The Residential Managing Agent : Learning from Build to Rent and Co-Living in the 1...

The Residential Managing Agent : Learning from Build to Rent and Co-Living in the 1...: During the early 1990s I was the estate manager for what was then known as the largest privately owned block of flats under one roof in E...

Communities must influence thoughtful regeneration

Large regeneration schemes are having a significant impact on the landscape and amenity across the region as developers endeavour to meet the housing shortfall. We can expect to see real impacts, positive and not so positive, on our communities. Thoughtful community driven approaches will be key to ensuring long term success of these schemes along with the delivery of basic infrastructure and the creation of a sense of place.

What form does real consultation and community engagement take? The usual public open meetings with grand plans and big ideas set out and an opportunity to ask questions in public is no longer sufficient to meet the criteria for real community consultation. Active involvement of local people, real consideration of their concerns and the establishment of a positive working relationship are the minimum requirements of the master-planner. Listening is the new watchword - driven by the lessons learned from the Grenfell tragedy and from the greater scrutiny, both formal and community driven, that will follow - a greater say in the shape of thoughtful regeneration schemes is both inevitable and to be welcomed.

In addition, the burgeoning and highly competitive build to rent (BtR) sector will change the way that future residents think about their homes. An expectation that on estate amenities will deliver wellbeing and convenience benefits attached to healthcare, fitness, transport, child care and community driven events and experiences all within the immediate locality. All of this to be potentially driven by proptech, with easy user interfaces that adapt to deliver what each local community needs, whether it is responsive repairs, parcel handling, key management, playgroups or a weekly food market or even a monthly outdoor music event.

This transformation must be both sustainable and beneficial.  It must deliver infrastructure that encourages a sense of ownership and delivers measurable benefits to wellbeing and it should encourage local enterprise. It might include restriction of vehicle access, the creation of cycle ways and footpaths and of public realm that brings the people outside and doesn’t seek to discourage children from playing and communities from meeting. It must consider working with local businesses to deliver employment through retail and leisure services and the formation of training and employment partnerships.

Public transport, access to services, high speed internet, health care and schooling seem like fundamentals but still get overlooked in the race to bring new stock to the market. But the growing influence of amenity rich build to rent, a cooling market and a wholesale shift to longer term interests and sustainable brand values, means that developers, regeneration specialists and planners, all see the value of creating communities that will stand the test of time.

That also means that the quality of ongoing estate management is paramount and, in conjunction with communities, helps to maintain both quality of the environment and asset values for the long term.

At Mainstay we have been working with master planners and home builders for nearly 20 years, providing post completion management packages for complex regeneration schemes.  Our holistic approach to estate management engages the community and seeks their involvement at every level and this sets us apart from the standard schemes of management. Our early involvement, pre and post planning, ensures the right amenities are supported by the right the right service levels which in turn sit within the right corporate structure - giving residents an effective degree of control and oversight of estate services for the longer term and creating better communities with real 'ownership' in their locality.

Good Residential Management - the same but different

The growing influence of build to rent on the residential management industry cannot be overstressed. The impact of tech-led, real time, customer feedback and genuine community engagement is pushing managers to come up with new and exciting delivery models that put the customer at the front and centre of their activities. And this is not only in terms of communications and transparency but now in genuine placemaking roles, creating activities and events that add a further dimension to the environment.

Despite significant reforms making their way into the leasehold sector, managing agents still retain the important role that should see them acting not only as guardian of the asset and overseer of compliance and risk, but as the genuine glue that brings people together and requires a collective buy in. That must be a good thing for both customers, who have long been deserving of better, and property managers, whose role now incorporates the very important function of bringing communities together and really listening.

A wide mix of tenures, from leasehold, shared ownership, market rented and social or fair rented the manager increasingly juggles a huge range of differing expectations. Can these be brought together with strong community and partnership values? I think they can and I think the best site based teams are already demonstrating coherent strategies to run complex mixed schemes and raise the inherent value of life on those properties.  I am, of course, talking about larger regeneration schemes - but there is no doubt that changes at this level have always trickled down to smaller developments eventually.

We must see our role as more akin to running an excellent hotel. All of the gritty hard and soft FM activity continues in the background and for customers this as a given - so long as it represents fair value. It is the added value front of house roles that important differentiators.  They are changing the industry and driving interest in successful schemes. 

The future is likely to see us dealing with a wide range of tenure types (and maybe even some new ones…) but our management will be valued through branded living destinations, with the very best creating a loyalty and positive feedback that reduces voids, has longer tenancies and creates real customer loyalty.

In that environment, who are you recruiting next?

Learning from Build to Rent and Co-Living in the 1930's

During the early 1990s I was the estate manager for what was then known as the largest privately owned block of flats under one roof in Europe - Du Cane Court in Balham, South London. 730 units plus my office adjacent to reception, so no hiding. Around half of the flats were just 240 sq ft studios with one main room, a kitchenette and a bathroom.

Completed in 1936 this staggering Art Deco building was built to provide rented accommodation for those working in the West End - being next to the Northern Line Station at Balham South. Consequently many of those who moved in worked in the theatres, opera houses and music halls of Soho and Covent Garden. When I started there many of the flats were still statutory tenancies although most have subsequently been sold on long leases.

Du Cane Court didn’t really do kitchens. The kitchenettes were just 5 ft x 4 ft and literally wouldn’t allow for even gentle cat swinging activities. However, this was more than compensated for by a large and lavish bar and restaurant situated on the 7th floor. The menu was comprehensive and operated for long hours, meaning that many tenants never used their kitchens at all. Sadly this facility was damaged by a fire in the '70s (I think) and, you guessed it, replaced with more flats. Other facilities would have included garages, parking, a shop, an estate office, laundry services, basement storage units, Japanese landscaped gardens and full site team of 18 - including a plumber and handyman. Even when I was involved Du Cane Court was unique and was held to the highest standards of service with an exceptionally active community of interested residents.

Sound familiar? Yes, we are seeing the combination of smaller units, build to rent and co-operative living all making the headlines. But it's nothing new - I promise. These things are all cyclical and there is much we can learn from the successful Build to Rent of the past.

Why a common sense approach to ground rents is now critical

The Government has suggested that all future leases on flats might be set with ground rent at zero. The rise in ground rent values that has allowed the capitalisation of this asset class has indeed seen some very badly-behaved developers seeking to maximise the return on the sale of the freehold. However, whilst this market has developed hugely in the last 25 years it is not all bad news - particularly where complex tenure and physical structures call for a degree of responsible oversight by organisations who have their reputation to protect.

Enter the pension funds and large-scale investors who will ensure that covenants are consistently and fairly upheld, that insurance is placed and that health and safety compliance is paramount. These are valuable powers that are sometimes overlooked where those responsibilities are given to reluctant resident directors who are pressured to constantly cut corners and manage costs - at the price of good asset management.

Good institutional Landlords now dominate this sector having purchased many billions in ground rent assets in recent years. This is a good thing for leaseholders who know that in a crisis the landlord will ultimately step in and ensure that works are undertaken, insurance cover is at the right level, long term capital expenditure plans are in place and proper risk assessments are undertaken and acted upon.

Do away with ground rents and there is potential impact on the value of those investments and a shift that could see the return of small scale investors looking to take advantage not just of the rental income stream but of the peripheral income available through most leases.

Good asset management by institutional grade investors in this quality investment product adds value for all stakeholders - including leaseholders. It also adds a genuinely sophisticated and dynamic level of asset management and safety oversight. 

On increasingly complex developments with mixed tenures, including shared ownership and private rental, an overarching landlord strategy can be the glue that binds a community and creates a sense of place. In the new world of build to rent (where it is possible that units could in the future be retailed as long leases) institutional landlords will become the norm. Leasehold owners will rightly expect the same level of attention to quality and service that the build to rent revolution will routinely have to deliver in a highly competitive environment.

So, prevent the application of short term doubling clauses, set a universal review mechanism and index. Limit starting ground rent values to a percentage of the apartment values as agreed with a chartered surveyor and you have created a transparent approach that will actually enhance the value of a scheme and allow residents to purchase the freehold at a reasonable price if they choose to do so. 

Institutional investment in residential property is a good thing, it is transformative and should be encouraged.

Domestic Violence and the Property Manager

At a recent IRPM Seminar, Gudrun Burnett of the Domestic Abuse Housing Alliance (DAHA), told the audience, that around two women a week are murdered in domestic abuse cases in the UK.  There remains a staggering number of domestic abuse cases that go unreported within our communities and DAHA aim to highlight actions that housing professionals can take to encourage them to report incidents and to make available helpline numbers and take sensible preventative actions.

Some of these include simple things like including helpline numbers on noticeboards, talking to the people reporting regular neighbour noise issues and separating nuisance noise from genuine issues involving violence, coercion and bullying in the home. Community engagement is key to dealing with this issue, an issue that remains largely hidden because of our reluctance to report it or to get involved. However, early intervention can be a genuine lifesaver for someone.

Instead of demonising noisy neighbours, sometimes it is essential that we look beyond the disturbance and take more responsible actions to understand the underlying causes and deal with them. Creating communities is increasingly cited as a part of developers and the property managers ambition - good communities will look out for each other, set standards and deal with bad behaviours. This is a virtuous circle that we should all be encouraging.

 

Nationwide Domestic Abuse Helpline:  0808 2000 247 (Freephone)

DAHA: https://www.dahalliance.org.uk/

 Guidance leaflet here:  https://www.irpm.org.uk/docs/members/1ea3638b8c0b0a42284da2aff0562d3e7c0d241.pdf

Why Managing Agents must be a part of Placemaking strategy.

What is Placemaking?

Place making is not a new term, it has been around for many years but it is being used more widely as regeneration schemes and very large estate schemes have come to the fore in recent years. Placemaking puts the community at the heart of a scheme and requires the collaboration of all stakeholders to create places that people want to live in, contribute to and self-govern. Principally it is the combining of a wide range of knowledge and skills to make better places and environments in which to live and work.

Why is it important?

In the UK there remains a significant housing shortage that is driving significant regeneration projects. In order to ensure their success, past mistakes need to be avoided - density, lack of infrastructure, poor management planning and lack of resident engagement have all resulted in failed developments over many years. Long term management planning is essential to ensure safety, security and economic viability of large complex developments. All parties should be certain that fairness and the balanced allocation of costs is at the centre of the management plan. Developments need to be connected to services and the wider community and to be alive to local culture and tradition.

Who does it involve?

Placemaking involves all stakeholders including the local community, the new community, planners, architects, developers, property managers, asset managers, estate agents and lawyers. Managing Agents have an important role in assisting planners and architects to design viable long term solutions that allow the community to self regulate their environment. All large communities need facilities and central meeting areas, open space and play areas. Managing agents have real experience of what works and what does not and in particular what will stand the test of time economically.

 What does it change?

Placemaking is changing the way that we will design, interact and share space. Creation of real pride and sense of belonging is important in ensuring that schemes will stand the test of time, generate best value for investors and demand for homes. Public open spaces, the provision of services, transportation, running costs, cyclical costs, security and safety are all important considerations at the outset. Considerations such as traffic restrictions, cycle paths, central squares, secure designs, kitchen windows overlooking play areas, recycling and sustainability are all in the mix.

 The key components and how does a managing agent play a part?

Transparent, collaborative management styles, partnership with developers and the community. Managers need to demonstrate real expertise and availability and willingness to share and participate in community engagement and should be the binding central factor around communications with all parties.

Agents need to demonstrate measureable service delivery that is enshrined in contractual terms and where possible rewarding success and penalising failure. A detailed community management plan is essential and needs to be provided and explained in detail and amended as and when necessary to meet the needs of those living and working on the scheme. Managers should facilitate community involvement, provide advice and information and where necessary training to ensure that communities can make the right decisions.

 Summary

Successful placemaking enhances environments, improves values and future investment in the locality. Managing agents are long term community partners in this process and will be involved long after developers and other experts have moved on. It is important therefore that they are included in the early stage consultation and design and not selected as an afterthought.

It is up to agents to maintain collaboration between the communities long into the future, ensuring that the physical environment remains at its best and that people choose happily to live within. That is no easy task and one for which the residential management sector needs to adapt to rapidly if it is to keep pace with the social sector.

Commonhold Mark II - what it might look like...

My notes from ARMA 2017 Conference Experts Panel on Commonhold Mark II

Why was Commonhold Mk I not adopted?

• No premium - unlike leasehold
• Costs of set up higher to start with
• Risks of new untested tenure
• Didn’t work where there was an ultimate freeholder
• Worked poorly with multiple service charge schedules
• Limits leasing to under 7 years - big issue for HAs and shared ownership models
• Mortgage support very slow in arriving
• Difficulties during development period - particularly with handover on large developments
• Developers naturally conservative

What could Mk II look like

• Completely new piece of legislation
• Will deal with multiple service charge schedules
• Will allow for shared ownership models (ie longer leases)
• Will be a big opportunity for exceptional managing agents
• Just as B2R (PRS) will be disruptive to the managing agent's model, Commonhold will be to.
• New radical approaches to customer service. Completely responsive and proactive rather than passive and reactive - hiding behind legislation.
• This will require customer measurement at every interaction…
• Devaluation of the existing leasehold market must be avoided at all costs

But

• Potential for the creation of a two tier market is a concern… 5 million existing leaseholders potentially prejudiced
• Therefore if leasehold to be abolished - there must be a generous sunset clause  - say 20 years
• OR some compulsion to switch rather than voluntary as the per existing system
• It will not be a panacea for existing management issues - many of those exist worldwide

• It will be outside all currently relied on statute - ie no test of reasonableness, no S20, no limit on contracts etc.
• Issue with lack of engagement from unit holders…
• Doesn’t work for shared ownership leases - big issue for HAs
• No checks and balances for individual unit holders around costs, value for money and efficiencies
• It will still have its fair share of bullies, crooks and swindlers
• Will we be tackling unfair practises in Commonhold? - yes, within 20 years.
• Lacks security in the event the Commonhold is wound up

Opportunities

• But it will give owners real control
• It will add another tenure type that many owners will find attractive as an ownership solution
• It will give managers the opportunity to be creative with customer engagement, procurement and big data.
• It will simplify the onerous and complex statutory framework in which leasehold operates

Some Advantages of Leasehold

• There are some…
• Established framework woiking within defined legislation and principles of transparency, reasonableness and compliance
• Third party landlord to kick
• Landlords are a safety net when all else fails
• Legal framework, developing case law and access to FtT
• Expertise available and
• Generally, management is in the hands of experts
• Increasingly institutionally owned - e.g. pensioners of the UK
• Reputationally driven nowadays
• Funding/income for small developers
• Rights to extend lease and RTM already enshrined
• Most new ones have RMCs
• Works where there are complex ownership issues, mixed tenures, mixed uses etc.
• Abolishing it completely would be problematic with the current system of land ownership
• Easy to fix aggressive ground rent clauses.
• Developers have already stopped the unreasonable practise of building leasehold houses (where were the lawyers?)

Despite everything you hear, standards continue to rise in leasehold management and have risen significantly in recent years. Especially around compliance - which is particularly important given recent events.

My Residential Management Predictions for 2018

AI, AI, meet your new Property Manager...

1. Full overarching regulation is coming, but slowly. Expect another two years before any primary legislation arrives, it is a long process and, frankly, only primary legislation will go anywhere near the type of regulatory oversight, consolidation, simplification and improvement of existing leasehold principles that is required for any changes to be meaningful.

No one will be surprised at the outcome of the recent consultation; consumers call for an end to feudal leasehold, managing agents welcome more regulation. Yawn.

The real solution lies in pushing professional managing agents, removing a small number of rogues by creating some strict membership requirements and increasing barriers to entry. Add to this some real education and information for all stakeholders.

For every story of mismanagement, rip-off fees and criminality there are many thousands of success stories, added value and risk mitigation. As an industry our PR is appalling - start telling the good stories and shouting them loud. Many built environments are positively enhanced by the activities of managing agents. Why are we scared to shout about it?

2. More leasehold flats will be built - leasehold is not going away anytime soon (we have seen the back of houses though). Multi- tenure developments are difficult for HAs without the leasehold system. This is because leasehold works well with shared ownership and we all know that shared ownership is growing exponentially. Whether or not that is a good thing, I will visit in a later blog.

Additionally, look at who is investing in freeholds. Pension funds (benefiting a large swathe of the population) with a long term interest in looking after their assets and protecting their reputation. This is resulting in a sea change in the way that property is be managed - more accountable, more transparent, more community driven and therefore more valued. High quality oversight has arrived already, regardless of any future additional regulation.

3. Your clients are changing. Many of them are local authorities or housing associations or hybrid niche developers working with the aforementioned. They have very different ambitions for their customers. They see themselves as placemakers and want to remain embedded in their communities for many years. Managing agents need to be changing too. Some are.

4. Disruptors to leasehold management - it's not just pressure groups, all party parliamentary groups or negative press coverage - its the new approaches to management that will be driven by new entrants into PRS, student and multi tenure housing including hoteliers, venture capitalists, pension funds, US multi family providers. They are not like traditional landlords. They will not behave in the received way. This is a good thing.

5. Community Engagement is the new buzzword! But actions speak louder than words. Expect to be asked to evidence your actual, real, community activities.

6. Housing Associations - work with them? Ignore them? Watch them fill your space? They are better funded and more sophistcated than you ever imagined and will represent a significant part of the future residential management market/opportunity. Get to understand them. How can managing agents improve their relationships with HAs?

7. Commonhold Mark II - A revisit to the original Commonhold and Leasehold reform act is long overdue. Some straightforward amendments could make Commonhold more workable. But, without an element of compulsion or reward, it will remain a distant second to the established system for decades to come.

8. The price for fully compliant, transparent and responsive management is going up... customers will pay for accountable and expert management if they can see measured results.

9. PRS - it's big, it's here, it needs expert property managers - expect owner/developers to come raiding your team for the best soon.

10. Artificial Intelligence - we operate in a people dependent sector. How much do you think could be done by AI? Have a good think about this - a huge percentage of what we do relies on accurate input and output. Robots do processing better, they are always correct and can work 24/7.

Early adopters will steal the market.

11. Grenfell - When I was a kid my Nan lived on 21st floor of Stebbing House, just down the road from Grenfell Tower.  I spent my summers living there and working as a City foot messenger throughout my teens. I was also at school and in the same year as Eddie Daffarn, the blogger who warned of an impending disaster at Grenfell and was, allegedly, ignored.  I am also a property manager and so, like many, I feel a connection to this tragedy, the saddest and most significant residential tragedy in my lifetime.

Have I ever brushed off a cry for help from a resident because it seems to be absurd, exaggerated or unlikely to transpire? Would I do so in the future? No. We must ask ourselves the Grenfell question every time someone suggests something unlikely is possible.

In future agents must be appointed principally not only because of their professionalism and expertise but also because they demonstrably listen to and reflect upon comments and concerns from within the communities whose homes they manage. Sadly this has been the worst way to have to recognise the importance of professional property management and its impact on our built environment.

I would hope that this industry's destructive race to the bottom has now concluded. A more thoughtful, intelligent future beckons.

DCLG Update

Just after I make my predictions along come the DCLG with a statement that includes: making certain that ground rents on new long leases – for both houses and flats – are set at zero.  I had been told that this might happen (by someone close to discussions) but found it hard to believe - after all this will potentially impact the value of the existing leasehold market and has damaging consequences around risk and costs. However the detail is a long way from complete and the statement includes reference to exceptions that are being discussed with the industry. Surely controlling starting ground rent values and reviews, along with promoting a workable commonhold solution as an alternative route is the way forward? 

Managing Agents and Housing Associations - Working Together

Hi Everyone

Many of you will be aware of the work we are doing trying to address the issues that Housing Associations have working with Managing Agents and vice versa.

The attached report is the initial draft of a document which will provide the foundation for subsequent work on:

 ·         A New Development checklist (July 2017)

 ·         Final Report (August 2017)

 ·         NLG Good Practice Guide (September 2017)

 ·         Joint Code of Conduct (November 2017)

I hope you can find the time to review the report and give feedback by Friday 4^th August please?

NB - We are looking for the final report to include Case Studies and other examples of existing Good and Poor Practice in this area. What has worked in such relationships and what is the impact when arrangements are particularly bad? Please let me have any such examples which will be helpful in promoting sign up to the final Code of Practice

Happy of course to answer any queries.

Regards

Alan Wake FIRPM and David Clark FIRPM

              

alan@castmediagroup.com

davidclark@mainstaygroup.co.uk

A guide to ensuring the best results for all stakeholders when working on leasehold and multi tenure schemes with Managing Agent and Housing Association input.

Executive Summary

There is no avoiding the fact that Managing agents (MAs) and Housing Associations (HAs) are increasingly working together on multi tenure schemes to deliver service charge management to their respective customers. HAs are often the largest single investor in a scheme and see MAs as a 'one size fits all' approach to a complex problem.

Often the MA will have overarching responsibility for the collection and expenditure of the service charges in accordance with statutory and regulatory requirements. HAs will either pass these costs on to their customers or make payment themselves. The cost of service charges for HAs is significant with many HAs now paying out £millions per annum in variable residential service charges and variable estate rent charges.

Too often there has been little communication between those who will directly manage the properties and no training or understanding of how these charges arise. The first communication is therefore a MA chasing payment or the HA asking for detail.

MAs cannot operate effective management without prompt payment of what is often a large proportion of the service charge contribution. HAs cannot pass these charges on to their customers or accounts teams effectively without a detailed understanding of how they arise. Service charges need to demonstrably represent value for both parties.

This report aims to pull together the thoughts of both parties and come up with some helpful pointers to working together to improve outcomes. Typically, the issues outlined in this paper will tend to occur on larger and more complex developments, but understanding them will improve relationships at every level and on all types of mixed tenure development.

The need to work together

Managing agents have been managing service charges for many years but have poor understanding of the aims and purpose of HAs. They simply carry on doing it “by the book” which can mean they will chase hard when there are outstanding charges.

HAs though, do not necessarily pass on service charge information to their customers who want to understand what it is they are paying for. There is also a disconnection in both organisations between property managers delivering frontline services and those in development departments doing the initial deals.

However it is clear that MAs and HAs are working together on many thousands of schemes ranging from small housing developments through to multi tenure mixed use schemes with many hundreds of units and a high degree of complexity.

There is willingness and an opportunity for both sides to work more closely, to benefit greatly themselves and to importantly improve services to customers. HAs have also become significant developers of new housing stock of all tenures. They can be profitable customers and allies for MAs.

·         Double charging

Managing agents charge a management fee, normally on a per unit per annum basis (questionable use of a percentage of expenditure does occasional resurface but is thankfully rare and is definitely contrary to RICS and ARMA guidance). This fee can start to look unreasonable when the HA is also recovering a management fee or admin fee from its customers. HAs need to be there at the outset when these fees are being agreed.

Managing agents need to ensure that they do not load all of their management fee onto, for example, the estate charges, when there are also heads of charge for blocks and parking. The net result of this is that the HA receives a charge that does not allow for the fact that they are managing the common areas of their own block. Management fees need to be allocated to each expenditure head to ensure fairness at every level and reduce the possibility of double charging. This requires good use of service charge schedules and careful drafting of lease terms.

There is some further useful comment on these issues within RICS Guide to Managing Mixed Use Developments.

·         RMCs and HAs

Residents' Management Companies (RMCs) allow developers to pass the responsibility for service charge management to a company whose members are fundamentally the leaseholders. This is a perennial problem for HAs who often hold head leases but in some cases are only granted one vote or who grant leases and have a vote for each, allowing them to control the RMC with potential for confusion and friction. Very careful consideration needs to be given to this element of the corporate set up. Conversely, HAs must engage with RMCs and not take a back seat.

If the HA is purchasing a significant number of dwellings does it make more sense for HA to be appointed manager within the lease or to take a headlease of the whole estate? Or should the HA consider taking informed control of the RMC?

·         Education

There is a requirement to ensure that HA customers are advised in detail about how charges will arise and be recharged. The more information on how charges are derived and how the lease allows for recovery should be provided by the MA and shared by the HA. Service charges can be complicated and the associated services opaque. There is a duty on all parties to ensure absolute transparency and plenty of advice and education in their delivery.

By way of example, Average service charges on new build in London now exceed £2,700 per unit. This means that an average wage earner will be paying around 10% of their pre-tax income contributing to services that remain largely invisible. (Guardian Money March 2016)  It is essential that MAs and HAs combine their services to ensure that customers receive high quality information about how services are paid for and delivered and how they benefit the asset value and the community.

Development departments need to understand the relationship between good design and management costs.

Collaboration and partnership

·         Understanding each other's position

Too often the relationship starts when the first demands for service charges are sent to the HA by the MA. Often this will be a demand for each and every lease held by the Association. Modern leases normally demand in advance so the charge can often be significant and prior to receiving any services.

In order to avoid misunderstandings there needs to be a constructive discussion prior to completion so that each party has clear lines of communication and details of how costs are decided and collected are both understood and agreed. It is not unreasonable to provide a summary of the costs in advance and to total the demand for the period. However this requires an agreement to work closely together at the outset.

·         Have senior level interaction

Managers and directors need to set the standard. This requires discussions agreeing what is to be reasonably expected.

For example: MAs should not load all of their fee onto estate charges if these are the only charges met by the HA or its' leaseholders. Charges can reasonably be split between different schedules. Building charges and estate charges should share appropriate proportions of the management fee - thus avoiding double charging when the HA add their fee for managing the building.

·         Working together, joint approaches, partnership, collaboration

Developers really want this too. The best managed schemes are notably partnerships between the main stakeholders. Collaborative approaches deliver much better outcomes and protect and enhance asset values which in turn benefits the community.

·         Training at handover

Generally MAs will be happy to meet with HAs and provide some basic understandings of the specific construction of service charges on a scheme and how this links in to the leases and collection of funds.

Starting early

·         Be in the room!

Developers generally want an early exit. They will set the service charge with a managing agent that allows them to sell units, minimise their voids contribution and exit smoothly. This will not necessarily always be in the interests of the HA or Good Practice. Solicitors for the developer will set up a corporate structure that allows easy handover to an RMC and/or a potential sale of the reversionary interest.

Does this represent an opportunity for the HA? Developers generally want rid of the freehold and want to sell affordable units – why not make it a package deal (subject to available funds)?

What are the HA rights to be? Will the HA be shareholders and/or directors of a RMC? How will your vote or votes be allocated? Will the freehold be sold without your consent, what is the ground rent clause - does it create a future issue?

Is the scheme manageable cost effectively? Does the HA really want 24/7 concierge services for example? Are the proposed systems the most cost effective in the long term? Are the replacement costs and life spans of plant reasonable? Who has the responsibility for insurance - does it sit with the landlord or with a RMC?

·         Bring your experts to the table

If you are investing in a significant number of units then be at the table to influence the lease terms, the corporate structure and the service charges and to maximise opportunities. This means coming to pre sales meetings with your experts, including your lawyer and property manager.

·         Understand what outcome you desire

What do you anticipate to be a fair and reasonable level of charges? Work closely with the managing agent to achieve this. If there are to be separate blocks/entrances is there a costs benefit to delivering services internally or will you benefit from any economies of scale delivered by the MA?

·         Work with any appointed MA.

It is likely that they have experience of setting up management services with the developer and will welcome your input and make adjustments and offer advice. The future success of the scheme is, at least in part, dependent on this relationship.

Leases, corporate structures and voting rights

·         Must suit all parties - RMCs, headleases, commercial elements, Special Purpose Vehicles etc., can all lead to complex corporate structures that will impact how you can interact with the overarching development plan.

·         RMC or no RMC - who shoulders the risk? Is this an opportunity being missed by HAs? RMCs give leaseholders control of budgets and of how management is undertaken but it can be difficult to find directors without a degree of compulsion. Will the RMC properly represent all occupiers including fair rented and private rented tenants and shared owners? In multi tenure schemes will all parties have a balanced influence?

·         Residents' Association - Consider not having a RMC where this is likely to create risks as above or where a golden vote will allow one party to overrule any decision. Residents' Associations can be formally granted by the landlord to give all parties a fair right to consultation and transparency.

·         Voting Rights - one size does not fit all. Where there are HA customers and the HA takes a headlease to a specific block it is quite possible that they will have sufficient voting rights to overrule any decision of the RMC on the broader scheme. Understandably MAs will look to avoid the creation of such voting rights although this can avoid inertia and issues such as a lack of volunteer directors. Certainly it is worth a discussion between the parties at the outset..

In complex schemes service charges can be a significant element of disposable income and clear informative advice on service charge structures, budget management and ongoing controls need to be clear for purchasers. For new purchasers, avoiding cost rises in early years requires an honest appraisal of the management costs from the outset. It is important for parties to recognise and discuss 'commercial challenges' particularly around the point of sale.

Service charge heads and allocation

·         Understanding the matrix and the schedules is key.

How are the charges to be split? Is there an equal estate charge? Are the units split by floor area? What does the lease say? What will be easiest to explain to leaseholders and what is equitable? It is very difficult to row back from the position created once the service charge matrix is completed - one party will always be disadvantaged.

If the matrix is not fixed within the lease there is always potential for challenge and the F-tT imposing alternative apportionments. Juggling certainty with flexibility, to take account of things changing in the longer term, is a delicate balance. This can be particularly tricky where the development also includes commercial units.

·         Why do we contribute to some things and not others? Who decides?

Generally the managing agent will work with the developers' lawyers to come up with a service charge framework that is as equitable as possible for all parties. This means ensuring that everyone makes a contribution to those services from which they will benefit. These will normally be wrapped up in an estate charge that will be apportioned in accordance with the agreed percentages in each lease. There may be charges made equally - such as a parking charge to those with a space. There may be charges for those that benefit from communal services. These may be apportioned in a way that reflects the availability and amount of benefit received (3 pronged - Availability benefit and use is a common expression in case law and particularly within commercial leases). The opportunity for creating complexity is myriad and unless HAs are at the table when these decisions are made they will be stuck with them and probably will never fully understand them.

·         Avoiding complexity

Creating a service charge matrix and budget can be a balancing act between over complexity and the creation of a fair allocation of costs. Simplicity is always easier to explain but there are many mixed schemes running with 20 plus heads of charge and significantly more line items.

·         Understanding Heads

Service charges on complex blocks can have several schedules for example:

o   Estate Charges - All parties including commercial tenants and houses are likely to contribute

o   Buildings Charges, internal - those leasing units in managed buildings on the estate will contribute if they use the internal common areas

o   Buildings charges, external - all building users including those such as commercial using their own entrance

o   Parking Charges - those with the benefit of parking only

o   Staff costs - who benefits from onsite staffing?

o   Commercial units - don’t benefit from much of the internal buildings charges but may cause more wear and tear to the estate as a whole

o   Insurances

There can be many others where costs are allocated to those who have availability, benefit and use. Understanding how the service charge is created and allocated is key to understanding how charges arise.

·         Capped charges

Capped charges are unusual but not uncommon in some regions and still surface from time to time as part of the planning requirement. Effectively this can result in the wider community subsidising the service charges for HA customers in perpetuity. A clear message around this needs to be agreed in advance and lease terms need to be very explicit about recovering additional costs from the wider community.

·         Voids collection policy

It is essential that there is an agreed voids policy. Where units are completed but unsold charges will arise. Developers often agree how void charges will arise and when they will be paid, whether they will include sinking fund costs and how they will be recovered - particularly where a lease has yet to be granted.

Demanding Service Charges

·         Understanding demand requirements

Demands are raised in accordance with the lease. There is no alternative available without undermining the ability to ensure collection of essential funds. This means that you will get a demand for service charge for each and every lease granted unless you agree sensible alternatives. Whilst individual demands may be a requirement to meet lease terms, no one is barred from creating a summary invoice where required and MAs should take a pragmatic role to assist the HA in collecting from their customers.

·         MAs understanding HAs requirement for simplicity

Nothing is less likely to meet with prompt payment than a pile of unexplained demands for 6 months service charge money up front! MAs must work with HAs to agree appropriate and sensible ways of billing. Whilst it is unusual to step outside of the lease terms (this risks collection of bad debts), there is nothing to stop payment in advance followed by monthly instalments by standing order. It requires a dialogue between the parties.

·       

           Service charge funding is critical

MAs cannot always wait for service charges to be paid in the next payment run. The terms of payment are dictated by the leases and these are designed to ensure that services can run smoothly on a day to day basis. All service charge monies are ring fenced in trust for the particular scheme/schedule. MAs cannot commit expenditure until and unless adequate funds are available for the scheme.

Where HAs are passing on the charges for recovery from leaseholders or shared owners then the delay may prove critical for funding:

o   Is there a requirement for the HA to fund charges up front?

o   Can the MA deliver demands earlier?

o   Can demands be made directly to leaseholders by MA?

o   Is it appropriate to share that information with the MA?

o   What are the credit control arrangements for late payers?

Payment for major items, such as insurances and annual contracts benefit from single payments rather than periodic. Cash requirements are not generally smooth. Consequently failure to pay service charges on demand can result in higher costs or cessation of critical services. Generally the HA has an important role in ensuring the smooth running of a scheme since they often have the most units. Lease terms commonly provide for annual or half yearly payments to ensure funds are available at the start of the year. This is in contrast to the typical HA leases / procedures of collecting service charges monthly and HAs often need to understand how they are going to forward fund when offering their own tenants more generous payment terms.

MAs need to be aware that generally HAs are happy to pay, often funding the charges themselves prior to collection from their customers.

·         S.20 consultation

Under the Landlord and Tenant Act 1985 (as amended by S151 of the Commonhold and Leasehold Reform Act 2002) Landlords must consult over qualifying works and long term agreements. This is an essential tenet of residential leasehold management and it is important that parties to a lease understand the importance of consultation and reading and responding appropriately. Details can be found here: http://www.lease-advice.org/advice-guide/section-20-consultation-for-private-landlords-resident-management-companies-and-their-agents/

Since that guidance was written, the upper Tribunal has determined, in the case of Leaseholders of Foundling Court and O’Donnell Court v London borough of Camden, Allied London (Brunswick) Limited and others [2016] UKUT 0366 (LC), that it is for the party which is originating the works to consult with the party who is ultimately responsible for payment of the service charge.

This will most commonly mean that the MA will need to consult with the HA’s service charge payers as well as with the HA themselves. This presents practical difficulties for the MA who is unlikely to have any direct contact with the HA’s sub-tenants and most likely will not even know who they are. The Upper Tribunal suggested that the most appropriate practical solution is for the MA (on behalf of the superior landlord) to request the information be provided by the HA (as intermediate landlord). If the HA  does not assist it may face difficulties in recovering contributions in excess of the triviality threshold (£250 or £100 p.a.) from its own tenants even though its own contributions may not be capped at that level.

Both parties therefore, need to work together to ensure that all tenants are fully consulted and all observations/nominations are received, and had regard to, by the party originating the works.

Communication

Agree lines of communications - Each party should establish named individuals with whom they can discuss processes and iron out problems.

That means finance teams and property managers on both sides need to have a dialogue.

People come and go - there needs to be processes to ensure that lines of communication remain open.

Most of all, both parties need to demonstrate accountability, transparency and good governance. These things only come by regular communication and agreed processes.

Use technology - the increasing use of portals, social media and texting give us new ways to communicate messages to our customers.

There is evidence of success in larger organisations when HAs and MAs have appointed specialist officers to deal solely with the other party on all MA/HA issues. Of course this needs a certain level of scale.

Conclusion

·         Managing agents and housing associations generally want the same thing - to deliver excellent value for money services to their customers

·         HAs must be in the room to influence the developer and the managing agent

·         Agree other avenues of engagement and processes and communicate regularly

·         The development department must talk to management department when looking to invest in large schemes - cost of management must be factored in to appraisals

·         Be pragmatic and flexible but ensure a fair deal for your customers

·         Build trust and look to create real lasting partnerships

·         Information is key

This is a growing opportunity for both parties - not a threat. HAs are growing and a significant proportion of that growth will be through leasehold flats and freehold houses with an estate charge. This represents an opportunity for those managing agents prepared to work closely with HAs, and for HAs who are prepared to put time in to ensuring that their investment is properly considered by the MA and the developer from the outset.

MAs are much more likely to be the developer moving forward and where they are not managing themselves they need to make informed decisions about the MAs that they engage.

Thanks to Alan Wake, Jeff Platt, Caroline Millington, Abbie Gregory, Graham Bennet and others who have lent a hand along the way including LEASE who held the initial roundtable discussions that led to this paper.

Definitions:

HAs - Housing Associations, Social Landlords and any charitable provider of low cost housing

MAs - Managing Agents, generally in the private sector who specialise in collection of service charges for long leasehold properties or estate charges on freehold houses with common areas.

RMC - Residents' Management Company

TA - Tenants' Association

F-tT - First-tier Tribunal

Reversionary Interest - An interest in the freehold or head leasehold held by a landlord that crystalises on the expiration of a lease or leases. Normally this will generate an annual rent or ground rent.

Other Useful documents/websites:

ARMA Guide to working on mixed tenure developments - www.arma.org.uk

Lease Guide to S.20 Consultation for Private Landlords, RMCs and their Agents www.lease-advice.gov.uk

 RICS Guide to Managing Mixed Use Developments 1st Edition 2012. www.rics.org.uk

www.irpm.org.uk