PAUL MOONEY explains why service charges for multi-unit developments are specified as ‘excludable debt’ in the new insolvency legislation.
The Personal Insolvency Act 2012 provides for “excludable” debt for seven categories of debt, one of which is “debt due by the debtor to any owners’ management company in respect of annual service charges under section 18 of the Multi Unit Developments Act 2011 or contributions due under section 19 of the Act”.
Section 28 of the Act details that the debtor must write to the creditor, being the relevant owners’ management company, seeking consent for the debt to be included in the Debt Relief Notice. The owners’ management company must respond within 21 days or the debt will be deemed to be included.
The other six categories of excludable debt include debt arising from local government charges, household charges, rates, HSE advances under the Nursing Homes Support Scheme, tax, duties, levies due to the State, or debts arising under the Social Welfare Consolidation Act 2005.
So why the special treatment for owners’ management companies?
In the opinion of this writer, it’s quite simple. An owners’ management company cannot be involved in unnecessary risk; it cannot choose its unit owners or exclude them, but it remains dependent on them for the entirety of its income. Every commercial business operates in risk, which can vary depending
on the sector and the protection that each business puts in place to reduce that risk. For example, valuation surveyors can take the risk that they may not get paid for a valuation, or may experience delays in payment, and can reduce this risk by receiving payment in advance, carrying out credit checks or simply declining an instruction that they perceive to be risky. Owners’ management companies, on the other hand, cannot choose their clients: any
individual who purchases a unit necessarily becomes a member of the company and is automatically liable for service charges.
Service charges are greatly misunderstood, not only by the general public but also by unit owners and members of owners’ management companies. An owners’ management company is entirely reliant on the payment of service charges by 100% of its unit owners to provide funds for the proper operation of the company and management of the property.
An example of the misunderstanding is in the “Standard Financial Statement” template of the Money Advice and Budgeting Service, where it lists items such as waste charges, building insurance, and repairs and maintenance under the “expenditure” deducting from the income of the client before determining a surplus to contribute towards secured debt (mortgage, etc.), and then to secondary debt, where you will find unsecured creditors and, remarkably, service charges. Service charges generally include waste charges, buildings insurance, and repairs and maintenance, but they are not given similar recognition.
A time of change
The legislative landscape for apartment blocks or multi-unit developments has changed significantly in the last couple of years.
For nearly 40 years Ireland operated with no legislation to govern the operation of multi-unit developments, with owners’ management companies reliant on their own title leases, memoranda and articles of association, and the Companies Acts, to guide them through their tasks. The Multi Unit
Developments Act 2011 obliged owners’ management companies to consider service charge budgets at a general meeting of owners, which, together with
other provisions in the Act, is resulting in greater transparency and exchange of information in the operation of multi-unit developments, resulting in a better understanding of the purpose of service charges.
It is encouraging to see a consistency in legislation and a further strengthening of service charge recovery at a time when we are facing steep population growth and a global shift towards urban living, and require a cultural acceptance of high-density accommodation as a housing solution for the sustainable growth of our cities.