FTW Devolution of service charge management
This page contains a summary of the whole process so it is quite lengthy. That will assist hose who prefer to print off pages like this and read it later. For those who prefer to dip in, here's a list of what's included later in this page.
- History
- A source of confusion
- The way forward
- Timescale
- Revised timescale
- Progress to date
- The near future
- The far future
- Questions and answers
History
1994 to 2004
Free Trade Wharf Management Company Limited (FTWMCL) was formed in November 1994 with the intention of purchasing and managing just Free Trade Wharf. The original purchase was funded by 103 shareholders, who contributed an average of £2,600 each to assist the fledgling company in purchasing what was at that time a 999-year head-lease.
On the management side, FTWMCL decided in late 1996 to dispense with the services of the then managing agent, choosing instead to manage the properties directly.
On the company side, the Directors of FTWMCL held onto the hope that it may be possible to bring all owners on board as shareholders. However the year-on-year profit was making this increasingly unlikely.
2004
In February 2004, FTWMCL purchased the freeholds of The Listed Building as well as that of Free Trade Wharf. On the company side, this meant a 40% increase in income further accelerating the share value increase. It also meant that for the first time, the number of shareholders was less than the number of properties being managed: 103 vs 210.
2005
In late 2005, it became obvious that bringing on additional shareholders was not going to be achievable. The growth in the company's value, and hence the shares, had been steadily increasing since late-1995, but had leapt ahead with the acquisition of the freehold of The Listed Building in early-2004. Added to that was the fact that if anyone did purchase a share at the full price, then, when the associated flat was sold, the share would have to be transferred to the new owner for just £1.00 - one of the many legal padlocks that made sense in 1995.
Just to round things off, owners of properties in The Listed Building don't qualify for membership of FTWMCL since their address is not 340 The Highway - another legal padlock.
In September 2005, the Directors met to decide if there was any way in which the shareholding could be extended to include those not currently participating. They reluctantly concluded that there was no reasonable prospect of any further shares being issued. This was largely due to the high price that would need to be charged. Shares can't just be given away, or even offered discounted shares since that would disadvantage the present shareholders and is contrary to the Companies Act. Opportunities to reduce the value of the company, and hence the shares, are also very limited without putting the company at risk.
As well as that, owning a share does not give any additional rights in the management of the service charges since such matters are already dealt with by consultation with the Residents' Association.
A source of confusion
At present, FTWMCL is a holding company as well as a management company. As a holding company, it owns the freeholds of Free Trade Wharf and The Listed Building, and is responsible to its shareholders for the proper use of those assets (Companies Acts). As the manager of the service-charge funds, it is responsible to the service-charge payers for the proper disposition of service-charge money (Landlord and Tenants Acts).
The confusion between company money and service-charge money is not well understood and has caused problems in the past where some owners feel they should get some additional say in how the service charges are managed, just because they're shareholders. There also seems to be a perception amongst some non-shareholders that the shareholders have some extra influence.
Here are just two examples.
- Some shareholders have attempted to raise service-charge questions at the Company's AGM. At that meeting many service-charge payers are not entitled to be present, so the question is inappropriate.
- On the other hand, some owners are surprised that the sale of the two visitor spaces in the exit courtyard in early 2005 [which were the subject of long-term abuse by a small number of residents] did not need the approval either of the owners or of the Residents' Association.
The way forward
Having identified in late 2005, that involving the non-shareholders in the present company was not viable, the Directors then turned their attention on how to set up some mechanism which would allow all 210 owners to feel involved but yet to protect the interests of the owners of the 103 who also owned shares. A number of different ideas were discussed but the solution finally chosen was to split the ownership and management aspect into separate companies.
After the split is complete, there will be two companies, as follows:
- FTWMCL will continue in its present role as owner of the freeholds at Free Trade Wharf and The Listed Building, but will delegate all its management responsibilities to -
- A NEW MANAGEMENT COMPANY, which will have total responsibility to manage Free Trade Wharf and The Listed Building, but will own, initially at least, exactly nothing.
Since the new management company will own nothing initially, it will be able to issue shares for minimal cost. For some reason, £1.00 seems to be the minimum value that is acceptable these days.
Timescale
Having identified that two companies was the way forward, the following tentative timetable was prepared:
- May 2006, announce plans to devolve the managemeent of the service charges
- June to September 2006, get new company up and runnng and sign up most of the owners
- October 2006 to January 2007, FTWMCL and the new management company agree contract to manage the various service-charge funds
- March 2007, new management company issues its first bills, for April 2007 payment.
Revised timescale
In March 2006, Judy Cheslin informed FTWMCL that it was her intention to retire at the end of September 2006. A decision therefore needed to be made about what was to happen post-September. While this would previously have been dealt with by FTWMCL, the proximity to handing over control to the new management company demands that the new company be involved in the decision. To do otherwise would be unfair on the new management company.
Progress to date
17 July
As of 17 July 2006, a likely contender for the new management company had been identified. It was/is a company which was created in 2003 to purchase the freehold of The Listed Building but which wasn't at the time able to raise the necessary finance. It was created with ownership and management of Free Trade Wharf and the Listed Building in mind, so the hard part of creating a suitable Memorandum and Articles of Association has already been done.
It had been expected that there would be a change of names of the two companies to reflect the ownership and management aspects but this has been deferred for the time being, as have the other structural changes regarding automatic retirement of Directors. It is still expected that the present board of Directors will stand down at the 2007 AGM.
FTWMCL has provided long-term finance for Free Trade Wharf Limited until 2016.
23 August
On 23 August, Brad Bamfield, chairman of the new company, presented a plan to take over the management of the service charges, taking into account the short term need to replace Judy Cheslin, and the longer term ambitions of the owners and residents. Essentially, Brad's plan, would divide Judy's responsibilities into three main headings, two of which would be provided by external suppliers. The bulk of the work however would be dealt with by an Administration Manager, who would be based at Free Trade Wharf.
FTWMCL gave the new company the go-ahead, on the following basis:
- since the new company did not at that time have banking arrangements in place, the existing company would issue the service charge bills for October 2006 and would collect the payments
- the new company would set up a bookkeeping system to receive invoices for service charge expenditure and to process them although these would continue to be paid for from the existing service charge bank accounts controlled by FTWMCL
- it is expected that, at some time during October to December once new company's systems are up and running and its banking arrangements were in place, the service charge funds will be transferred to the new company, allowing service charge expenditure to be paid directly from the new company's bank accounts
30 September
As of 30 September, the new company is up and running. It has installed an extra desk in the Estate Manager's office, which has now been renamed the Administration Offices. Additonal telephone lines have been run into there, and a more modern telephone exchange has been identified, allowing additional extensions, and voicemail facilities. This is expected to be ordered in the next week or so.
On the bookkeeping side, the new Company has decided to implement the SAGE range of products to replace the previous system based on Excel spreadsheets. This should allow more detailed and timely reporting of spending and service charge collection. Bailey Philips will provide the accountancy services to the new company.
The new management company has appointed Mrs Claire Troughton as the Administration Manager for a period of up to one year. She will assist the new company is setting up the processes and procedures and prepare the way for a permanent appointee. Claire Troughton will be known to many af Free Trade Wharf and the Listed Building as the Secretary of the Residents' Association.
24 October
The new telepone system has been installed - the Administration Manager can now be reached on 020 7911 3267. The SAGE software has been delivered, and installed, and is now having the details copied over from the previous semi-automated system
Questions and Answers
GENERAL
| How will this affect the service charges? | This change in responsibility should not in itself require any significant change to the service-charge amounts although the new management company may make decisions which will ultimately affect service-charge levels. One of the undecided issues at present is who will collect the service charges. In the worst-case, it may be necessary to write two cheques, one to the new management company for the service charges excluding the insurance premium, and another to the holding company for service charges. If that was to happen, the holding company would probably also collect the ground rent directly. |
| Will I have a say in how the service-charge monies are spent? | You already have that, and it's not expected to change. Each year, usually in January or February, the Residents' Association meet with FTWMCL, and determine the service-charge levels for the coming year. That detail is sent out in March, with the bills for payment in April. The only thing that will change in the new arrangement is that the Residents Association will instead meet with the new management company. |
| If I become a shareholder in the new management company will I be paid dividends? | If the new management company issues a dividend, then you would be entitled along with all the other shareholders. However, it's thought unlikely that the new management company would ever consider issuing dividends: in the early years, it won't have the money; in later years, there will be better ways to return value to its shareholders, such as paying for service charge items directly. |
| Why do I have to buy a share in the new management company? Why can't they be given away? | This seems a quirk of the legal system at present. Nil-par and nil-paid shares have been investigated. The former are not legal yet, and the latter provide complications when a flat is sold. |
| Why can't you just pay for my share in the new management company out of the service charges? | The service charges only covers things that are included in your lease. You can't be made to pay for something you didn't agree to when you purchased your flat, and there is no mention in your lease of paying for shares. What may be possible is for the organisation that's sending out the service charge bills to include an additional amount of £1.00 for those who are not yet shareholders. It would though have to be voluntary. There are some administrative headaches in this approach, so this is by no means certain that it will be possible. |
| I'm thinking of selling my flat. If I buy a share in the management company, does that mean I can advertise it as "with share in the management company"? | That is correct. |
| Why can't you just transfer the freeholds to the new management company? | That's a complicated question. The current owner, FTWMCL, can't just give the freeholds away, since that would disadvantage the present shareholders: they would have to be sold at a realistic price. The new management company however, at least in its early years, will not have anything of value and won't be able to purchase the freeholds. |
| Surely it should be a simple matter to transfer the freeholds to the new company since all the shareholders in the new company are already shareholders in the old company, or should be? | What's being suggested here is that a property that's effectively owned by 103 shareholders is handed over, or sold at a discount, to a company owned by 210. That would be unfair on the present shareholders and for that reason is prevented by the Companies Act. |
| If Free Trade Wharf Limited was formed in 2003, what has it been doing in the meantime? | When Free Trade Wharf Limited (FTWL) was created in 2003, it was with the intention that it would immediately purchase the freehold of the Listed Building. Its Articles were however written to include the possibility of owning and managing Free Trade Wharf as well, since that was perceived as a future possibility. The company failed to receive the financial support that was required, receiving only a third of the £60,000 that it would have needed to purchase the LB freehold. Instead, FTWMCL bought the LB freehold. FTWL itself though was not wound up since it was considered likely that it may become useful in future. It did not seem sensible to wind it up and then to incur another round of legal fees if something similar was required. In the meantime, it has largely been supported by a loan from FTWMCL. |
| Who appointed the new directors? Isn't there a sense of fail accompli in all of this? | At the Residents' Association AGM on 03 May, Peter McLean outlined his plans for devolving responsibility of the service charges to another Company, and asked for volunteers. Four owners answered the call to arms. One (Mr Chris Cooper) joined the board of FTWMCL on 16 May, while three (Mr Brad Bamfield, Mr Barry Morgan, and Mr Preston Morley) joined the board of Trade Wharf Limited on 17 July. Both companies allow, in their Articles, existing directors to appoint new directors. |
FOR SHAREHOLDERS IN FTWMCL
| I have a share in the FTWMCL. Why do I have to buy another share? | It is intended that FTWMCL will be taking a back seat as far as management of Free Trade Wharf and The Listed Building is concerned. You're not required to purchase a share in the new management company but if you don't, you may not get the management you want. |
| I have a share in FTWMCL. When I sell my flat, can I advertise it as "with share of freehold"? | This phrase is not strictly correct, but it's used so often, it's unlikely to be misinterpreted. The proper description to use would be "with share in the company which owns the freehold." |