No3 – Gaming the Leasehold system – Pass business through associated companies

The landlord and tenants act 1985 has the following provisions aimed to provide protection and transparency to leaseholders;

Section 21: Summary of the service charge costs. Leaseholders have the right to request a summary of service charge expenditures

Section 22: The right to inspect supporting accounts. If a leaseholder is not satisfied with the summary of financial information pursuant the section 21 of this act then they have the right to request access to the supporting documentation used to create the accounts.

Section 23: Request relating to information held by superior landlord. This is the requirement for a superior landlord to provide information relating to requests under section 21 and 22. If the superior landlord does not hold this information then he must apply to the immediate landlord.

Sections 22 and 23 are particularly important as this gives access to the underlying paperwork that make up the accounts, essentially the same data that the accountants have access to in order to prepare the accounts.

…..but here’s the kicker.

Some managing agents will appoint associated companies to act as an intermediary between the freeholder/managing agent and the contractor that actually completes the work. Here’s a worked example.

A building requires a height survey to determine where it sits in the regulatory programme for fire safety. The managing agent/freeholder appoints the associated company to complete this task. The associated company then appoints a chartered surveyor to complete the survey.

The chartered surveyor sends the invoice for their work to the associated company. The associated company marks this up and sends it to the managing agent.

It looks a bit like this

Now in theory, the leaseholder could challenge the £9000 invoice on the basis of reasonableness pursuant to section 19 of the landlords and tenants act 1985……Good luck with that. I refer you to my article on how the courts’ view “reasonableness”.