Brooks MacDonald Funds Limited · DRN-6162076

The complaint Mr M complains that Brooks MacDonald Funds Limited (BMFL) didn’t properly carry out their responsibilities as an operator of an unregulated collective investment scheme which caused him significant investment loss. What happened The Coronation III Limited Partnership (‘the Partnership’) was established in 2005. It’s an unregulated collective investment scheme (“UCIS”) focusing on property development. The aim was to redevelop properties in traditional shopping streets by converting the upper floors above commercial space into residential flats. The partnership owned freehold properties containing 17 flats and some commercial units. Mr M invested £75,000 into the scheme and became a Limited Partner in the Partnership. The General Partner (“GP”) of the Partnership and the Limited Partners entered a Partnership Agreement in February 2006. The same day the Partnership entered a property management agreement with Braemar Investment Management Limited, later trading as Braemar Estates (Residential) Limited (“the Property Manager”) and being sold again to a third party in 2018. On 21 June 2008, the GP appointed Braemar Securities Limited (later trading as BMFL), as the Operator of the UCIS. Mr D and Mr R were both directors of the GP and the Braemar Group. In 2010, the Operator, Property Manager and GP were acquired by Brooks MacDonald PLC when they bought the Braemar Group. Mr D subsequently facilitated a management buyout of the GP which meant he was only involved as GP from 2011. Mr R remained a director of BMFL and the Braemar Group. He became a director of the Property Manager in 2012 which meant he was a director of both the Property Manager and the Operator. The properties in the UCIS were sold between 2016 and 2019. In May 2019, when all properties in the UCIS had been sold, Mr M was informed he would receive £8,176.86. A final balancing amount would be paid once all final bills and charges were settled. I understand Mr M also will have received tax relief for some expenditure relating to flat conversions in the property which was one of the benefits of the investment. Mr D, in his capacity as the GP, complained to BMFL on behalf of a number of Limited Partners, including Mr M, in December 2022. In summary, their key complaint issues are as follows: • BMFL had delegated their responsibility for managing the properties to a Property Manager without proper supervision and monitoring of it. Once the Property Manager was sold to a third party in 2018, BMFL didn’t put in place proper systems for communication between themselves and the new property manager. • Poor property management and poor handling of disputes with the tenants of the properties led to the lender to the UCIS to enforce the securities held over some

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properties, causing them to be sold at pace at auction at a lower value than otherwise could have been achieved. • The Operator and Property Manager were owned by the same parent company, Brooks Macdonald PLC. The Property Manager was sold to a third party in 2018 and in the lead up to this BMFL were keen to keep the expenses of the property management company low to increase its value to potential buyers. This led to the properties being neglected and being sold at a lower value than they otherwise would have been. • There was a conflict of interest between BMFL’s obligation as the Operator to act in the best interests of the UCIS, and the joint commercial interests of the Property Manager and Operator. Mr R in particular was a director of both. This conflict wasn’t properly managed. • Non-disclosure to the Partnership of information about litigation and claims concerning the properties. • Financial accounts distributed by BMFL were misleading, particularly as they didn’t detail the full extent of rent and service charge arrears owed. • BMFL gave the Partners incorrect and misleading information in May and June 2017 about the cause of the problems being experienced by the UCIS, primarily blaming the lender. The Partners voted to extend the partnership on this misleading information. • Lack of proper document retention • The failures by BMFL have caused the Limited Partners to lose the majority of the capital they invested (since the original complaint was made it’s been clarified that losses to capital were around 89%). BMFL’s position in summary is as follows: • It was the GP’s role to appoint a property manager and oversee their operation, not BMFL’s role. Similarly, it was the GP’s role to ensure the financial accounts were accurate. • BMFL’s role as Operator under the 2008 Operator Agreement was for the most part administrative. • Under the relevant documentation, BMFL were not responsible for the management of the property owned by the UCIS. • While they accept they have a contractual duty to act in the best interests of the Partnership, they denied failing in that duty in the way they fulfilled their responsibilities under the contracts. • The fact that various entities involved belonged to the same group does not automatically give rise to a conflict of interest and there’s no evidence of the allegations made. • There were mechanisms in place to ensure any potential conflict was appropriately managed. • The information provided to the Limited Partners in May and June 2017 had been prepared by the GP and merely distributed by BMFL. • BMFL had no role in the sale of the properties. There also has been a dispute about whether this complaint falls within our jurisdiction. BMFL rejected that they had carried out a regulated activity given they had only provided administrative rather than “financial services”. They also raised objections that the complaint was raised too late. After one of our investigators set out that “establishing, operating and winding up a collective investment scheme” was a regulated activity, BMFL accepted that given they were the

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appointed operator of the scheme, we could consider their actions in relation to this. However, they remained of the view that the complaint was raised too late. Another ombudsman at this service previously issued a jurisdiction decision. She decided that this was a complaint we could consider. The complaint was then passed to me for a decision on the substance of the complaint. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. I previously issued a provisional decision the contents of which I’ll repeat below. Jurisdiction Even though my ombudsman colleague issued a decision on jurisdiction, I need to be independently satisfied that this is a complaint I can consider. I also note that until a final decision is issued on the substance of the complaint, jurisdiction remains a live consideration. Having considered everything carefully, I agree with the jurisdiction decision that Mr M’s complaint has been brought within the relevant time limits set out in DISP 2.8.2 R. I also agree that BMFL carried out a regulated activity. BMFL has not provided further material comments about this, so I’m not going to address this again. However, I have considered in more detail the question of whether Mr M is an eligible complainant. In order to be an eligible complainant that can bring a complaint to our service Mr M needs to be a person that falls into one of the categories in DISP 2.7.3 R. One of these persons is a “consumer” which I’m satisfied applies to Mr M. However, he must also have a complaint which arises from matters relevant to one or more of the relationships with BMFL that are set out in DISP 2.7.6R. One of the relationships set out in DISP 2.7.6 (3) R is: the complainant is the holder, or the beneficial owner, of units in a collective investment scheme and the respondent is: 1. (a) the operator of a scheme The previous jurisdiction decision found that Mr M was a holder of units in a collective investment scheme (which I agree with) and that BMFL confirmed they were the operator of that scheme. So the decision found Mr M had the necessary relationship with BMFL to be an eligible complainant. Whilst I agree that there is no dispute that BMFL is the appointed operator of the scheme, the term “operator” in DISP is specifically defined in the glossary of the FCA Handbook. The definition depends on what kind of scheme it relates to. The applicable definition for the collective investment scheme here (which isn’t authorised or recognised by the regulator) is set out in (1) (ca) which says: (except in relation to a recognised scheme) (in relation to any other collective investment scheme that is a contractual scheme) any person who, under the constituent instrument, is responsible for the management of the property held for or within the scheme;

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I consider ‘Property’ in this context means the asset held in the scheme which here is real estate property. In this particular complaint the issue of who is responsible for the management of the property in the scheme has been in dispute. Mr D says the management of the properties formed part of BMFL’s regulatory responsibilities when operating an unregulated collective investment scheme. BMFL has been adamant that managing the properties wasn’t their responsibility and that their function as an operator has been mainly administrative in line with the Operator Agreement. In my view the fact that BMFL is named the operator of the UCIS doesn’t automatically mean they are the operator of the scheme for the purposes of DISP. This needs a more in-depth analysis of who was responsible for the management of the property which I have done below: DISP refers to the person who is responsible for the management of the property “under the constituent agreement”. I consider this to be the Partnership Agreement supplemented by the Management Agreement and the Operator Agreement. I haven’t seen any evidence that new agreements were entered into since the Partnership Agreement and Management Agreement in 2006 and the Operator Agreement in 2008. I’ve considered the agreements in their entirety but have set out the parts which I consider particularly relevant to the issue that needs to be decided here. Partnership Agreement The Partnership Agreement of 10 February 2006 sets out on page one that: (C) The General Partner will subject to the provisions of this Agreement and the FSMA be solely responsible for the conduct and management of the Partnership's business of property investment to the exclusion of the Limited Partners. (D) The General Partner is to appoint the Operator and the Property Manager for the purposes of performing certain responsibilities under this Agreement in accordance with the terms of the Operating Agreement and the Property Management Agreement, In relation to the different duties of the involved parties the agreement says (with my emphasis): 14. Duties of the General Partner 14.1 The General Partner shall be responsible for ensuring that the Partnership is always managed and operated by an operator authorised to do so under the FSMA. 14.2. The General Partner shall procure that such person or persons as it may select which is then authorised under the FSMA and by the Financial Services Authority to act as Operator shall agree to act as Operator of the Partnership on terms to be agreed by the General Partner. 16.4 Authority and powers of the Operator (with my emphasis) The Operator shall have full power and authority, at the expense of the Partnership, on behalf of the Partnership and with the power to bind the Partnership thereby to carry out all the obligations and duties of the Operator set out In the Operating Agreement …. 17. Appointment of the Property Manager The Partnership acting through the General Partner shall appoint as property manager …to perform property management services in relation to the Investments (including without limitation to advise on investment and development opportunities, to undertake (at the Partnership's

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expense) development of Properties, to negotiate sales, collect rental income and negotiate, supervise and monitor lettings, rent reviews and lease renewals), to advise the General Partner in relation to the management, acquisition, development, sale, exchange or other disposal of Properties, to perform property administrative services in respect of the Properties of the Partnership, in this event, the Partnership (acting through the General Partner) shall enter into a property management agreement with the Property Manager under which the Property Manager will carry out such duties with regard to the Properties of the Partnership and its assets as the General Partner selects and is empowered to delegate and as are set out in such agreement. 17.4 The functions and duties which the Property Manager undertakes on behalf of the Partnership shall not be exclusive…. Operator Agreement The original Operator Agreement (with a third party) said: The Operator is responsible for the establishment, operation and winding-up of the Partnership. The Operator's role includes holding and maintaining the register of partners, admitting new members to the Partnership, preparing and circulating notices of general meetings, generally communicating with Partners in connection with all matters relating to Partnership administration at such time as it thinks fit and sending distributions to Partners. The Operator Agreement with Braemar Securities Limited (later trading as BMFL) in 2008 said under “Recitals”: (C) To comply with FSMA the Partnership requires that an appropriately regulated and authorised person act as operator of the Partnership and accordingly the General Partner has requested the Operator to be responsible for this task in accordance with the terms of this Agreement. (D) The Partnership wishes to appoint the Operator and the Operator has agreed to act in accordance with the terms of this Agreement. I also considered the following extracts from the agreement as particularly relevant here: 2.1 the Operator hereby agrees to act as operator to the Partnership …. and in particular (but not limited to) to establish, operate and wind up the Partnership, and to undertake in respect of the Partnership the duties of an operator of an unregulated collective investment scheme. 4. Specific functions of the Operator 4.1. Without prejudice to the generality of clause 2, the Operator is in particular appointed to undertake the specific functions set out in the Schedule. The Schedule listed 18 different points which I’m not going to list here in detail, but they were largely aligned with the administrative activities summarised in the original operator agreement. 4.2. The Operator acknowledges that the management activity in relation to the Partnership Assets will be carried out by the General Partner or such other person as appointed by the General Partner. Management Agreement The GP also entered into a separate agreement with the Property Manager, Braemar Investment Management Limited on 10 February 2006. The Property Manager’s services were wide ranging and were set out in Schedule 1-3 including Administrative Services, Development Management Services, Investment Management Services and Property Management Services.

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Their responsibilities included for example: • acquisition and disposal of property for the scheme • development planning for the properties and procure and prepare the contract works • letting of property and income collection • repair and maintenance • advising the GP about his obligations as a landlord • inspecting the properties at least once a year to ascertain their condition • respond to normal management enquiries from occupants • issue legal proceedings on behalf of the GP (with their consent) • insuring the properties • inform the GP if anything reasonably might affect the value of the property or advise on enhancements which might increase the value The agreement said: 3.1 In performing its duties under this Agreement, the Property Manager shall consult and co-operate with the General Partner with a view to ensuring the efficient and timely provision of the Services, 3.4 The Property Manager shall act only as agent for, and on the instructions of, the General Partner on behalf of the Partnership in carrying out its obligations under this Agreement …. I also considered the Information Memorandum about the Partnership which was used to inform potential investors about the scheme. This said: Braemar Investment Management (NB: which was the Property Manager at the time) will be responsible for finding, developing and managing the Partnership's portfolio. The General Partner’s non-executive director will verify that property management decisions are being made in good faith and in the best interests of the Partnership. Having read all the agreements, I consider the Property Manager was responsible for managing the property here. They were appointed by the GP and the agreement is clear about the close co-operation and consultation with the GP. The Operator was not part of this agreement in any way. I did consider whether the “duties of an operator of an unregulated collective investment scheme” which the Operator had agreed to perform would also include the overall responsibility for the management of the property. There is no dispute that BMFL was appointed to and had agreed to carry out the regulated activity of “establishing, operating and winding up a collective investment scheme” as per The Financial Services and Markets Act (FSMA) 2000 (Regulated Activities) Order 2001. The administrative functions mentioned in the Operator agreement would constitute activities in operating a scheme. The question is whether “operating” would always involve the management of the scheme property (i.e. managing the assets). In FSMA the terms “operator” or “operate” are not generally defined. There isn’t a clear definition whether “operating” a collective investment scheme refers to the administration of the scheme or whether it means the actual running of the investment scheme including the management of the investment assets. Mr D has pointed to 9.4 of the regulator’s Perimeter Guidance Manual (PERG) which in turn refers back to Section 235 of FSMA about collective investment schemes. Section 235 of

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FSMA stipulates that in order for any arrangements to be a collective investment scheme, they need to have either or both of the following characteristics: (a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; (b) the property is managed as a whole by or on behalf of the operator of the scheme. I assume Mr D considers that b) clearly supports a view that BMFL, as the operator of a collective investment scheme, must manage the property. However, I don’t agree this is conclusive. I say this because "management of the property by or on behalf of the operator" is an optional element in a collective investment scheme, not a definitive requirement. I acknowledge that in many cases the operator of the scheme will also manage the assets of the scheme. However, taking into account that operating a collective investment scheme isn’t defined in FSMA and the contractual agreements on the Partnership specifically set out the property management activities as responsibilities of the Property Manager, I consider that under the constituent instrument the Property Manager is responsible for the management of the scheme property and is therefore the “operator” for purposes of DISP 2.7.6 (3)R. Managing real estate property is also not a regulated activity, so the Property Manager was able to do this without any regulatory permissions. I conclude BMFL isn’t the operator for the purposes of DISP and therefore this necessary relationship between Mr M and BMLF doesn’t exist. I then considered whether Mr M has any of the other relationships in DISP 2.7.6R with BMFL. The majority of relationships clearly don’t apply here. The only other possible relationship to consider here is whether Mr M was a customer of BMFL. Customer is not defined in DISP so will carry its ordinary meaning. I next considered who BMFL provided their operator services for. The Operator Agreement was between BMFL and The Coronation III Limited Partnership. A limited partnership isn’t a separate legal entity and whilst the majority of dealings were between the GP and BMFL, I consider the individual Limited Partners, like Mr M, were also part of the Partnership. I also note that some of the services were specifically agreed to be provided directly to the Limited Partners, for example prepare and circulate notices of each general meeting, circulate copy of accounts and an annual update from the Property Manager, provide individual sections of the Partnership tax return for the Limited Partner’s individual tax returns and communicate with and report to Partners in connection with administrative issues. Under 13.1 of the Operator Agreement it was also agreed that the Operator would indemnify not just the GP and the Partnership as a whole but also each Limited Partner against losses and liabilities arising in respect of or in connection with or as a result of the negligence or wilful default of the Operator. Overall, I’m satisfied that Mr M had a customer relationship here with BMFL and is therefore an eligible complainant. provisional findings on the substance of Mr M’s complaint I’ve taken into account relevant law and regulations, regulator’s rules, guidance and standards and codes of practice, and what I consider to have been good industry practice at the time. And where the evidence is incomplete, inconclusive or contradictory, I reach my

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conclusions on the balance of probabilities – that is, what I think is more likely than not to have happened based on the available evidence and the wider surrounding circumstances. The crux of the complaint here is that BMFL in their role as the Operator failed in their obligations and caused Mr M to lose the majority of his capital investment. Both parties have made substantial submissions which I have carefully considered. We are an informal service and so I will not address every point made. I will focus on what I consider are the key issues that have more likely than not led to Mr M’s investment losses and whether BMFL can reasonably be held responsible for this. The key reasons put forward of why the losses were incurred are in essence: • The properties were neglected and not properly maintained. • Particularly due to issues with the roof, tenants refused to pay rent and service charges and there were disputes. • Sales did not proceed in 2015/2016 and so the lending bank regarded the loan as non-performing and consequently sold it to an offshore entity which raised interest rates significantly and forced disposals of property. • Accounts and information about the value of the properties circulated by BMFL was incorrect and misleading. BMFL’s obligations as the Operator of the Partnership I consider the main underlying argument brought forward by Mr D here is that BMFL was ultimately responsible for the property management and was obliged to oversee the Property Manager. For the reasons set out in the jurisdiction part of this decision I disagree that this is the case. The contractual documents do not support that BMFL was responsible for the property management in any way. This was very much a matter between the GP and the Property Manager. And as I explained I also don’t consider it was a specific requirement to do this when carrying out the regulated activity of operating an unregulated collective investment scheme. I also note that I don’t think BMFL carried out any property management activities in practice or could be reasonably perceived to have done this by the Partnership. I’ve seen lots of emails (provided by both parties) and any property management issues were always discussed between Mr D, in his role as GP, and the Property Manager. Mr R was copied into quite a few of the emails, which is perhaps not surprising given he was a director of the Braemar Group and BMFL, however I can’t see that the impression was given BMFL was actively, and in their role as Operator, managing the properties or were taking on these responsibilities. I recognise that for many years the Property Manager and the Operator were part of the same group and that Mr R was a director for both firms. However, they were still distinct firms with distinct responsibilities and so I don’t consider BMFL is responsible for any failures of the Property Manager. BMFL was responsible to provide the services as per the Operator Agreement which as described previously were mainly administrative. When carrying out these activities they needed to act in the best interest of the Partnership and therefore the Limited Partners like Mr M. This is not only set out in the Operator Agreement, but this is also a regulatory obligation as per 2.1 of the Conduct of Business Sourcebook (COBS) (“Best interest rule”). The Principles for Businesses set out in the FCA Handbook also apply to BMFL. For completion I note that the FCA Handbook also includes specific rules about collective investment schemes (set out in COLL), however these don’t apply to UCIS. Maintenance and neglect of properties/disputes with tenants

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It’s clear that a lot of the problems with the property and loss of value is connected to issues with the roof of the property and associated damp/mould issues. It looks like there were issues with a leaking roof going as far back as 2006 (maybe even before the properties were bought by the Partnership) and in various emails and documents over the years repairs to the roof as well as replacing the whole roof is discussed and I can see repairs were undertaken. The annual report in 2016 also mentions that the property was severely affected by rising flood waters in the winter of 2015/2016. I can see that property repairs were delayed at least in part by a longstanding dispute with one of the neighbouring tenants. The annual report in 2015 said now that this dispute was resolved, real (repair) works could begin. In May 2015 the Property Manager emailed Mr D and informed him that one of the tenants had reported damp patches on his ceiling. A contractor had been sent out and repairs were recommended with estimated costs of £2,300. In addition to that, a quote was to follow with regards to a roof hole. Mr D was asked whether they could proceed with the repairs. Mr D advised not to take any action and review between tenancies. The same tenant asked for a rent reduction due to the issues which was declined by Mr D. Frustrated with that response, the tenant reported the issues to the local council who, after visiting the property, issued an improvement notice which ordered several repairs including repairs to the roof. As the property was Grade II listed there were permissions needed to replace the roof which was only granted in June 2016. It’s clear that the property had needed repairs for a long time and it’s possible that some of the delays and lack of maintenance were caused by the Property Manager. It’s also clear that the disputes with tenants which led to rent reductions and non-payment of service charges were all relating to their dissatisfaction with the condition of the property. However, as explained above none of this was the responsibility of BMFL. Delay in selling the property and aborted sales All property was planned to be sold in spring 2014 (seven years after the flats were first occupied and at which point tax allowances couldn’t be clawed back). An email to Mr D from the Property Manager in October 2014 referred to Mr D receiving an offer for the entire portfolio of £3,995,000 which he rejected. In October 2014 Mr D received a report from Savills explaining that due to low yields selling the portfolio as a block was less attractive to investors. The individual sales of units were said to achieve a higher value. The Property Manager did point out to Mr D that a sale this way would take longer. Mr D decided to proceed with this individual sales strategy and the lender agreed with this strategy. On suggestion of the Property Manager it was also decided in early 2015 to sell the freehold and the leaseholds separately. The Property Manager noted that prior to going on the market some works needed to be undertaken for the flats sale and these would need to be complete to get the maximum value. A potential buyer for the freehold was found and the strategy of selling the freehold and leasehold separately was presented to the lender. Emails in May 2015 show that the lender was still waiting for some draft lease agreements and an opinion from an independent party to confirm that the creation of leaseholds would have no material impact on their security.

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As explained above, the improvement notice from the local council was issued also in May 2015 which further affected the sale of the properties. Given planning permission was needed for the roof replacement, the necessary repairs were delayed further and eventually started in August 2016. I can see from a report issued by the Partnership’s solicitors which the Mr D instructed in 2019 and the accompanying emails that some sales were further delayed and some had to be aborted in 2016. This included: • two apartments that were planned to go to auction, but on request of further documents it became clear they were still suffering from water damage and had to be replaced last minute with different properties. • delay or inability by the Property Manager to provide information requested by buyers’ lawyers. • a buyer withdrawing from a sale quoting neglect of the property leading to an improvement notice, disorganised document prompting concerns property is not properly managed, concerns about the lack of sales history and concerns about the freeholder’s financial position. • the freehold sale was delayed because by July 2016 the repairs required by the improvement notice had not yet completed and information required to agree additional provisions in the sale agreement was delayed by the property manager. From what I have seen it’s clear that there were delays of selling the properties since 2014. This was due to sales strategies changing which required agreement from the lender, a change in lease structures (which were still not in place by 2016), delays in providing information requested by buyers and not being able to provide some information at all, buyers being concerned about the state of the property and outstanding repairs as well as the freeholder’s financial position. Much of the delays stem from the property’s state of repair. As explained earlier the maintenance of the property was the responsibility of the Property Manager in close co- operation with the GP who had to agree to repairs. The change in sales strategy was the decision of the GP and the issue of new leases, draft contracts etc was to be arranged between the GP, the Property Manager and the GP’s solicitor. The delay and non-provision of some documents necessary for the sale was also the responsibility of the Property Manager. The following evidence shows that Mr D also considered that the issues were caused by the Property Manager. Mr D told the solicitor in an email on 12 March 2016 when discussing missing information for sales: ‘Again, Braemar Estates ought to hold all this information for the General Partner’. And the background of the 2019 solicitor’s report notes: ‘CIII considers that Braemar has failed to discharge its duties under the Management Agreement in relation to both the project-management of the development and the management of the Properties competently.’ I conclude that BMFL wasn’t responsible for the delay in sales. Change of lender

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In February 2016, the lender to the Partnership sold their loans to an offshore lender. By this point the lender had been providing the loan to the Partnership beyond the contractual terms on a consensual basis. The new lender imposed a deadline of 30 June 2017 by which point the full loan needed to be repaid. They also significantly increased the interest rate on the outstanding balance, halted the freehold sale and insisted on three flats being sold per quarter. This created a huge pressure to sell properties quickly, some at auction, which possibly led to decreased sales prices. I have no doubt the change in lender had a big impact on the finances and pressures on the Partnership. Mr D says the lender sold their loans as they were non-performing as two years beyond the lending contract no properties had been sold. I have seen no direct evidence that this was the reason for the loan sale, but I consider this a plausible reason. However, the delays to sales have been discussed above and I don’t consider BMFL is responsible for this. And any negotiations and discussions with the lender were done by Mr D. Non-disclosure of arrears and litigation/misleading accounts Some leaseholders had been withholding service charges. Mr D says this wasn’t disclosed to the Partnership and as a result the accounts were wrong. He wasn’t aware of the substantial arrears and litigation. The debts were monies which belonged to the Partnership and these debts would have entitled the Partnership to forfeit leases and monies could have been used to repair the building. Two main instances of withheld services charges have been mentioned here. The first was from the same party which the Partnership had been in dispute about withheld service charges in earlier years and which was settled outside the courts in 2014. Back then there was a dispute between the Property Manager and Mr D about Mr D not being informed about the litigation. Mr D says he only more recently found out that the same leaseholder had not resumed paying service charges after 2014 and that the Property Manager had brought legal proceedings against him in the name of the Partnership for an outstanding debt of £5,913 without Mr D’s knowledge again. The leaseholder went bankrupt, and the incorrect creditor was recorded when this should have been the Partnership (I understand this record has since been corrected). Based on the evidence I have seen I can’t agree that Mr D was unaware of any outstanding debts and possible legal proceedings for this leaseholder. In an email exchange in late September 2015, Mr D asked the Property Manager about this leaseholder’s debt and was told two days later that it was £3,240. With email of 1 October 2015 Mr D told the Property Manager: ‘Please can you initiate proceedings against [leaseholder] and remind him that any sale of his apartment will be blocked whilst there is a debt. If he has a mortgage, please can you claim against the lender too.’ In an email on 4 August 2016, the Property Manager told Mr D that they were currently chasing the leaseholder for the outstanding service charge amounts. I don’t know what happened afterwards. It’s possible that Mr D wasn’t updated on the start of actual proceedings and that he wasn’t aware of the full debt amount by the time proceedings were ongoing. However, it’s clear he gave concrete instructions in 2015 to start proceedings, and he was aware that the leaseholder was still not paying the service charges post settlement in 2014 and there was an actual debt. So even if I assume that the Property Manager didn’t

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provide further updates to Mr D like they should have, I would have reasonably expected Mr D to seek an update about whether the debts had now been paid or, if not, whether proceedings had actually started as per his instructions, particularly as there had been a previous substantial dispute with the leaseholder. The second debt the Partnership says they weren’t aware of consisted of unpaid service charges from another leaseholder (A Ltd). Mr D says as far as he knows no legal action was taken against the leaseholder and the debt moved to the new freeholder when the freehold was sold in 2018. Mr D said this debt was £23,645. I’ve seen a statement of account for A Ltd sent on behalf of the new landlord which shows: “SC balance @31.03.2018 as per Braemar” as £14,082.11. There was also an admin balance and an annual adjustment at year end “as per Braemar” which together totalled a sum of £15,074.11. Mr D has included the yearly service charge of £8,571.35 which was charged in advance on 1 April 2018 in the sum of £23,645. The freehold was sold by the Partnership in 2018. I don’t know when exactly that happened, so it’s possible that some of the service charges for the financial year 2018/2019 wouldn’t have been due to the Partnership. It’s also not clear since when the service charges were not paid. Either way, the complaint here is that these debts weren’t disclosed to the Partnership and I haven’t seen any evidence in emails or reports that these particular service charge arrears were disclosed. The monthly reports prepared by the Property Manager set out details of rent arrears, but I can’t see that service charge arrears were ever mentioned even at times when there were known service charge arrears from the first leaseholder I mentioned earlier. I’ve seen an example of a separate Service Charge Budget report from 2012/2013. I don’t know whether later ones would have shown any arrears, but on the evidence I have currently, I can’t see they did. I would note that I think questions about any outstanding arrears of service charges would likely have been part of the sales process when selling the freehold in 2018. I can see this was a question when the first freehold sale was prepared in 2016 (which then didn’t take place). So possibly arrears would have been disclosed then, but again I cannot say for certain this was the case, so it’s possible that the Partnership didn’t know about these arrears until many years later when Mr D became a director of the new freehold company for the properties after the Partnership had dissolved. Preparing the annual accounts and to be satisfied that they gave a true and fair view was the responsibility of the GP (as set out in the annual reports under “respective responsibilities of General Partner and Auditor” and in the Partnership Agreement). With regards to the arrears from the first leaseholder, as explained above, I consider the GP ought to have made enquiries as to any outstanding arrears given the history and his knowledge that there had been arrears after the 2014 settlement. However, on the information I currently have I think it’s possible the GP wasn’t reasonably aware of the arrears from A Ltd. It was the Property Manager’s responsibility to keep the Partnership informed about this, not BMFL’s. However, I did consider whether BMFL ought to have checked the accounts and pointed out these missing arrears before distributing them. I think the crucial issue here is that whilst BMFL and the Property Manager were separate entities, Mr R was a director of the Braemar Group and a director of BMFL. BMFL as the operator of the UCIS had to act in the best interest of the Partnership. In my view it would be unreasonable to separate any knowledge Mr R had depending on how he acquired it. This means if Mr R knew about these service charge arrears through his involvement with the Property Manager and if he knew the GP wasn’t aware he should have informed the GP accordingly. The same applies if he ought to have reasonably spotted that the service charge arrears weren’t accounted for in the yearly accounts before he distributed them for the GP.

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I can see that Mr R was copied into quite a few emails to the Property Manager, but not all. And based on what I have seen I’m not convinced that he would have been involved in all details of the Property Manager’s day-to day business to the level that he would have known about the specific service charge arrears and/or that Mr D might not be aware of them. The financial accounts did include amounts under “Debtors”, and I’m not persuaded that it would have been obvious to Mr R what these related to (as this wasn’t specified in the accounts) and that these specific service charge arrears were missing-if he even knew that there were some arrears. I can’t see that a check of accuracy of the accounts as a matter of course was a general responsibility of BMFL. So I’m currently not persuaded that Mr R in his role of director of BMFL withheld information he had about the service charge arrears from the Partnership. However, even if I’m wrong about this and BMFL did know information that the GP wasn’t aware of and should have shared it, I don’t think it’s more likely than not that this would have prevented the financial losses to the Partnership. I understand from Mr D that A Ltd withheld service charges due to the state of repair of the property, so if the Partnership had decided to forfeit the lease, I doubt that they would have found a new leaseholder quickly without doing further repairs. In the meantime, they would have had additional loss of rent. I appreciate they could have initiated legal proceedings with Mr D’s consent and it’s possible they could have received additional service charges from A Ltd if successful. However, even if they had obtained these additional service charges from A Ltd, I don’t think it automatically follows that repairs would have been carried out more quickly, the lender would have not sold the loans to a new lender in early 2016 and a significantly increased value would have been achieved by selling the properties more slowly. First of all, as I said before, it’s not clear when the arrears for A Ltd actually started, so it’s possible they didn’t start until after the lender sold the loans in February 2016 or, even if they started before, that legal proceedings could have been successfully led to payment and repairs would have been carried out before then. I also note that some of the delays were down to other factors than cashflow including the change in sales strategy, the longstanding dispute with the first leaseholder mentioned above and the necessary permission to replace the roof. Overall, I am not persuaded that the non-payment of a sum between around £15,000-23,000 (depending on what the actually due amount to the Partnership was) would have solved all existing problems and prevented the Partnership’s losses. I also considered whether BMFL withheld information about the state of repair of the properties. However, from what I have seen Mr D was broadly aware of the state of repair. Over the years there had been rent deductions due to damp issues and disputes due to outstanding repairs and at the latest in 2015 when the improvement notice was issued by the council, Mr D would have been aware of the severity of the issues. So I don’t see that Mr D was kept in the dark about the property’s condition. In May 2017 Mr D drafted a letter to the Limited Partners to ask them to extend the Partnership to allow more time to sell the remaining properties. The letter reiterated that there had been a need to break up the property to exceed the balance sheets and that they had worked with the lender ‘beyond the contractual lending term on a consensual sale process during essential long standing maintenance and improvement spells, and whilst flats were being prepared for sale, the sale of the Freehold reversion and creation of individual flat leases.’ It then explained the unexpected change in lender with significant interest increases and demands to sell a certain number of flats per quarter. A new refinance facility was agreed in principle which would allow more time to sell the remaining flats and achieve better sales results, but for this the partnership needed to be extended.

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Mr D says this letter was misleading and BMFL wasn’t transparent about the failures of the Operator and the Property Manager. If the real cause had been known, the Partners could have sought compensation and improved their position. I’m assuming Mr D is referring to issues like delays of carrying out repairs, not keeping him informed about litigation and arrears and not providing or delaying the information required when the freehold and first flats were meant to be sold in 2015. The longstanding maintenance issues were mentioned and most importantly, Mr D was aware of the ongoing repair issues and the delay in sales. I don’t think it’s reasonable to blame BMFL for any of those issues not being mentioned. Conflict of Interest It has been submitted that there was a potential conflict between BMFL having to act in the best interest of the Partnership and the joint commercial interests of the Operator and the Property Manager. Part of the argument goes back to the view that BMFL should have supervised and monitored the Property Manager. More specifically, Mr D said the Property Manager was keen to keep its expenses low to increase its value in the period prior to the firm being sold. And that it was in their commercial interest to keep overheads low in order to maximise profits for the Property Manager and enhance the resale value. He says evidence of this is that the Property Manager obviously had inadequate resources, filing and documentary systems and staff to provide the necessary services. For the reasons set out earlier in this decision I don’t consider BMFL was responsible to monitor or supervise the Property Manager. They had to act in the Partnership’s best interest when fulfilling their duties as per the Operator agreement. I haven’t seen persuasive evidence that they failed in this regard. I also haven’t seen persuasive evidence that repairs deliberately weren’t carried out or delayed or fees not being collected in order for the Property Manager to look more attractive in a resale. The fact that there were possible service issues with the Property Manager or that they didn’t fulfil their separate duties towards the Partnership is not evidence of a conflict of interest. The only mismanagement of a conflict of interest would be in my view if Mr R was aware of information through his involvement with the Property Manager which he withheld from the Partnership on purpose when carrying out their function as Operator. I explained above that this would have been for example information about arrears that the Partnership wasn’t aware of. I refer to the previous section of this decision where I’ve explained why even if information was withheld, I didn’t think this caused Mr M’s losses. Summary Overall, I consider that BMFL is not responsible for the losses incurred by Mr M. I would note that Mr M’s property investment through a UCIS always carried increased risks specifically due to the high gearing in the loans and the possible change in interest rates, possible defects and repair issues (particular in a grade listed building), finding tenants who would pay sufficient rent and the demand for the property when it came to selling it. In my view the issues with the roof and rising flood waters which despite patch repairs over the years still lead to damp and water ingress issues was one of the root causes for further issues down the line. This led to disputes with leaseholders, rent reductions and service charge arrears. Then there were changes to sales strategy which led to further delays and the sudden change in lender which led to significantly increased interest rates and pressurised sales. I also note that when it came to selling properties it was noted yields were low and so the properties weren’t attractive to investors which reduced the buyer’s market. The GP’s annual reports over the years also did note challenges in the property market.

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I consider these were all inherent risks in a property investment. In my view and for the reasons explained in this decision anything that could be managed around these risks, including the maintenance of the properties, rent and service charge collection, marketing of properties, execution of sales, negotiations with lenders etc needed to be managed by the Property Manager and/or the GP and not BMFL. Responses to my provisional decision BMFL accepted the decision. Mr D provided additional comments. I will focus on what I consider to be the key arguments here. • He wanted it to be clear that he had always acted as GP of the Partnership and not personally. • BMFL seemed to try and put all the blame on the GP, the Property Manager and Mr D personally. If this was apparent to BMFL why didn’t they, as the only regulated party, intervene to protect partners’ interests? The absence of such intervention undermines the assertion that the responsibility lay elsewhere. • Insufficient weight had been given to Mr R holding directorship of both the Property Manager and the Operator. The firms shared systems, premises, personnel and reporting structures. The firms acted as a commercially unified group with daily professional and social interactions. Any suggestion that BMFL was operational independent and separate is misguided. • Critical documentation was missing and this only became apparent during attempted sales of the assets. Missing records and property management incompetence materially reduced the value in a rising market and contributed directly to forced sale outcomes. When parts of the business, including the Property Manager were being prepared for sale, it created incentives to minimise issues and conceal operational deficiencies. • BMFL submitted little information for years, but then produced extensive late material much of it new to Mr D. This enabled a retrospective defence unsupported by parity of arms. • The Operator had a contract with and obligations towards each limited partner in the Partnership. The Operator is responsible for any losses in assets caused by the Operator’s misfeasance regardless of whether there was also misfeasance by the GP or the Property Manager. My findings I carefully considered Mr D’s additional comments. However, I remain satisfied that BMFL isn’t responsible for the limited partners’ losses. It is correct that Mr D throughout has acted as GP of the Partnership. Any references to him in the decision should be understood in this context. As explained in my provisional decision, BMFL was had some administrative responsibilities in the Partnership. They are correct to point out that any issues that might have contributed to the financial losses here fall outside this remit. I don’t consider the failure of the

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investment was likely caused by one particular issue alone. There would have been a range of factors as previously set out, some outside the influence of any of the parties here. If BMFL had knowledge that the GP or Property Manager was not acting in the Partnership’s best interest or was aware of material information which the Partnership was unaware of, this should have been shared with the Partnership. I want to be clear that I don’t consider this to mean that every mistake, delay or issue needed to be reported or that BMFL had to intervene in the day-to-day management activities for example to improve any services provided by the Property Manager. As I said it wasn’t BMFL’s role to monitor or supervise the other parties in this way. However, if they were signs that the GP or the Property Manager were acting fraudulently or materially misleading the Partnership in any way, then I would have expected BMFL to inform the Partnership accordingly in line with their regulatory obligations to act in the clients’ best interest. The GP was representing the Partnership, so any significant shortcomings of the Property Manager as described above should have been reported to the GP unless there was reasonable concern the GP was not acting in the limited partner’s best interest-which I don’t think was the case here. From what I have seen the GP’s aim throughout has been to achieve the best outcome for the investors and given that the GP was involved in all communications and was very much aware of any ongoing issues with the lender, sales strategy and property management, I don’t think there would have been reasonable concern that material information was being withheld from the Partnership. I also haven’t seen any indications that the Property Manager was acting maliciously or that they were withholding relevant information from the GP (other than possibly the debts incurred by A Ltd which I’ll address again below). Nor do I have seen persuasive evidence that they were deliberately delaying or not carrying out maintenance to further their own interests. So I don’t think BMFL had any reasonable reason to intervene here. I would also note that BMFL couldn’t have terminated any contract with the Property Manager (only the GP could do that). I acknowledge that the Operator and the Property Manager might have been more closely connected at an operational level than I have assumed. However, this doesn’t change the outcome of this decision. BMFL and the Property Manager were still separate companies with separate duties and roles. So BMFL isn’t automatically responsible for the actions of the Property Manager even if they were closely connected. I also said in my provisional decision that if I was wrong and BMFL did know about the arrears from A Ltd and ought to have disclosed this to the Partnership, I don’t consider this would have prevented the financial losses here. I already addressed the issue of missing information when some of the flats were about to be sold and the allegations of commercial interests creating a conflict of interest. I have nothing further to add to my provisional findings on this. Mr D claims that BMFL only provided information to defend this complaint late in the process and that this caused some procedural unfairness. I don’t know what exactly was shared with Mr D previously. However, I have shared the information that I have relied on in my decision with Mr D and I would note that this would have been information that wasn’t new to him, including emails to and from him, the various contractual agreements and information he has provided to this service himself. So I can’t see any procedural unfairness here.

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It is correct that BMFL is responsible for any losses they caused even if other parties also contributed to those losses. However, as explained in detail, I don’t consider BMFL is responsible for the financial losses in this case. My final decision I do not uphold this complaint Under the rules of the Financial Ombudsman Service, I’m required to ask Mr M to accept or reject my decision before 31 March 2026. Nina Walter Ombudsman

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