Residential Service Charge Accounts
RMC (Residents’ Management Company)
RTMCo (Right to Manage Company)
Flat Management Companies
What are they?
These relate to residential leasehold properties (usually in a block of flats) on which variable service charges are paid by the leaseholders in accordance with their leases to cover the cost of providing services, repairs, maintenance, improvement, insurance or management.
In practice this is effectively a charge made to property owners to cover the costs of the maintenance and upkeep of the common areas of the property. An example of this would be the hallways where there is, say, an electricity bill for the lighting. As this cost is not directly applicable to an individual flat or property, this will be shared. Another example would be the gardening costs for communal gardens.
So how does it work?
There are several stages to go through:
- A budget is prepared based on expected costs that the property will incur. This budget is normally produced to cover the following 12 months and will give a total estimated cost.
- The total cost will then be allocated to each relevant property. How this is allocated between the properties is normally set out in the property lease agreements.
- Each leaseholder will then receive a service charge demand reflecting what is due. This is effectively an invoice from the Residents Association to the leaseholder.
- On receiving the funds, the Residents Association will then settle the common costs as they arise on behalf of the leaseholders.
- At the year end a set of financial statements will be prepared reflecting the income and expenditure of the property for that period. This will reflect actual costs rather than budgeted amounts, so any surplus or deficit can be calculated.
Type of demands
Service charge demands
Service charge demands are issued to cover the ongoing routine costs such as electricity, cleaning, managing agents fees etc. These costs are expected to be incurred in the general maintenance of the property.
It is important to realise that for monies collected on this type of demand, any surplus can be repayable to the leaseholders and similarly any deficit can be recovered.
Major works/Sinking fund/Special reserve
This type of demand can carry several names but the reason for the demand will always be specific. These demands are normally for a particular matter, such as redecoration, a new roof etc. Monies collected via these demands are held separately from the service charge funds and can only be used for the reason they have been collected. In some cases, this may be a high cost area that is planned/anticipated, and so collected over several years.
Accounts format
Depending on how the Residents Association is structured, the format of the accounts can be very different. Often the Residents Association would be formed via a limited company, with the leaseholders being both shareholders and directors. If this is the case, the accounts will be drawn up applying the usual company accounts rules and regulations. However, more and more Residents Associations are now treated as trusts. Trust accounts do not carry the same structure as a limited company. In fact, there is no set format.
Section 21 Review
If the property has 4 or more dwellings, then a Landlord & Tenant Act Section 21 review may be required. This review is carried out specifically to assess the reasonableness of the expenditure included in the accounts. Quite often the accounts will include a separate report for this. The report will itemise any expenditure items that look unreasonable and cannot be supported. This exercise is required for the protection of leaseholders, who are not directly involved in the finances of the Residents Association.
The above does not constitute specific advice and is intended only as a general outline.
Please contact us if further details are advice are required.
