Massive Backwards step for Managers, Landlords and Consumers

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If you manage residential leasehold property then you cannot have missed the furore that is being generated by the case of Phillips v Francis (No. 2) [2012] EWHC 3650 (Ch) the judgement on this long running case having been handed down in December 2012.

I am not going to dwell on the details of the case - interesting though they are - you can search them and read the full detail easily on line. It is the ruling relating to S.20ZA (2) Landlord and Tenant Act 1985 (this section defines 'relevant' works) that concern us here and in particular what activities require a S.20 consultation notice. The judgement states as follows:

As the contributions are payable on an annual basis then the limit is applied to the proportion of the qualifying works carried out in that year.  Under this legislation there is no ‘triviality threshold’ in relation to qualifying works; all the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself. (my emphasis)

Thus we are advised that, for the last 27 years, we have been doing it all wrong and that the existing case law of Martin v Maryland Estates, relaied upon widely, is incorrect in separating out disparate sets of work.

It has always been a concern of the LVTs that landlords do not split up related works in order to avoid consultation. However this case appears, on the face of it, to take that requirement further in that the works do not have to be related in any way. All qualifying works are to be aggregated for the purposes of the consultation and there is no longer any separation within a service charge year of qualifying works. As such works currently regarded as falling below the 'triviality threshold' are now to be included if the aggregate total exceeds £250 pa. Of course this will effect almost every scheme, every year. It will include reactive work such as changing a light bulb or repairing a lock. It will include contingencies, overruns and contract variations. 

In an attempt to stop landlords splitting related works to avoid S.20 (a perfectly honourable intent) the court has created the unintended consequence of generating notices across all qualifying works regardless of how they are to be funded and regardless of whether they are related. 

Let us say that you carry out a repair to lifts that requires consultation because at least one flat will contribute more than £250. You serve notice and proceed in accordance with legislation. Later in the year you redecorate a corridor. In itself it does not require consultation since no lessee is required to pay a contribution of more than £250. However, you have already exceeded the limit elsewhere and thus, now, further consultation is required. And so on and so on. 

This then applies to all qualifying works in year if you are likely to exceed the threshold. What to do? I am not sure. Can you serve a speculative notice? No, I do not think this is possible on the basis of an estimate. Perhaps take all budgets to LVT for pre approval of expenditure? This might give the landlord comfort but would quickly inundate the tribunal and cause delays. This case will increase workloads, will increase costs and will confuse leaseholders. Fact.

We can but hope that a new decision is reached that turns this judgement around or clarifies it further and that in the meanwhile the LVT takes a very loose and pragmatic approach to interpreting it. I am still reading comments and forming a view on what actions to take. I am hopeful that clarity and common sense will prevail and that news guidance will follow.

Fingers crossed everyone, because as it stands the spirit of S.20 consultation is badly broken and the consequences are significant.

My Predictions for 2013

Quite a few of you read my predictions last year so I take it there must be some real interest in predicting what is going to happen in the viscerally exciting world of residential leasehold property, so here goes...

1. ARMA Q will be agreed with all stakeholders, finalised and be ready for lift off before the year end. ARMA membership will continue to increase as non-members take up the opportunity for a genuine arms length regulatory regime. It will become difficult to justify not signing up as membership races past 300 companies.

2. If you can't sell 'em, rent 'em! The private rented sector (PRS) has really started to take off (again) and genuine private sector 'build to rent' properties are actually in development. This must present an opportunity for those managing agents who have added asset management and portfolio management to their existing skills.

3. Dealing with the differing needs of Landlords (or buy to let investors) and their sub-tenants as well as leasehold owners living on site will continue to be a challenge for every managing agent. It is difficult not to have sympathy for owners living on schemes that are increasingly let to tenants with little (or less) interest in maintaining the quality of common areas. Interests are not aligned which always causes dispute.

4. Big regeneration schemes will start to go live, promising a mix of developer, investor and social interests and a mix of tenures. Interesting approaches to management will be flushed out as requirements for Community Interest Statements meet the need for commercial returns. As with large mixed use schemes, quality standardised management plans from the outset will be key to success.

5. I think we will see an even bigger push towards energy saving strategies this year, including the introduction of phased switch over to LED lighting which is fast becoming the quickest way to find real mid term cost savings as well as delivering reduced carbon footprint - win, win then.

6. Gala Unity v Ariadne Road RTM - this Lands tribunal case has an important impact on RTM of single blocks or parts of an estate. It is suggested that the parties will come to some informal 'arrangement' over those areas of management no longer covered by the leases because of grey areas arising when one part of a scheme opts out. I think this will have some serious implications for RTM's, Landlords and their agents. Looking forward to the first test of reasonableness under such circumstances at LVT.

7. Like the one above, a number of cases in the courts currently and some that will arrive at appeal this year seem likely to turn received wisdom on it's head in relation to consultation, interpretation of leases and what is recoverable as a service charge - there appears to be an almost concerted effort to shake up the leasehold  sector - but at the moment it looks like it will not be for the better, simply adding more confusion and opacity. There will be some lawyers winning whatever. I will be writing in detail about this later in the year.

8. Is this to be the year of office to residential conversions? Will it lead to a new revitalisation of our city centres, some of which have been at a standstill since 2008? There is evidence of planning applications rising for this newly encouraged  conversion opportunity. I suspect that these conversions are not cheap and, as ever, banks and liquidity will be key.

9. I anticipate more partnership and collaboration amongst agents, as specialities and regional strengths make working together more likely to 'delight' clients than struggling to do it alone. This opportunity seems to have been taken in many other industries in recent times and I think it will work well in property management.

I round up by stating that the coming year will not be easy for agents, or their clients, or their customers. With no sign of relief from the relentlessly difficult economic climate, agents have to work harder and harder to demonstrate the real value of their services, and leaseholders, understandably, want to extract as much value for the least outlay. I think great new approaches, innovations and pioneering models should and must arise from this scenario - I will go so far as to call it an opportunity. Fingers crossed I will be reporting on one of these later in the year. Watch this space!

Regulation is coming - but it has a cost.

As ARMA Q proceeds through consultation it will be interesting to see who really reads it and makes meaningful comments on its proposals. So far I have heard from no-one outside of other managing agents who broadly support the proposals but have concerns centred around some of the detail.

As it stands, ARMA Q will require every managing agent to detail annually, to its client and all leaseholders, every bit of income derived from its activities on their behalf, including any associated companies. This will, of course, include any insurance commissions. There are well established precedents for what is reasonable for the insurance work that managing agents undertake for their clients, but what of other areas from which many derive an income?

A good proportion of agents provide other services such as cleaning and concierge, health and safety and various maintenance services, not to mention lettings and estate agency services. Will they be required to reveal margins on these services by block? Surely that would make it impossible for them to compete fairly with other external service providers who will not be required to reveal their margin?

I also include in this any national procurement agreements that results in a payment to the agent - even if this is dressed up as a consultancy fee. How is it intended that this is revealed on a block by block basis? How does the agent prove that it represents value for money for each and every block? What if the agreement has a confidentiality clause?

An example would be the sort of agreement that agents have for the purchase of utilities. Because they can buy these for a huge number of blocks they are able to negotiate procurement agreements that give them a fee and benefit their customers because of their buying power.

Clearly for customers who have a poor record with insurance claims or a high level of engineering maintenance issues, national procurement models can provide huge benefits. If agents stop these agreements then there is every possibility that, not only will the contract costs increase universally, but that the agents' management fee will need to go up too.

Bulk purchase, procurement activities and regional/national agreements have a significant benefit to customers, providing additional value and protection of a large syndicate/portfolio. They are universally used throughout the FM industry to achieve best value and they cost time and money to set up and administer. For example: Lift contracts are often set up by the developer as part of the procurement of lift installation. As a consequence the leaseholders may inherit an expensive long term agreement - which effectively compensates for driving down the installation cost. Managing agents with portfolios of lifts to maintain can use their buying power to renegotiate these contracts - sometimes halving the costs. This process requires hard negotiation and agents should not be ashamed of taking a fee for delivering it.

Transparency in the regulation of managing agents will require that all of this activity is undertaken openly and that is a good thing, but not if it leads to agents being unable to take a reward for their efforts. Many agents are uniquely qualified and they work hard to achieve accreditations and compliance standards. They may employ specialist risk assessors, and engineering and asset management specialists. They may have a range of highly specialised skills that add value and are generally only available elsewhere at a cost.

Independent managing agents provide an essential service. Make sure that all income streams are clear in your contractual arrangements with them. That way, and that way only, you will receive best value. There is a wide choice of service levels available at a wide range of prices - chose the one that suits your development and look closely at  what would happen in a genuine emergency.

Most importantly - make sure your agent is going through the ARMA Q accreditation process, it will be the only independent accreditation and that might count for a lot when there is a major issue to be resolved.