The RTM company arrives: whose money and whose instructions?
On 1 September the Fernhill RTM Company acquired the right to manage Fernhill Court, 18 flats. You are the managing agent appointed by the freeholder, Fernhill Estates Ltd, under an agreement running to 2027. On 3 September the RTM company asks for the service charge balance of £58,000 (of which £41,000 is reserve), the accounting records, the leaseholder ledger, the contractor list and the communal cupboard key. Fernhill Estates replies that the money is 'ours', that nothing should be released until its handover legal costs are paid from the funds, and that you should carry on managing for six months 'while they find their feet'. The RTM company has already issued its own budget and told leaseholders to stop paying you; three leaseholders have paid September's demand into your account. A director of your firm holds shares in Fernhill Estates Ltd.
1. Who is entitled to the funds and records, and how should the £58,000 be dealt with? What do you do with the three September payments?
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The freeholder's position is wrong in principle. Service charge money (and reserve) is held on trust for the contributing leaseholders, not as the freeholder's own asset. On acquiring the right to manage, the RTM company takes over management of the premises, and the 2002 Act framework entitles it to require the landlord to pay over the balance of the service charge funds and to transfer any investments representing them. The precise mechanism and timetable are set by the statute and regulations - ask the RTM company to make the request in the prescribed form, signed by an authorised officer, and take that as the trigger rather than an informal email.
The £58,000 is not one number. Prepare a completion statement splitting:
- money already spent or committed before 1 September (payable to the freeholder/creditors);
- arrears and debtors;
- the reserve for future works (belongs to the RTM company);
- unexpired contracts, insurance, utilities and any s20B notices outstanding.
Transfer the net balance to a designated account for the RTM company and obtain a receipt. There is no lien over trust money to secure a general debt.
Records. The accounting records, ledger, contractor list and key are needed by the new manager to manage and to meet its own accounting duties. Provide copies promptly (retain originals only as long as the freeholder genuinely needs them) and log exactly what was provided and when.
September payments. You had no authority to demand money after 1 September. Segregate the three payments, write to the leaseholders explaining the position, and either refund them or transfer them to the RTM company after accounting for pre-1 September costs. Do not mix them with the freeholder's money and do not use them to pay the freeholder's legal costs.
2. The freeholder instructs you to withhold the funds until its handover legal costs are paid, and to keep managing for six months. What do you advise and what do you do?
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Decline the set-off, in writing, and explain why.
There is no automatic right to set a landlord's own legal costs against trust money. Those costs could only be recovered through the service charge if the lease permits it, the costs are reasonable, and they were incurred for the benefit of the tenants. Costs incurred resisting an RTM company's statutory rights are very unlikely to meet that test, and applying trust funds that way exposes the freeholder to a claim by the RTM company and exposes you to a client money breach and a complaint. Advise the freeholder to take its own legal advice on any claim it believes it has; the proper route is a claim, not self-help against the fund.
'Carry on for six months'. You cannot manage a block in which another party holds the statutory management role unless that party agrees. What you can offer is a written transitional services agreement with the RTM company - defined scope (payroll, utilities, insurance renewal, open s20 consultations), defined fee, defined end date. Without that agreement, continuing to issue demands would create double charging, conflicting instructions and complaints.
Practical sequence:
- Written advice to the freeholder identifying what can and cannot lawfully be done, recorded on file.
- Written response to the RTM company setting out the completion statement, the records being provided and a proposed handover date.
- A single letter to all leaseholders explaining who manages the block from 1 September, who to pay, and how their balances are protected.
- Freeze new commitments on the block (no new contracts, no major works instructions) except genuine emergencies.
If the freeholder insists on withholding the fund, escalate internally and take legal advice before acting.
3. A director of your firm holds shares in Fernhill Estates Ltd. How does that affect your position, and what do you disclose to whom?
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The conflict is structural, not incidental. Your client is the freeholder, but here the freeholder's interest in retaining the fund is directly adverse to the RTM company's statutory entitlement - and a director of your firm has a personal financial interest in the freeholder's position. Advice on whether to release the money could affect the value of that shareholding, and the instruction you have been given (withhold the funds) aligns with the director's interest. That is precisely the situation in which independence is questioned.
Steps:
- Declare the interest in writing immediately to the freeholder, the RTM company and internally; record it on the block file.
- Remove the conflicted director from any decision on Fernhill Court and appoint an independent senior person to review the handover.
- Assess whether the firm can continue to act at all. If the conflict is unmanageable - and a shareholding in the party whose conduct is in dispute often is - decline the instruction or resign and hand over cleanly. Say so early; a late withdrawal is worse than a prompt one.
- Check whether the interest should have been declared at appointment, and whether it was; if not, that is a separate breach and may need notification under your professional body's rules.
- Notify your professional body if you identify a notifiable breach, and consider the position under your professional indemnity cover.
Disclosure to leaseholders. They do not need the director's personal finances, but they do need to know whether the firm's advice is independent and, if you step back, where their money and records are and who now holds them. Keep the message factual and short. Document everything: the risk is not that the conflict exists, but that it was left unmanaged and undisclosed.