ESOS Regulations are here - Are you caught?

No avoiding the obvious...

In December 2015 the Energy Savings Opportunity Scheme comes into force and is mandatory. This is a European regulation that will require all firms employing more than 250 staff and/or with a turnover of more than 50m Euros to identify cost effective savings measures and carry out ESOS assessments every four years.

Crucially for most managing agents you will qualify if there are more than 250 employees within your wider corporate group - so if you are a subsidiary of a large organisation you will need to act now or ensure that your parent is acting.

Also, importantly for some, ISO14001 will not qualify you for ESOS. For this you will need to undertake ISO50001.

In essence ESOS will require you to do three things:

1. Measure your total energy consumption.

2. Conduct energy audits and identify efficiencies.

3. Report compliance to the Environment Agency.

The scheme is estimated to bring £1.6billion of energy saving to UK firms by 2030.

Full details can be found here:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/351158/ESOS_Guide_FINAL.pdf

Why providing good information upfront to your customers is not enough.

"Blah blah blah" said the fourth previous owner as he handed over the keys to my Triumph Spitfire 1500 in signal red. I was 23, it was my first sports car. It was shiny, the sun was out, the hood was down.

Trunnion Bearing - How interesting is that?

Had I chose to listen to what he was saying I would have learnt something very useful; "Remember to periodically remove the front wheels and hubs and then the steerer trunnions. These must be refilled with EP90 oil, no other. Otherwise your front wheels will fall off."

Of course I sort of heard, but then I almost instantly forgot as the romance of powering over the A13 flyover at Canning Town in the sunshine took over.

Two months later I was on my way home from work (East London Housing Association back then) when I noticed a wheel rolling off down a side street. That's odd I thought...

Anyway, I do love my laboured analogies but it has to be said. Providing lots of information about the complexity of leases, the service charge structure etc. at the point of sale, does not really work does it? The recent CMA report suggests that more comprehensive information should be provided by estate agents and conveyancers. My view is that much of this is available, much has been trialled and nothing much has changed.  It is the worst time to try and introduce a complex proposition and it needs a significant investment in time from both sides.  Buying a flat is stressful enough without understanding the lease and your rights and obligations. It is also an emotional time taking the keys of what will possibly be your biggest ever investment. The subject of leasehold is quite frankly dull and complex to all but those of us who work in it and make a living from it. This fact never changes and whilst leasehold owners may appear to be interested, most want to get home for tea as soon as possible - and that's if they turn up. I can't blame them.

You see these days we can drive out of a car showroom in one of the most complex machines known to man without a clue how it works or how to change a flat tyre or how not fill it with the wrong fuel. Such is the reliability of the machinery, and the rarely called emergency breakdown services, that we do not chose to know how it works. It is the same in leasehold property. Does anyone really read the owners manual - or do we just press all the buttons to find out what they do? I didn't realise my current car has an automatic parking system until 6 months had passed. Replace 'owners manual' with 'lease' and you understand where I am going with this.

The difference with motor vehicles is that the industry thrives on high quality products backed up by responsive support when there is an issue. Think how much servicing has changed - they tell me when it needs doing and come and take the car from home and bring it back. This costs the same as if I take it myself. We need to aspire to this level of service if we are to give consumers in our sphere what they get elsewhere and now expect routinely - they do not want to be bothered with the detail.

When things go wrong or when costs are more than your customer thinks reasonable, then there is a great deal of explaining to do. In virtually every other type of transaction there are very clear consumer rights, servicing schedules, care instructions. When buying a flat we do not think that we are purchasing the right to pay service charges over a fixed period, demanded with little explanation and then chased hard to ensure that the wider community is not inconvenienced.

So what is the solution? Well it is up to you - whatever initiatives follow the CMA report, you will still be explaining service charges and lease terms to your customers. So, firstly, we must make the subject more engaging. One way to do this is to ensure that the community is involved in all aspects of your service delivery and can debate it - advise what you are doing and why, advise what you would like to do and why. Send out newsletters that are entertaining and informative not just dry and preachy. Get your customers involved in the discussion and demonstrate your expertise. Consider having consumer champions, consider inviting leaseholders to review your procedures and your proposals.

Secondly, the service you offer must be one of genuine excellence, recorded clearly and delivered on time. What we do is essential and therefore I contend that it must be possible to demonstrate its value by doing it well and taking pictures, if you follow. We have never been better equipped, technologically speaking, to keep our customers fully informed and drip fed with the right messages.

I am a leaseholder as well as a property manager. On one property I was promised the earth when the new agents took over. That was more than 18 months ago. Since then I have had three pieces of correspondence. Two were demands, one a set of accounts. I simply have no idea what they have been doing day to day because they don't feel the need to tell me anything. Now if I imagine what it is like to know nothing of the complexities of leasehold I will already be quite annoyed and maybe even suspicious. Come my first interaction with the agent....

I still hear the plaintive cry of the overworked manager; "We are just doing our job, but leaseholders simply do not understand leasehold and their obligations..." Sorry but this just does not cut it anymore. It is your duty to do everything possible to ensure that your customers are well informed. Believe me, it becomes a virtuous circle.

CMA conclusion: Carry on everyone.

Goodness there are loads of CMAs. When looking for a picture I could have used the real one, but the Country Music Association seemed so much more, well, entertaining. I could have gone for Certified Management Accountants, Canadian Medical Association or the Christian Motorcyclists Association. None of this is relevant however.

It is a peculiarly human trait that we love administrating, regulating, rule making and have whole public services based around the notion that we need to be controlled and that oversight of our activities, in whatever form, is important. And, of course, it is. Except that we now live in a world where the actual cost of statutory regulation with real enforcement is prohibitive so we have to self regulate - which means the market decides.  I suppose therefore the CMA were never likely to come to any other conclusion. 

If you like CMAs there are many...

Moving on then to the CMA's final report on Residential Property Management - we can see that X experts were used over X months to come to the conclusion that the market for residential leasehold management works pretty well  - although there are a small minority of landlords and agents who have historically abused their position and potentially continue to do so. No shit Sherlock!

The report recommends a number of improvements to be made through the existing codes including the RICS and ARMA Q and two pieces of potential primary legislation.

Dealing with the legislation. The first would require legislation that would allow leaseholders to force landlords to retender management if 50% of leaseholders agree. This is a good thing as its adds to the powers given by RTM and I suspect would be a 'no fault' right as well. It would be another reason to ensure agents put customers at the centre of their activities and would be much easier to trigger than RTM I suspect.

Secondly in a change to the 1985 Act, they suggest that S.20 is reviewed. No one will argue with that (well I do know of one!) and I have blogged about this previously.

However, don't hold your breath:

Work on new legislation to give leaseholders the right to
trigger re-tendering and rights to veto landlords’ choice of property manager is
unlikely to commence in less than 12 months. The timescale for
implementation would then depend on preparatory scoping and feasibility
work and the Government’s legislative priorities. 

So 2-3 years minimum then.

The remaining report is best summed up by the following extract:

1.51 In considering what remedies would be appropriate, we noted that for many
leaseholders, overall the market works reasonably well, but that particular
problems can and do occur where existing safeguards fail to provide
adequate protection. We consider that the problems that exist in the market
are best dealt with through targeted measures to improve the working of the
current model, rather than through a fundamental reform of the regulatory
framework. We note the existence of redress systems and/or safeguards,
which provide a degree of protection in many cases and whose performance,
where shortfalls are identified, can be enhanced. 

Pretty clear then that there will be no attempt to tidy up the complex statutory framework in which managers operate or to add some compulsion to the use of regulatory codes. We continue with a two tier market in the vaguely stated hope that the market will sort out the rogues over time as consumers chose agents on their reputation, accreditations and membership of the appropriate bodies.

I have heard this before, in 1985, 87, 96, 2003 etc.etc. The industry is improving but sadly new players with no rules or governance and existing bad practice continue in some areas. The changes have, by and large, been glacial but the CMA believe that the market will resolve itself and consumers will make the right choices without a fully regulated industry. Sadly there is no previous evidence of that.

So what is good then?

• It is great news that the CMA has recognised the efforts of the industry to improve its reputation and that ARMA Q is given full recognition. 
• I am pleased to see that the public sector was not excluded from the report - why should leaseholders of local authorities and housing associations be excluded? 
• Disclosure of fees and corporate links is a good thing and is already covered by ARMA Q.
• Standardising pre purchase questions would be useful although it has been tried before. Unfortunately conveyancing is a highly competitive market driven by price and not prone to adding to its workload. Not compulsion - no success. 
• The proposed additional fact sheets - they do already exist though.
• Efforts to improve the availability of alternative dispute resolution (ADR), neutral evaluation, or mediation services rather than FTT should be applauded.

We recommend that property managers have a plan and strategy for regular
communication and engagement with leaseholders to explain and discuss the
decisions affecting them. 

This one is so obvious it shames me that it needs to be said at all.

Overall then not much real change other than an endorsement of activities that are largely already underway and with a couple of helpful, albeit distant, legislative recommendations. Sadly, without some compulsion to move to regulation we will still see most of the behaviours highlighted continue from those who remain outside of the accredited routes. Despite my naturally cynical approach I do feel that the CMA have summed things up pretty well. Sadly, like others before them, they have not really found a solution and can only reinforce all that is going on and hope, vainly in my view, that the market will sort itself out.

It remains my belief that until we have compulsory regulation that is backed by statute we will continue to entertain the chancers, opportunists and the downright criminal hiding in the shadows of leasehold - where so much money is now sloshing around - that only real legal enforcement will finally clear it up.



Here is a link to the full report:
https://www.gov.uk/cma-cases/residential-property-management-services
If you are a property manager you should read it in full (about 3 hours) - I reckon it is worth it.

Phillips & Goddard V Francis Episode 5. Halloween - The search for a new case to moan about.

Excitement has been building for months now and the chatter amongst managers had reached a fever pitch of wild speculation, fantasy and urban myth. Yes, Phillips v Francis, the most exciting thing to happen in leasehold management for years, has had managing agents scratching their heads or burying them for nearly two years. But now the waiting is over and I can confirm that judgement in the appeal of Phillips and Goddard v Francis has been handed down and, in summary, the bit we didn't agree with has been overturned. So concerned were we that there was an 'Intervener' in the form of the Secretary of State for Communities and Local Government. This sounds quite threatening to me - I am imagining a black cloaked Machiavellian character, who says nothing but is there to observe the 'correct' outcome.

Nothing too scary this Halloween

Anyway, this is an excellent outcome since pretty much nobody I know has been endeavouring to comply in any event. Apart from the fact that it simply wasn't clear how it was possible to comply, doing so would have required significant additional expense for leaseholders as well as additional mire and confusion. In the current days of value for money and transparency, Phillips was never going to cut it. Once again the simple problem of some landlords failing to comply with the spirit of the law led to the sledgehammer approach affecting everyone. On this occasion common sense seems to have prevailed... Eventually.

Looking at the judgement more closely, Judge Cotter remarked:

“In my judgment a commonsense approach to
construction needs to be taken and in view of the fact that it
acts as a trigger for the protection afforded by consultation. If
the threshold were too low and all minor or non permanent
works covered, the result would be commercially
unmanageable to the detriment of both lessor and lessee. The
phrase building works use to describe significant works with a
permanent effect by way of modification of what was there
before. Whether works are indeed qualifying works, is a
question of fact having regard to the nature and extent of the
works in question.”

Martin v Maryland Estates Limited [1999] L&TR 541 is the relevant piece of case law to which the Master of the Rolls, Lord Justice Kitchin and the Chancellor of the High Court, no less, turned their not inconsiderable attention. Effectively Martin was overturned by the Chancellor in the previous appeal. Martin's common sense approach over whether works are 'qualifying works' and whether they exceed the 'triviality threshold' was the basis on which we all operated prior to Phillips and, it seems, will continue to do.

I do however remain sympathetic with the owners at Point Curlew - Disaggregating major works, to my mind, was already a clear breach of the law as it stands and there is already much case law to support this. Three years in the courts has done nothing but come to the conclusion that everyone already knew was right and proper. Furthermore, the appeal wasn't allowed on the point of management charges, hinging largely on the somewhat unclear lease in this instance. '...it is reasonable to expect that, if the parties to a lease intend that the lessor shall be entitled to receive payment from the tenant in addition to the rent, that obligation
and its extent will be clearly spelled out in the lease...' It isn't clear in this lease and the original Chancellor's decision was upheld on this point by the current Chancellor. He made the further point:

"Lack of clarity on these common issues is capable of affecting huge numbers of lessors and tenants across the country and involving them in expense and disharmony. The reported cases show that many of the disputes turn on similar or nearly similar provisions. Those who draw up or approve residential leases for their clients are plainly under a duty to take care that there is clarity and certainty in relation to those matters."

Once again I am reminded that adding further complexity only makes for more loopholes for the unscrupulous and more penalties for the innocent. Now, who fancies revisiting S.20 consultation levels?

A very happy and slightly less scary Halloween everyone. I'm off to steal sweets from kids. Bye.

Full case can be read here: http://www.irpm.org.uk/docs/public/Phillipsfinal3110.pdf

CMA Update Paper - Please don't add further Complexity.

Unnecessary complexity?

The CMA update paper for its market study of residential leasehold management fails to understand some fundamental tenets of the leasehold system and cannot succeed until it gets them right. Perhaps they would benefit from some IRPM training?!

But more seriously, this is a real reflection of why consumers misunderstand the role of managing agents consistently. Let's face it, residential leasehold is complex and further complicated by layers of ownership that lead to misunderstandings about who is freeholder or head leaseholder and who is landlord or has landlord's covenants. The CMA have still not nailed this one.

Given the highly detailed response to this part of the consultation undertaken by Jeff Platt on behalf of the IRPM, I did not respond directly this time but contented myself with the knowledge that IRPM have really covered everything.

The full 35 page response can be found here:

http://www.irpm.org.uk/docs/public/CMAMarketStudyupdatepaperresponsefinal.pdf

It is well worth a read.

I do think it is important that we are aware of the limitations of the CMA's understanding so far. Allowing these errors to permeate into any final recommendations will do no one any favours - excepting those who make a living pulling apart badly drafted legislation, regulation and codes in the tribunals.

We operate in a complex legal framework with case law dating back many years and enshrined within that is the concept of 'reasonableness'. This shapes our behaviour as agents. When it doesn't consumers have various routes to achieve redress, shortly to include ARMA Q. All agents are required to be members of an Ombudsman and the sector has it's very own tribunal. Both RICS and ARMA members are bound by the RICS UK Residential Property Standards. In fact all agents are bound by the RICS Code since it has statutory backing.

There is much talk in the review of 'switching' opportunities. I think there as a misunderstanding of the relative ease with which this is taking place now, particularly where the threat of RTM is sufficient to either force a change of behaviour or for a landlord to agree to switching in order to avoid the RTM process. RTM is a fairly big and effective hammer given it is a 'no fault' right. Just the threat of it has caused both agents and landlords to change their approach. There is no mention of this in the report.

Switching of agents is currently, in part, being driven by price. But managing agents are not selling a simple one-stop product, it is an essential and relatively complex one. Prices should reflect that level of complexity and not be driven entirely by cost. We need to see our industry valued as essential and professional and not treated as a simple commodity. That alone will allow standards to continue the push to service excellence. Understanding what agents do is the responsibility of not just agents but intermediaries across the purchase process.

Finally, there is the education of managers and other suppliers. Specialist qualifications are now the norm for those involved in block management and more and more specialist topics are being added, including finance, mixed use, PRS and soft skills such as customer services. Managers are better equipped and qualified than ever before.

Residential management is on the right trajectory. Any poorly drafted interference in that process has the potential to create yet more confusion and potentially ignores the raft of regulation and case law that already envelops surrounds consumers in this sector.

A simple recommendation that all agents must abide by the RICS Code and must aim to meet the requirements of the self regulatory regime ARMA Q within a stated period would more than exceed the ambition of the CMA as reflected by their interim report. Poorly performing agents are being weeded out by increased barriers to entry, significantly higher levels of competition and increased consumer understanding. Further complexity helps no one.

Resources for managers and leasehold owners.

Information is the missing link in our world. So many issues would be alleviated were we all up to speed with current legislation, regulation, the snappily titled First-Tier Tribunal (Property Chamber) (FTT(PC)) and the overwhelming amount of knowledge needed to understand leases, budgets, accounts, consultation process and the myriad other areas involved in running residential blocks.

Suffice to say there are  few of us who can claim to have a handle on all of it. Not me.

So here is a list of great places to keep in your bookmarks and to review whenever you have a spare moment:

• ARMA  http://www.arma.org.uk - a brilliant source of guidance with over 300 notes for members and much more besides. Even non-members and leaseholders are well served by the freely available documentation and there is so much more if you join.
• Leasehold Advisory Service  http://www.lease-advice.org - again a fantastic source of well written and clear advice as well as case updates.
• IRPM  http://www.irpm.org.uk - great resource for members in particular and growing source of quality analysis
• FPRA http://www.fpra.org.uk/ The Federation of Private Residents' Associations is a not for profit organisation dedicated to supporting leaseholders and lobbying on their behalf. An excellent resource for residents' groups it should also be followed by conscientious managers.
• ALEP http://www.alep.org.uk/ everything you could ever want to know about enfanchisement.

• SLC Solicitors - http://www.slcsolicitors.com/ have an excellent section on their website entitled 'Guides'
• Brady Solicitors - http://bradysolicitors.com/ likewise
• Brethertons - http://www.brethertons.co.uk/

• www.lawandlease.co.uk/  Amanda Gourlay's (of Tanfield Chambers) eloquent dissection of all the latest case news and, for my money, the best sector analysis out there. If you have any involvement in this sector you have to keep this one bookmarked and visit regularly.
• http://leaseholdlawyer.wordpress.com/ - Chris Alexander's blog is also an excellent source of comment.
• http://www.leaseholdlife.info
• www.leaseholdknowledge.com/
• www.leaseholdinfo.com/
• The Residential Manager https://davidclark'sblogspot.co.uk  - In all honesty this one is rubbish.

• News on the Block - http://www.newsontheblock.com/ growing web resource
• FlatLiving - http://www.flat-living.co.uk/ similarly a growing resource
• Property Week - http://www.propertyweek.com/ the old favourite and a little more engaged with the residential sector than Estates Gazette in my opinion.

Is your managing agent solvent?

 There will soon be a perfect storm that includes the CMA (OFT) report into residential leasehold management, ARMA Q going live, increased competition and ongoing consumer pressure that will lead to many small to medium managing agents throwing in the towel once and for all. Some will find sale or merger opportunities, some will simply shut up shop and one or two, possibly, will run off with your money. It's coming, I promise.

Sounds dramatic, but I have researched my case well. I have looked at many  managing agents  financials (more than 30) in detail over the last month and I have spoken to many. Balance sheets and histories are freely available on sites like Duedil and they tell a sorry story for some, well quite a lot actually. Reduced turnovers, negative balance sheets, tiny net worth, squeezed profits, senior staff leaving or worse.

For me it is the financial history of many firms that is most telling where, despite what we are being told, turnovers are static and profits are being squeezed by growing wage demands and increased and often justified client and customer requirements for visible value for money.

Those that are succeeding have two things in common; they have scale and they offer a wider range of integrated services. Whether as estate agents, facilities managers or general practice surveyors, you need a broader slice of the delivery cake to make residential leasehold management work as a business proposition. Self delivery of health and safety compliance, surveying, soft services such as cleaning and concierge and debt collection all make businesses more stable and embedded. Look to the commercial facilities management industry for a potted history.

Those promising different levels of service, new standards of response, less units per manager, etc.etc. are still having to deliver at the same or at lower price per unit. We are in a period of unprecedented competition and that is driving service standards and pricing. This is a good thing but inevitably it will shake out the weakest, good or bad.

I get asked a lot by leaseholders what they should look for when deciding on an agent. There are the obvious things that all guides will give you but they rarely mention the financial aspects. So here are my easy steps to ensure that you, as a freeholder, a director of an RMC/RTM company or simply as a leaseholder need to do, in addition to the obvious things, to ensure you are protected:

1. Have a look at your managing agents financial history. Use one of the freely available web services which will give you much of the information you need like turnover, profits, balance sheets, ratios and ownership. Buy the last accounts - usually no more than a few £s.
2. Take into account the size of the business and the number of staff relative to the service promises being made. Are you happy that turnover and profit is sufficient for the type of business.
3. Are they trading solvently? Are they improving their numbers year on year? Do they have the scale to survive a major loss of business such as a big instruction?
4. Is their client base varied and broad?
5. Is your money properly protected and held in trust in a separately identifiable account?
6. Are they ARMA Q accredited or working towards it. If not, why not? (Being a member of RICS does not cut it as a substitute for Q- they may well audit periodically but they will not be looking for the same signs.) If they imply that cost is prohibitive then that in itself tells you something important. Regulation should not be optional.
7. Ask about the plan for the business, succession, retirements, sale etc.

Remember it doesn't matter how good your agent is, how solid their reputation is, if they are unable to trade at a profit or to meet their commitments. Add this to the list of essentials when looking for a new one...

FRED 50 - unhelpful, unfriendly and getting on a bit, WLTM clear thinker.

Just one comment to the Financial Reporting Council, to start with:

It's a Residents' Management Company NOT a Residential Management Company. Look at any lease with an RMC for clarification.

This demonstrates a fundamental misunderstanding of what it is that you are dealing with. Whilst it may only be semantics in some eyes, in my view it is an entirely different thing and at very least is confusing for consumers and members/shareholders of RMCs.

This is the first of many areas that need clarification, most of them raised by respondents to the FRED 50 consultation (see below).


 The consultation document can be seen here:

 http://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRED-50-Draft-FRC-Abstract-1-Residential-Managemen-File.pdf



Read the fascinating responses to FRED 50 here:

https://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRED-50-Draft-FRC-Abstract-1-Residential-Managemen/Responses-to-FRED-50.aspx

Farewell ARMA, hello ARMA Q

Fifteen years is a long time to be involved in your trade body, some might argue too long. During that time I have gone from being a property manager to a partner, then managing director and owner and now a non exec. I have experienced a massive residential boom and a huge increase in the complexity of managements followed by the worst recession in living memory. Make no mistake, ARMA has been a significant element in my career, a source of the highest calibre information and a meeting of the best brains in the industry. I will miss it greatly.

Best of all, and despite what you might hear from a decreasing minority of detractors, I have never met a more focussed, determined and engaged group. All of them want to improve the industry, all of them give freely of their time and they have in the last 20 years greatly changed for the better the way that agents and landlords operate.

My own highlights were the creation of the Institute of Residential Property Management (IRPM) in 2002, an idea born out of the ARMA Education Committee and built on a shoestring. Now numbering 2,800 members and growing, IRPM is seen as the essential qualification for property managers, provides a direct entry route to RICS and is a valuable signifier for both employers and consumers.

The second highlight will come out of the need for independent regulation, something brought sharply into focus when I was, for a brief period, chair of the practice committee. It is right and proper that we do not sit in judgement of our peers and I believe ARMA has managed to attract the highest quality individuals to sit on the independent regulatory panel. ARMA Q must set the standards for the future and must be embraced by all in the industry – including those that, for one reason or another, choose to remain outside of the ARMA umbrella. This work has been undertaken by a dedicated secretariat headed by CEO Michelle Banks, their absolute determination to see it through has been extraordinary and I am filled with admiration.

Now comes the really tough bit, implementation of ARMA Q and making certain that it becomes the accepted standard and is endorsed at the highest level. I will follow with interest from the sidelines, shouting occasionally like a bad football dad…