Is it really legally necessary for monies raised as service charges to be maintained in an exclusively designated trust account? I understood that a trust account was best practice only, not a legal requirement. I thought, as described in FPRA Newsletter Issue No 94 Autumn 2010, trust/designated accounts were stipulated in the Commonhold and Leasehold Reform Act 2002 but were never enacted and had been flatly rejected by the current government along with a raft of other provisions.
If it is legally essential to hold service charge funds in a separate trust account, then it will increase our bank costs for maintaining two accounts and, presumably, our accountancy costs too. We are only five flats, own our own freehold and keep a small reserve in our one all-purpose bank account. We manage the property ourselves and varied our leases to convert ground rent to peppercorn status. Thus most years, the only bank transactions are lessees paying in their service charge contributions plus communal electricity direct debits and my paying suppliers. The only other transaction likely is our charge to solicitors asking for information when flats are sold. Even including bank monthly charges, we will have only 40 transactions during the current year. We are a very small limited company with minimal accountancy needs.
My motive in asking you is that we are shortly to have our annual accounts certificated to 31st March and are reviewing our current chartered accountants’ charges by asking for quotes from other chartered accountants. One has raised the need for a trust account. He says his professional body has instructed him trust accounts are essential.
The FPRA replies:
It is correct that the Commonhold and Leasehold Reform Act 2002 Section 156 contained the requirement to hold funds in a separate trust account, this section however, has never been enacted so cannot be considered law.
That said what is not in any doubt is that monies paid by lessees are trust monies and should be held in a ring fenced designated bank account (Section 42 of Landlord and Tenant Act 1987). As we are only dealing with one scheme here it is, for practical reasons, easier to have only one account. Within that one account you must be able to identify what the balances are for service charge money and any reserves and if there is any freehold money in it.
The bank at which the account is held should also be made aware the account is a trust account and the funds in it (being service charge and reserve) are held in trust for the lessees and do not form part of the assets of the freehold company, this ensures the bank cannot “grab” the funds in the unlikely event the freehold company is liquidated.
There are new standards for accounting for client money issued by the ICAEW and agreed with RICS, ARMA and other accounting bodies and is summarised on the Leaseholders advice note available for download at the ARMA website and it seems that the one accountant who has mentioned this has read his circulars from the account tenants professional body.