest due to owning a flat with a reduced contribution of service charge. Its doubtful the just one remaining board member could make the vote. This would effectively make the board non existent for this vote so probably it could never be voted on for that reason.

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Landlord Reactions To The 2017 Autumn Budget