[level-member] The topic of collecting Ground Rent in Freehold and Resident Management Companies is complex, sparking hot debate in the world of Block Management and Accounting.
In this article, we explore the perks and pitfalls of this freehold income in Resident Freehold Blocks and offer advice* to help your FMC/RMC overcome them….
When considering the collection of Ground Rent in a Freehold Management Company (FMC) or Residents Management Company (RMC), one has to weigh up Practicalities & Cost versus Legislation and Implications.
At Callaways, we frequently see Companies set up for Enfranchisement and Right to Buy claims, that have not been advised on how they may want to address the future collection of this freehold income.
Commonly, when all flat Leaseholders jointing acquire the Freehold, they will want to dispense with this requirement, perceiving it an “extra cost”. Conversely, where some Leaseholders chose not to partake in the Management Company, the collection of Rent from all or some flats owners is considered an “return” on a freeholders investment, divided up proportionately at regular intervals.
Whilst either arrangement may pass unnoticed and without issue for several years, there are several reasons for RMC/FMC’s to consider all aspects of their decision and formalise it, whether on formation or retrospectively. Doing so will protect against unexpected out of pocket expenses for company sundries, tax implications and delays at point of sale!
1. Accounting for Rent receipts
Following the letter of the “Law” any Ground Rent collected should be received and accounted for in a separate bank account to any Service Charges. Unless the company members are proficient in Accounting they will then need to employ the services of a professional to report the years activity, in the form of a Company return. Despite common belief, a company is not dormant, just because it is not paying out expenses from the Ground Rent. Income must still be recorded to Companies House and where expenditure has not been incurred in excess of the sums received, the profit should be noted. Once dividends of this balance are issued, the individual shareholders will need to make sure that their own circumstances do not mean a tax is applicable to this income.
2. No Ground Rent due
In the eventuality that ground rent is not being charged, there may be no Company “kitty” to pay for the annual return, Directors and Officers Insurance and other non recoverable service charge expenditure. This then means that shareholders still have to contribute a sum outside of the Service Charges to cover these costs, despite it not being labelled as Ground Rent. Passing these expenses incorrectly through the Service charge would mean they were not recoverable in the event of a dispute but some well drafted (or varied) leases overcome this issues by incorporating the allowance of company costs. It is important that you are familiar with the particulars of your development/block.
3. Retrospective Variation for the collection of Ground Rent
Having considered the above, should you find yourself wanting to dispel with a requirement to collect Ground Rent but realise this decision was not formalised, it is not too late. A proactive approach to this problem would is to amend the documentation to support the preferred practise. This can be achieved by seeking to vary the lease, which unfortunately can be a lengthy and expensive process, involving the lender consent for all mortgagees on flats (and their relevant fees!).
Fortunately, if all flats are shareholders, a pragmatic alternative may be to agree a Board resolution waiving this entitlement. The resolution can then be presented to each incoming buyer at the point of purchase.
Callaways strongly recommend that all RMC/FMC’s seek independent legal advise on the issues raised in this article to ensure you are operating within your own restrictions and avoid litigation – this would be an expense well-incurred and spent from Ground Rent income.
*DISCLAIMER: Whilst every effort is made to ensure the accuracy of the information given, Callaways are not specialists in Company practise and legal matters and rely on industry professionals to advise Clients how best to proceed in each individual case.
Written by Lauren Wadey MIRPM, AssocRICS for Callaways[/level-member]