The need for service charges arises where a property is part of a larger development with shared services and common areas. In such cases, it is usual for a management company to oversee the collection of charges from owners or tenants, and to arrange necessary services. Such services typically include:
- Insurance of common areas;
- Maintenance of automated access, lifts etc
- Refuse disposal and cleaning
- Repairs and maintenance
- Sinking fund provision
- Managing agent payment (where employed, as is usually the case)
- Audit and accountancy
A management company is usually formed when a development is ready for occupation. Where more than seven units are in the development, such a company normally takes the form of a company limited by guarantee. Small developments (less than seven shareholders) may be managed by a company limited by shares. Under present legislation, guarantee companies are subject to a statutory annual audit. Small companies which are limited by shares are not required to be audited. Annual accounts must nevertheless be presented to the AGM. Auditors of management companies are appointed by the members at the AGM, usually on the recommendation of the directors or their managing agents. The directors are appointed or re-appointed at the annual general meeting.
The directors are responsible for the day to day running of the management company on behalf of the members. Directors are commonly owners of units within the development. While directors are likely to have the interests of the development at heart, they often don’t have sufficient time to deal with day to day issues. Accordingly, for all but the smallest developments, it is usual for directors to appoint a managing agent to deal with day to day issues as they arise.
The directors have fiduciary duties, as set out in the various Companies Acts from 1963 to 2012. In addition, in 2011 a Multi-Units Development Act (“MUD Act”) was enacted into law. The MUD Act does not apply to commercial developments. Health and safety legislation may also apply to management companies, as may employment legislation. The scope of such legislation is outside the scope of this article, but directors of management companies may be personally subject to penalties if their company does not comply with the legislation. The appointment by directors of an agent does not protect them from their legal responsibilities.
The annual service charge is arrived at by dividing the total budgeted expenditure by the number of units in the development, or by some other method of apportionment, such as floor area. The budget for the coming year is usually presented to the AGM for approval at the same time as the previous year’s annual accounts.
Service charges are sometimes contentious, in cases where for example:
- Some owners/tenants are unwilling or unable to pay;
- The directors are not actively involved in the management of the development;
- The managing agent is perceived as unresponsive or incompetent.
The current economic climate has resulted in far greater levels of non-compliance with service charge payment. Arrears are an issue. Sometimes directors are unwilling to recognise the problem by making adequate provision in the annual accounts, on the basis that the debt will ultimately be paid from the disposal of the unit. In theory this is true, but management companies can get into financial difficulty in the meantime if debt arrears are not covered by increased charges levied on compliant members.
It is usually easy to recognise a successful, well-managed development as soon as you enter the property, which is why it is in the interests of owners to ensure that their development is being well managed. Tenants will similarly wish to live in a well-maintained development, so it is in their interests to ensure that in cases where they are responsible for payment of the charges, they do so.
If you are a director of a management company, the qualified accountants at Long & Company would like to hear from you and will be happy to quote for the audit. Please contact Sinead Murphy (email@example.com) or Stephen Connolly (Stephen@longaccounts.ie)