Written evidence submitted by Gordon Clifton [LHR 428]

1. Summary
    
1. For as long as leasehold continues to exist those who influence the level of charges or who take money from leaseholders must be strictly regulated. In the RMC model this includes:
1. Directors
2. Property Management Agents
3. Accountants and reporting standards
4. Solicitors
    
2. For RMCs it is not enough to set up a company under the Companies Act as if a commercial model is all that is needed. A new model with greater oversight is required to safeguard the interests of leaseholders who thought they were simply buying a home without any idea of the extent of possible exploitation and crippling cost possibilities. Or that they would have to be shareholder activists and read and fully understand in detail all the obscure information generated by PMAs and approved by Boards of directors, their solicitors and accountants all of whom have but one objective – to profit from leasehold and leaseholders.
    
2. Introduction
    
1. The Committee will have received much input setting out the many and serious problems associated with the anachronistic form of tenure known as leasehold. This paper deals with an arrangement which is often touted as a solution to many of these problems: a Residents Management Company (RMC).
    
2. The RMC approach provides for a company subject to the Companies Act 2006 with objects to inter alia purchase and hold the freehold and to administer the estate whether this is a block of flats or an estate of houses.
    
3. Directors are not required to have any professional qualifications, relevant experience or declared interests in property. The sole requirement is usually that they should be a leaseholder in the estate.
    
4. Controls in RMCs are usually very weak with little or no effective statutory enforcement. Instead, success or failure is based on trust. As in the commercial world, trust might be adequate in some circumstances but overwhelmingly control and enforcement is needed.
    
5. The consequences of the observations that follow include service charges which are higher than necessary; more substantial charges through special levies: and yet more charges through cash calls on leaseholders in their role as shareholders in the RMC.
   
   In one specific example a special levy was made of £1.1M for an unauthorised project that was then overspent by £600,000. The overspend resulted in a further levy of £400,000 of which £211,000 was disallowed by the FTT[1]. A cash call on shareholders of £200,000 followed.
    
6. The following observations and recommendations are based on the author’s experience as a voluntary advocate helping leaseholders / shareholders in their difficulties and conflicts within RMCs.
    
3. Directors
    
1. As noted earlier there are no requirements of directors other than to be a leaseholder. There are no background checks into past criminality and bankruptcy, or to determine if there are links to property management agents (PMAs). Neither is selection based on experience or the likelihood of a real contribution to the operation of the company. Typically, there is no requirement to demonstrate an understanding of the Companies Act 2006 and the duties set out in S170 – 177 or the possible implications of failing in those duties.
    
2. Such unqualified directors are expected to operate in the context of fiendishly complex leasehold law. This makes them vulnerable to exploitation by unregulated PMAs and their solicitors, both of whom are in business to make money for their shareholders and partnerships. One publication by a PMA trade body highlights the extensive knowledge needed by RMC directors thus making the case for a PMA.
    
3. A leaseholder population comprising mainly retired and elderly people, or very busy younger working people, will all too easily, and mistakenly, support others who are more than willing to take on a director’s role. The latter can have money-making motives. An example of this is where minor property speculators buy into the estate[2] and offer themselves for election. This is made worse when a PMA introduces their own connections. When the speculators outnumber ordinary leaseholders, the latter can be eased or coerced out of the boardroom leaving the speculators to pursue their own agenda and to plausibly deny everything.
    
4. A minority of shareholders who are aware of a compromised boardroom[3] and the very adverse impacts on leaseholders’ funds and the management of the estate have very little scope for corrective action other than a lengthy and very expensive S994 action with only very uncertain outcomes.
   
   The Insolvency Service used to declare an interest in corporate abuse but now states they:
   
   “…investigate trading companies and take action to wind them up and/or disqualify the directors if there is evidence of misconduct”
   
   The Insolvency Service was recently tested with a fully documented case to which they responded that they investigate live companies infrequently. The Service would seem to be of no use in arresting misbehaviour by directors.
    
5. Readers of this paper might consider the problems of directors and infiltrated boardrooms somewhat far-fetched. Experience suggests that if preventive controls are not in place there will be people who will exploit the resulting openings. Almost all legislation has the assumption of abuse as one of the supporting pillars. Leasehold should be no exception.
    
6. Preventive controls need to include requirements targeted specifically at RMC directors because the Companies Act 2006 is of no practical value in either prevention or correction. It might be that proper controls and eligibility requirements would result in no leaseholder volunteer directors. This would lead directly to the conclusion that the RMC as a means of coping with other dysfunctional aspects of leasehold is illusory.
    
4. Property Management Agents
    
1. Property Management Agents are in a unique position in leasehold. They are not statutorily regulated yet they hold substantial leaseholders’ funds, ostensibly in trust, with no independent checks and controls. They have a dramatic influence on the use of leaseholders’ funds and the size of service charge budgets. Some large PMAs operate in many estates with no transparency or controls over funds. Significant amounts of money are involved. The potential for the round-tripping of cash is high especially in deliberately low net worth PMAs.
    
2. Some PMAs are abusive towards leaseholders and are not above the coercive and unlawful use of S146 of the Landlord & Tenant Act to extract disputed sums of money from leaseholders. Elderly and vulnerable leaseholders are often seen as easy targets for this and other abuses.
    
3. Some PMAs belong to ARMA[4] who had a quasi-regulator function but this collapsed a few months ago when the internal ‘regulator’, a Labour MP, tried to investigate a PMA but was stopped from doing so by the ARMA executive. She immediately left the organisation commenting that self-regulation cannot work.
    
4. When an aggressive PMA targets a board of unknowledgeable directors, or is introduced to a board comprising minor property speculators, the scope for abuse is very much greater. For example:
    
1. The PMA will closely look at the estate for work, preferably leading to S20[5] action and the associated fees.
2. Minor work might be left to deteriorate until it becomes a S20 prospect.
3. The PMA will encourage directors to spend money on major ‘improvements’ notwithstanding the need for other basic work.
4. Any reserve funds will be seen by the PMA as money to spend and to use as working capital notwithstanding the provisions of the lease.
5. A PMA might introduce a parking company who will then make money through the forgetfulness of leaseholders rather than unauthorised parking and possibly in breach of the lease.
    
5. In an anti-competitive approach to supplying services PMAs will have their own circle of contractors. In one instance a PMA published a description on their web site of an event set up jointly with four other PMAs who between them manage 500 blocks of flats. The purpose of the event was to bring together several preferred contractors. This might be construed as cartel-like behaviour. Other contractors admit that they will not work with the organiser of the event due to what was euphemistically described as the terms of trading.
    
6. Matters go from bad to worse when a PMA introduces their choice of solicitor and accountant.
    
7. With a compliant Board a PMA can easily become a shadow director but with plausible deniability.
    
8. There is very much more to the abuses inflicted by PMAs onto leaseholders as other submissions to the Committee will show. For as long as PMAs have a role to play they have to be subject to strict statutory regulation and oversight. The combination of unscrupulous and unregulated PMAs and unknowledgeable or conniving boards of RMC directors is disastrous for leaseholders and their funds with no possibility of restraint or redress under present arrangements. The two remaining redress bodies in the sector are ineffective and pointless when dealing with a determined PMA.
    
5. Accountants and reporting
    
1. There is a general concern about accountants and accounting in leasehold including the application of standards and the quality of those standards.
    
2. In RMCs there is justifiable concern about the introduction of an accountant by the PMA and the dubious independence particularly when an independent audit of service charge accounts is needed. It is risible that the same accountant can construct the accounts, be responsible for the data and then to audit his own work. Such an ‘audit’ results in service charges becoming payable under some leases in which the audit is a form of protection for the leaseholder.
    
3. As noted earlier, if controls are non-existent, or weak, individuals will exploit them either for personal gain or for an easy life. Much greater regulation of accountants and their appointment to RMCs is needed together with a significantly clearer definition of the standards to which they should work in the leasehold sector.
    
6. Solicitors and their roles
    
1. As with accountants, there are justifiable concerns about solicitors and their practices generally, particularly when they threaten unrepresented leaseholders despite the SRA’s code of conduct. It is potentially worse when the solicitor is introduced by the PMA.
    
2. The combination of a solicitor who exploits their knowledge and experience of leasehold law and practice in concert with a hardened and determined PMA against lay leaseholders is lethal to the leaseholder. When the directors join in and solicitors are paid from leaseholders’ funds it must come as no surprise that leaseholders, especially the elderly and the vulnerable, simply give up and wish it would end soon.
    
3. As a minimum, solicitors must be reined in by the SRA and their appointment to the RMC should be put to shareholders with, importantly, an actionable statement that they have no connection with the PMA, the accountant or any of the directors. Solicitors should be required to acknowledge that they have an accountability to the RMC members and not just the Board, thus recognising a significant difference between the RMC and a commercial company.
    
4. Another difference with a commercial company is the inclusion of a secrecy clause in the company’s Articles. RMC directors are known to shelter behind such a clause to avoid the transparency that is so necessary in the RMC. Secrecy clauses should be eliminated from all RMC articles.
    

September 2018