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:
I hope you can find the time to review the report and give
feedback by Friday 4th 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:
Lease Guide
to S.20 Consultation for Private Landlords, RMCs and their Agents www.lease-advice.gov.uk
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