I read with great interest Aisling Keenan’s reply last month to a reader concerned about being overcharged for their apartment management fee. I have the following related query. Do the provisions of the Multi-Units Development Act 2011 override or supersede the provisions of leases and assurances, as applicable, in respect of the size of service charges and sinking-fund contributions that an owners’ management company may levy on its members?
Our development contains apartment-only blocks, apartment/duplex blocks and a number of houses. The provisions of leases and assurances relating to service charges and sinking fund contributions predate the Multi-Units Development Act 2011 and provide for separate charging of distinct subsets of members for the upkeep of three common areas—the apartment-only and the apartment/duplex blocks; the internal common areas of the apartment-only blocks; and the external common areas—such that only those who have an interest in a particular common area are charged for it.
The leases and assurances of the members require that the elements of service charges and sinking-fund contributions to be levied on the subsets of the members be based upon certified audited accounts for each of the three common areas, so that sinking fund balances for each such common area are attributable to only those members who have an interest in it.
Our OMC only operates one account, bases charges and contributions on approved budgets, does not provide a reconciliation of actual expenditure and estimated expenditure for each of the three common areas and apportions an aggregate surplus among sinking funds arbitrarily. The OMC has not appointed the accountant mandated by leases and assurances for such purposes. By its own admission, the OMC is applying the provisions of the Multi-Units Development Act 2011 to service-charge determinations and sinking fund contributions rather than the provisions of leases and assurances.
Is the OMC correct in applying the provisions of the Multi-Units Development Act 2011 retrospectively to what it charges its members and in how it accounts for same in contravention of its contractual obligations?
The general principle is that the legislation is supreme over the contract and one cannot contract out of legislation, writes Aisling Keenan. One of the most contested matters in an owners’ management company today is the apportionment of service charges and sinking-fund levies. The Multi-Unit Developments Act 2011 sets out the provision for the apportionment of annual service charges, which states:
s.2(6) ”a reference to fair and equitable apportionment of the costs and expenses of the mixed-use multi-unit development shall mean that account is taken of all relevant matters including the respective level of use of any common areas by the owners of different classes of units and their servants, agents and invitees”.
In addition to this, the Act also sets out that:
s.18(13)”The annual service charge shall be calculated on a transparent basis and shall be equitably apportioned between unit owners.”
What this means in relation to the circumstances that you describe here is that if the lease agreement includes an equitable apportionment then there is congruence between the lease and the Act. If, however, the lease agreement sets out an apportionment that is inequitable and unfair then the Act will supersede the lease. The Act may be applied retrospectively. Leases that contain unfair apportionments can easily be set aside by the courts under a section 24 application of the Multi-Unit Developments Act.
If the provisions in the lease agreements for the apportionment of service charges are shown to be inequitable, then the apportionment must be changed to comply with the Act. At the construction stage of your OMC, the apportionment of service charges was probably prepared by solicitors and quantity surveyors and set out on a cost centre basis as you have described.
It is a common occurrence that owners in management companies today find that these types of complicated apportionments do not work well for them in practice as they are often found to be inequitable. In mixed developments like yours the service charges should be levied in accordance with usage, and it is possible to do this based on each budget heading being apportioned to each owner depending on the usage and also, sometimes, the size of the unit.
One of the problems associated with the apportionment of service charges is the fact that all costs are set out in advance of expenditure, and they are based on and charged out as projected costs. This means that costs at the end of the year may return higher or lower on different items. This makes the task of apportioning costs an inexact science and, for this reason, requires the parties to negotiate and agree on the overall costs.
The fundamental principle in an Owners’ Management Company is the principle of collective responsibility. For the system to work at its best for all parties, agreements are required in certain specific cases. For example, the methodology of the cost centres may be disadvantageous to some owners who are not benefiting for some items of expenditure requiring them to pay for services not used.
Applying the apportionment on a usage basis per budget item will provide for increased transparency of apportionment.
A more exact apportionment of service charges will improve consistency within the development and transparency of financials for owners in relation to service charges and long-term planning for planned preventative maintenance programmes and sinking funds. The correlation between a lack of transparency of financials in an OMC and unpaid service charges is well-established. If owners have confidence in what they are paying for, they will pay more quickly. The most effective remedy for any OMC in dealing with a poor compliance rate in the payment of the annual service charge is the demonstration of transparency of financials.
Aisling Keenan is a property managing agent and consultant, and an associate member of the Society of Chartered Surveyors Ireland
