Changing your Articles of Association to tackle non- paymentofservice charges could be adangerous tactic, says brucemaunder-Taylor
Who are the real
There aresome blocks of flats run by resident-controlledmanagement companies inwhichone leaseholderisclaimed to be holding everybody else to ransomandwho in turn claims victimisation by the Board of Directors. To voluntaryunpaiddirectors ofaResidents’
Management Company (RMC) with no capital assets of its own, no profits to rely on, and only aself-balancingservice chargeaccount, anylegal proceedings that result fromthis situationcan be anightmare-astheycan be forthe leaseholderwho feelsvictimised. In a typicalcaseofthiskind, theRMCwill issue County Court proceedings for recovery of whatever is owed;thematter will be referred to theLVT foradetermination;thematter will return to the County Court (if not settled); and substantial costs-often running into tens of thousandsofpounds-willhavetobepaid. This does notonlyapply to recovery of service charges butalsotoalleged breachesofalease andother litigation affecting residentialblock management. In an attempt to tackle this problemand
avoidlitigation,there is nowanemerging tendency forsolicitorstoadviseRMCsto changethe Articles of Association(therules which govern themanagement of their company) to enable theRMCto collectmoney fromtheshareholders, either collectively or individually,ifthe directorsdecidetomake a demand. The expectation is that if one resident,who is accusedofbeing a‘rogue’ leaseholder, puts the company to substantial cost,the Directorscan legitimately demand thosecostsfrom that leaseholderasa shareholder ormember of theCompany and expecttorecover themthat way.
TesT case The ability for a company to do this was tested all the way to the Court of Appeal in thecaseofDiMarco –v-MorsheadMansions Limitedin2008,when it wasdecided that whatever is payablebyway of servicecharges throughthe leaseisquite separate anddistinct fromwhat is payablethrough theArticles
Flat Living Autumn2011
Is one rOGues?
of Association of theCompany. The Court determined that this is the case even if the sumsbeing demanded are, effectively, service
charges.Inthe caseofMorsheadMansions, it is understoodthataGeneralMeetingof theCompany is nowheldeachyearfor the majority to vote on abudgetnecessary to manage the block of flats. No service charges arecollected throughthe leasemechanism and all funds are collected through the Articles of Associationfrom theshareholdersofthe Company(everylesseebeing ashareholder). If anyone wishes to challenge the demand, it is not a service charge, therefore the leasehold legislationdoesnot applyand theLVT has no jurisdiction. There are also someRMCswhich still collect
servicecharges throughthe lease, buthave variedthe Articles of Associationsothatthey
Theseprovisions in Articles of
Associationare open to abuse…
candemandfrom aparticularleaseholder, a group of leaseholders or all leaseholders, litigation or othercosts, sometimesona collective basis, sometimes on an individual basis. As farasisknown,individual demands have notbeentested in theCourts, but thethreatofusing such aprovision in the Articles of Associationis, frankly, frightening andtends to bringarapid conclusion to the dispute.
OpenTOabuse The problemis that these provisions in Articles of Associationare open to obviousabuse if used unfairly and threaten to put us back to wherewewerewithrogue landlordsbeforethe Landlord andTenantAct 1985 andsubsequent legislation. This time, the leasehold sector could be faced not with rogue landlords, but
Theanswer? It had been hoped that Commonhold tenure would help to resolve thismatter as the Commonhold provisions effectively allowfor thebudgettobeagreed by theCommonhold membersataGeneralMeeting, bymajority decision, and that decision is then enforceable. However, to transferfrom afreeholdblock of flats with each flatheldonlease to Commonhold tenure requires unanimous agreement,whichisrarelyachievable. Unless anduntil Parliament changes theunanimity rule (for example, at present to vary all leases underS.37ofthe 1987 Actrequires75% in favour andnot morethan10% against),then Commonhold tenure is outofreach ofmost blocks of flats. That leaves changing the Articles of
Association of theManagement Company in theway described above, andputting alot of powerinthe handsofthe directorswho do notneed to seemajoritydecisions unless the Articles of Associationalsoprovide forthat. On theother hand, if oneindividual or asmall groupofleaseholders is puttingeverybody else to vast expense onwhat ought to be unnecessary litigation,what other choice is there?●
brucemaunderTaylor is senior partnerofMaunder Taylor. Tel 02084460011
Websitewww.maundertaylor.co.uk
57 Is cOmmOnhOld
leaseholder in your block
holding
therest to ransom?
with alleged rogue directors ofRMCs. It is nownot uncommon forRMCstofind
themselves in afinanciallyembarrassing positionwhen dealing with a difficult leaseholderissueastheydonot oftenhavethe financial resources to seethe disputeall the
waythrough.Lawyers with or withoutexpert witnessesare expensive, andthe litigation process is not only two layers (County Court andLVT), butnow oftenincludesmediation as well, imposed as a third layer. There are manyordinarypeople(leaseholders as well as directorsofRMCs)whofind this surprising
andunacceptable.Itmeans they startlooking for alternatives.
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