Industry comment, updates and news from the Websters team.

Are your Residential Management Company accounts correct?

Tuesday, September 21st, 2010 in Landlord, Managing Agent, News, Residential, Service Charge

We have already reported that many residential management companies (RMCs) are not preparing their accounts correctly, as, in addition to valid company matters such as ground rents, they often include service charge payments, that are items made solely on behalf of the tenants. Service charge monies are held in trust by the company and should be excluded from the statutory accounts and reported to tenants separately.  This article looks in more depth at the current position.

Following problems with the sections in the 2002 Commonhold and Leasehold Reform Act, dealing with the separate treatment of service charge funds and the provision of regular statements of account, revised proposals were included in the Housing and Regeneration Act 2008.  These new sections were originally anticipated to be in place for accounting periods beginning on or after 1 April 2009 but this did not happen. However, in anticipation of the new legislation, ARMA (Association of Residential Managing Agents) had already issued, in 2008, a Lessee Advisory Note (LAN08) in which they advised that the Service Charge monies were held in trust by the management company and should not be accounted for as company assets. In June 2010 ARMA said again that their advice remained unchanged on this matter, whatever the arguments under current law. In a final complication, we understand that ARMA were advised in July 2010 by Grant Shapps, the housing minister, that the Communities and Local Government Department were not going to progress the regulations.

Therefore, although legislation will not require service charge statements to be issued to lessees, the Institute of Chartered Accountants guidance to its members accords with the ARMA guidance, in that the basic accounting principal still applies so that the accounts of service charge companies should only include those transactions where the company is acting as principal and separate accounts should be prepared for lessees of service charge transactions. Hopefully the legal position will be confirmed shortly.

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