Payment via an intermediary?

[Gwynee]

I am a director of the 'Right to Manage' company for the flats where I live, and we use an agent to do the day-to-day running of maintenance, etc, including payment of bills.

One of the blocks needs a new flat roof and we have obtained 4 quotes. The cheapest is a contractor who did the roofs of two other blocks on the estate a couple of years ago; they did an excellent job and we would be happy to have them again. However, there was an issue with payment for their previous work which is still, apparently, not fully resolved and might see them back in court (problems between the contractor and our agent - we are not involved in the dispute). As a result of this the contractor is concerned about being paid for the new project and has asked for 75% payment up front (when materials and scaffold are on site) with the remaining 25% on completion.

I can understand the contractor's wariness about being paid but my fellow directors are also wary about paying up front. My question is would there be a way of making the up front payment to a third party/stakeholder who would release the money to the contractor when the work is complete? This could give the contractor confidence about being paid but also give us confidence the job will be completed. Would this be too complicated or expensive to achieve?

Any alternative suggestions?

[Lootman]

The idea of the upfront money being held by a third party in some kind of escrow account would reassure the contractor that he will definitely get paid. And it will reassure you that the money will be repaid to you if the contractor vanishes.

However if it is not made available to the contractor at the start of the job, then how can he buy the materials and scaffold that he needs to start the job?

When I have been in this position I have made an initial payment to cover the costs of materials. Then made interim payments in instalments as work progresses, with a final payment upon completion. That is pretty much the way banks make construction loans as well.

[Gwynee]

Hi Lootman, thanks for replying, sorry for the slow response - I've been offline over the weekend.

Purchase of materials wouldn't be an issue for the contractor, they are a medium sized company and wouldn't normally expect to be paid until after the work is complete. The work should only take about a week. It is just the previous bad blood between the contractor and our agent that has caused them to ask for up front payment.

I will look into escrow accounts, not something I have any knowledge of but it might be an option. Would we need to involve a solicitor to make this work?

[dspp]

Hi Lootman, thanks for replying, sorry for the slow response - I've been offline over the weekend.

Purchase of materials wouldn't be an issue for the contractor, they are a medium sized company and wouldn't normally expect to be paid until after the work is complete. The work should only take about a week. It is just the previous bad blood between the contractor and our agent that has caused them to ask for up front payment.

I will look into escrow accounts, not something I have any knowledge of but it might be an option. Would we need to involve a solicitor to make this work?

I have to do this from time to time for various reasons.

A local solicitor ought to be able to do this, i.e. receive funds, hold them, then release them to one place or another. They will want a clear definition regarding what constitutes the right amount of progress so as to be able to release the money, and what is to happen to the funds if that outcome is not achieved in xx-time. They will ordinarily charge for the service and you should expect a charge of a few hundred pounds imho given the costs we incurred on the most recent one. Don't make it more complicated than it needs to be.

regards, dspp

[Clitheroekid]

I am a director of the 'Right to Manage' company for the flats where I live, and we use an agent to do the day-to-day running of maintenance, etc, including payment of bills.

One of the blocks needs a new flat roof and we have obtained 4 quotes.

The first thing to say is have you gone through the necessary consultation process with the flat owners? I only mention it because if you haven't the most you can recover from each of them via the service charge is £250! This may not be an issue if there are only a small number of flats and they're all happy with the arrangements, but failure to consult can and does cause severe problems in larger developments.

The cheapest is a contractor who did the roofs of two other blocks on the estate a couple of years ago; they did an excellent job and we would be happy to have them again. However, there was an issue with payment for their previous work which is still, apparently, not fully resolved and might see them back in court (problems between the contractor and our agent - we are not involved in the dispute). As a result of this the contractor is concerned about being paid for the new project and has asked for 75% payment up front (when materials and scaffold are on site) with the remaining 25% on completion.

I don't understand this. If they did an excellent job why is there an ongoing dispute, and why is it with the agents and not the RTM company? After all, the agents are just that - your agents - and shouldn't have any skin in the game.

I'd have thought the best way forward would be to step in and sort out the dispute, and if the contractors should be paid get them paid. This will put you in their good books, and it may even be that if you promise to pay what they're owed (assuming it's due) they would drop the demand for the up front payment.

I can understand the contractor's wariness about being paid but my fellow directors are also wary about paying up front. My question is would there be a way of making the up front payment to a third party/stakeholder who would release the money to the contractor when the work is complete? This could give the contractor confidence about being paid but also give us confidence the job will be completed. Would this be too complicated or expensive to achieve?

Although this sounds a good idea in theory, in practice it's not that simple. For a start, you have to find someone willing to act as stakeholder. Although you may be able to use a solicitor they are (or should be) very wary of acting in situations like this.

Firstly, they have to decide who is their client - they can't act for both because of the obvious conflict of interest. Secondly, they have to be wary of money laundering rules. Solicitors are not allowed to provide banking facilities, so if there is no underlying legal work they may not be willing to hold the cash. But the biggest problem is what happens in the event of a dispute, for example if the builder says the work is completed, and demands payment from the solicitors, but you say it's not completed, or not done properly, and instruct the solicitors not to release payment.

This means there has to be some form of dispute resolution mechanism built into the deal, and it all starts getting rather complicated and expensive.

Any alternative suggestions?

Depending on the sums involved you might consider requiring a performance bond, which is essentially a guarantee from a third party, such as an insurance company, that the work will be completed properly. However, although the contractor has to pay for this it's reflected in the tender price, so it would add to the overall cost.

If you can't sort out the existing dispute, and they're a reputable and financially sound firm then I'd say just pay the 75% and save yourself a lot of messing about. You still have your contractual rights to sue them if the work isn't done properly, but as they've already proved they can do the job properly there would seem to be no real reason for concern..

[Gwynee]

Thank you Clitheroekid, really helpful on all issues.

The managing agent is starting the notice procedure now, so it will be a couple of months before work can start, so we have some time to address this issue.

With regard to the previous dispute, it seems our agent paid the money to the wrong bank account after some fraudster hacked their emails. They subsequently paid the contractor 75% but 25% remains unpaid and the contractor has a court judgement in their favour. The agent kept us in the dark about all this and we have only just found out. We have more questions to ask.

I think we have decided against the extra complication and cost of the third party stakeholder option.