Related Party Transactions in Service Charge Accounts: A Practical Guide for Managing Agents

Related party transactions are one of the most misunderstood areas of service charge accounting — and one of the most likely to create compliance issues, leaseholder mistrust, and delayed sign-offs.

If you are a managing agent operating in the UK resident block management sector, understanding how to identify, document and disclose related party transactions properly is essential.

In this guide, we break down what related party transactions mean in the context of service charge accounts, why they matter, what must be disclosed, and how to build a practical process that keeps you compliant.

What Is a Related Party Transaction in Block Management?

In simple terms, a related party transaction occurs when service charge money is paid to someone who is connected to:

• An RMC (Resident Management Company) director

• A landlord

• A managing agent

• A key decision-maker

• Or their close family or connected businesses

  
  

The purpose of disclosure is not to prevent these transactions. It is to ensure transparency, reduce the risk of undue influence, and maintain trust with leaseholders.

Even though service charge accounts are not statutory accounts prepared under full financial reporting standards such as FRS 102 or FRS 105, they are still formal financial reports. They are expected to follow recognised guidance, including:

• RCAEW Tech 03/11 (now commonly referred to as TECH 03/11)

• The Property Institute best practice guidance

• General financial reporting principles relating to related parties

Transparency is not optional — it is expected.

Why Related Party Transactions Matter in Service Charge Accounting

Poor handling of related party transactions can lead to:

• Leaseholder disputes

• Delayed accountant or auditor sign-off

• Allegations of overcharging

• Regulatory complaints

• Damage to managing agent reputation

  
  

The issue is rarely the transaction itself. The problem arises when:

• It was not disclosed

• There is no tender trail

• Documentation is missing

• The invoice narrative is vague

• Referral fees or commissions were not communicated

  
  

If a leaseholder would “raise an eyebrow” if they discovered the relationship, it almost certainly deserves disclosure.

Who Counts as a Related Party?

Many managing agents define related parties too narrowly. In practice, the definition is broader than expected.

1. People

This includes:

• RMC directors

• Landlords

• Company secretaries

• Key decision-makers

• Close family members (spouse, partner, parent, child)

• Household connections

For example, if a director’s spouse owns a cleaning company servicing the block, that is a related party transaction.

2. Businesses

Related parties also include:

• Companies owned or controlled by directors

• Businesses owned by close family members

• Corporate entities within the same group structure

• Silent shareholdings where influence exists

If a director or managing agent has an ownership interest in a supplier, disclosure is required.

3. Managing Agent Connections

This is where many compliance risks arise.

Examples include:

• A managing agent using a contractor owned by one of its directors

• A group company providing services to managed blocks

• Referral fees or commissions received from insurers or contractors

• Rebate arrangements not clearly disclosed

• Inter-company support charges without clarity

These situations are not automatically wrong. But they must be transparent.

Common Pain Points We See in Practice

From a service charge accounting perspective, three recurring issues appear:

1. Uncertainty about who qualifies as a related party

2. No consistent process for identifying related party transactions

3. Vague or incomplete disclosure notes in service charge accounts

Many managing agents only consider related parties when their accountant asks at year-end. By then, documentation gaps may already exist.

How to Build a Compliant Process

The solution is not complicated. It simply requires embedding related party checks into existing procedures.

Step 1: Ask the Question Early

You should build related party questions into:

• Client onboarding

• Supplier onboarding

• Year-end information packs prepared for accountants

  
  

Suggested checklist questions include:

• Do any directors or key decision-makers have an interest in suppliers used?

• Are any contractors connected by family or ownership to directors or staff?

• Are there any commissions, referral fees, rebates or admin fees linked to suppliers?

• Have any directors been reimbursed expenses from service charge funds?

• Are there any loans, advances or temporary funding arrangements between entities?

  
  

By asking these questions early, you “catch” issues before they become problems.

Step 2: Keep the Right Documentation

Good governance is largely about record-keeping.

You should maintain:

• A full supplier list for each site

• Tender documents and quotations

• Contracts and invoices

• Board minutes and written approvals

• Director declarations confirming relationships

This documentation protects both the managing agent and the RMC if challenged later.

What Needs to Be Disclosed in Service Charge Accounts?

The core disclosure principle is simple:

If there is a connection and money or benefit has flowed, it must be disclosed.

If there is a connection but no transaction occurred, no disclosure is typically required.

Minimum Disclosure Should Include:

• The nature of the relationship

• The service or transaction provided

• The total value for the year

  
  

Additional details may be helpful where relevant, such as:

• Whether competitive quotes were obtained

• Whether commissions were retained or credited back to the service charge

• How the arrangement was authorised

Clarity builds confidence.

Specific Scenarios Managing Agents Should Consider

1. Connected Contractor

If a director’s relative provides gardening services:

Disclose:

• The relationship

• The services provided

• The total annual value

2. Insurance Commission or Referral Fee

If a managing agent receives commission:

Disclose:

• The type of arrangement

• Who received the commission

• The amount

• Whether it was retained or credited back

Failure to disclose commissions is a frequent cause of leaseholder complaints.

3. Director Expense Reimbursements

If a director pays for signage or emergency works and is reimbursed:

Disclose:

• What the expense was for

• The amount

• Confirmation of approval

Even small reimbursements can raise concerns if not transparent.

Common Red Flags in Block Management

Leaseholders and accountants often look for patterns such as:

• The same contractor used across multiple blocks with no tender evidence

• Emergency works always awarded to a connected supplier

• Vague invoice descriptions such as “consultancy” or “admin support”

• Group company charges without explanation

• Contractors with similar names or addresses to directors

• Missing payment approvals

These are not automatic breaches — but they require scrutiny.

The Three Cs: A Simple Framework

We recommend managing agents follow a straightforward governance approach:

Catch

Identify related party transactions early through onboarding and year-end checks.

Confirm

Maintain documentation and evidence that pricing and approvals were appropriate.

Communicate

Provide clear disclosure notes in the service charge accounts.

If you ever feel uncomfortable disclosing something, that may be a sign to review the arrangement.

Why Transparency Protects Your Reputation

Service charge accounting is not only about compliance with TECH 03/11 or accounting best practice. It is about:

• Protecting managing agent credibility

• Reducing disputes with leaseholders

• Ensuring smooth accountant sign-off

• Demonstrating professional governance

In today’s regulatory environment, transparency is expected.

Managing agents who proactively disclose related party transactions are far less likely to face reputational damage.

Listen to the Full Podcast Episode

In our latest episode of Qube Talk: Service Charge Accounting Insights, we discuss related party transactions in depth, including:

• Real-world examples from block management

• Practical onboarding checklist questions

• Disclosure wording guidance

• Red flags to watch out for

• How to build a repeatable, compliant system

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🎧 Listen to the full episode here