The CMA study into residential management services partly originated in the public criticism expressed over the Office of Fair Trading investigation into the Peverel / Cirrus collusive tendering scandal.
Owing to the prime minister’s response to a direct appeal by LKP, this resulted in a meeting with the OFT on September 2 2013. It was chaired by the Rt Hon Ed Davey and present were Clive Maxwell (OFT CEO), Cav Elithorn (OFT senior director heading the Peverel / Cirrus inquiry) and Stephen Blake (OFT senior director, cartels and criminal enforcement group).
Mr Davey and Sir Peter Bottomley echoed LKP’s view that the Cirrus inquiry was deeply flawed, particularly in regard to the leniency deal (and, given that there was full co-operation, the time involved to arrive at a finding).
Sir Peter Bottomley MP has publicly stated his view that possible criminal activity was being alleged in the Cirrus bid-rigging. More here
The OFT’s inquiry into leasehold management, which is now the CMA’s, was announced on December 3 2013; the findings of the Peverel / Cirrus report were published on December 6 2013.
Why is the OFT investigation into the Peverel collusive tendering considered to be flawed and why does that have relevance to this enquiry
It remains unclear why the Peverel/Cirrus investigation qualified for Chapter I leniency rather than one where a dominant party required a Chapter II Rules should have applied.
Questions remain about why Peverel qualified for leniency on two grounds. 1) It is disputed Peverel were the first to self report. SoS Davey and others argue they raised matters first 2) The OFT findings makes clear there is some concern that other instances of collusive tendering . A mandatory condition of partial or full leniency is that full disclosure is provided at all times
No retirement home leaseholders have been able to use the findings to go on and take court action either in the main courts or the Tribunal. No site which believes itself part of the sites where there may have been “reasonable grounds” have been able to prove their case.
Of the smaller companies for formed part of rigging none has paid the fine imposed by the OFT save for the smallest, Owens Installations, who paid £1,777. The largest of the small payers, Glyn Jackson, escaped the £35,700 fine imposed by taking the company into administration in September 2013 following the initial findings published 6 months before the final decision. In addition to the monies owed to the OFT not being paid HMRC was left as owing a further unpaid debt £50,000. Mr Jackson had however opened a new company in April 2013 called Safeguard Communication Systems Ltd. That company now appears to take over the business obtained relevant working capital from an unknown source and now operated from the same firm of accountants that provided services to Glyn Jackson Ltd
In August 2014 LKP exposed the fact that Glyn Jackson and his new firm have again been working with Peverel. More here
Cirrus profit and turnover levels remain similar to that which arose before the collusive tendering investigation. As such the investigation and findings appears to have had minimal impact on their business. An action intended to protect the consumer rights has resulted in further disbenefit to some and very limited benefit to others.
Overview of CMA inquiry by LKP
LKP welcomes a number of the recommendations raised by the CMA, but questions the ability to implement a number of them through any form of voluntary regulation rather than through primary legislation.
This sector has been scrutinised a number of times in the past – by the OFT, by the courts, by Parliament, by the media – and it would be futile to propose feeble and tokenistic voluntary measures. New and improved codes and raising standards have been with us for at least 30 years and yet we still have the same problems and still believe just one more set of voluntary codes will impact a highly unbalanced market.
The OFT is also aware that it conducted a similar investigation onto the Scottish Property Management Market overseen by many of the same companies trade bodies. As the CMA will be aware that market does not suffer the burden of English and Welsh leasehold law, but none the less the findings made one last attempt to persuade the sector voluntarily to regulate itself.
It was deemed that self-regulation had failed and in 2011 the Factors Act was passed. We do not follow the logic that England and Wales with the added burden of third party freeholders who profit from this sector will somehow self-regulate in a way that the Scottish market has failed to do. “I have listened carefully to the hon. Gentleman’s argument for further legislative action but I do not feel there is a need for additional coercive action at this stage. I would like to have an opportunity to test the effect of the voluntary code” Peter Lloyd Under Sec State Social Security 1988-1989
It cannot be emphasised too strongly that abuses of leaseholders takes place almost exclusively when a third party freeholder who owns what is a small minority investment in the overall value of the block or in a block – compared to the collective value of the leases – owns the freehold and exploits the opportunities provided under current legislation.
Although there are rogue operators in leasehold who pick up freeholds in auctions, much of the exploitative practice is corporate and endemic and involves companies that are members of trade bodies with apparently reassuring codes of practice.
Given that the size of the market is now accepted by the DCLG to be much larger than was thought to be the case, many leaseholders are not protected by any codes of practice. The sector is now acknowledged to be 4.1 million privately owned leasehold properties and the Association of Residential Managing Agents claims its members manage only 900,000 of them.
The Property Tribunal court record will demonstrate this and LKP is very surprised that evidence from the tribunal forms no part of the initial CMA findings.
It would illustrate, inter alia, the preposterous varying fees for subletting charges. Even though the Upper Tribunal has ruled that £40 plus VAT would be a reasonable sum for a freeholder to give consent, fees are charged far in excess of this sum, and frequently when no fee is chargeable at all. It short, it is a perk, where freeholders and their managing agents pluck figures from the air. The tribunal record on this is voluminous.
Regarding dispute resolution, LKP is sceptical of any proposal that offers wriggle room to the sector. The sector favours internal company complaints procedures, ombudsman, mediation etc. Anything other than open discussion of the complaint with a publicly available ruling. For many years the sector has been able to keep issues behind closed doors. Only with the advent of the internet has more information began to seep out to leaseholders
It concerns LKP that the CMA refers to leaseholders as the customer / consumer. Unless the leaseholders appoint the property manager they are neither of these. The customer of property managers is the freeholder who appoints them. In the IRPM exam we provided from 2011, it makes some effort to have property managers understand the client is the landlord/freeholder.
It is important to understand that freeholders’ investment in a block of flats is frequently less than five per cent of the value of all the leases. (In the case of Charter Quay the true “open market price” for the freehold/headlease agreed by independent surveyors acting for both landlord and leaseholders prior to court action represented approximately 0.6% (zero point six percent) of the value of the leases on the site.
Freeholds are eagerly bought by experienced players in this sector at auction. In the main, they are not bought solely for the ground rents and the reversionary value of the leases.
They are bought because there are other potential income streams.
The freeholder enjoys extraordinary powers:
– to appoint the manager, to insure the building (and receive commissions), to decide on major works and appoint the contractors, to charge subletting fees (often a random figure), to charge fees when a leaseholder chooses to sell, to mine value out of the site by issuing new leases for common parts, to exploit development opportunities.
Above all, a freeholder is in the unique position in a civil dispute of being able to seek forfeiture of a lease: that is, to obtain the lease of a property that is often worth thousands of times the sum that is in dispute.
Attached is a forfeiture order of April 2013 where the dispute originated in unpaid ground rent and service charges amounting to £3,500. After interest and legal costs this became £9,547.
The £165,000 flat, which was unmortgaged, was forfeited, resulting in devastating financial loss for the former owner and a windfall for the freeholder.
Forfeiture is an extraordinary power in the freeholders’ armoury that dwarfs mortgage companies’ ability to seek repossession.
Freeholds are a considerable and worthwhile asset.
Freeholds where the owner appoints the management is where the money and power lies in the leasehold sector.
House builders have every commercial incentive to create freeholds which do not empower leaseholders, but which give opportunity to future freehold owners to make decisions and monetise.
The large property management companies are eager for the management contracts from developers, and compete for the business.
These management companies are not competing in the interest of the leaseholders, who ultimately do the paying. They compete to do the bidding of the developers and then the subsequent freehold owner.
Although leaseholders are supposed to be offered the opportunity to buy the freehold, this is easily and routinely worked around. The leaseholders have to be collectively organised and prepared to make a quick decision in order to purchase the freehold.
Every single major property management company in the sector is of substantial size BECAUSE it has been appointed by developers or commercial freeholders.
None is large because it has been appointed by RTMs or RMCs. The sole, partial exception is HML Holdings plc, but it only has c50,000 flats under management. Its portfolio is the result of decades of slow growth with RMCs.
There are references in the CMA report to leaseholders being “customers” or “consumers”. These are misnomers in situations where a freeholder appoints his choice as managing agent. The managing agent’s customer is the freeholder, not the residents.
It is a curiosity of the sector that some property managers are considered badly by leaseholders where they are employed by freeholders, and yet well viewed when employed by leaseholders.
LKP notes the reference to 80,523 RMCs and seeks the source of this data.
The leasehold sector occasionally seeks to suggest that leaseholders are very largely in control of flats because of the number of RMCs.
Most recent blocks of flats do not have RMCs, and the large corporate property managers have become large because they do not exist.
It is encouraging that some house builders – Barratt, Berkeley and McCarthy and Stone, for example – realise that cleverly augmenting the value of their freeholds and then selling them to an aggressive monetiser has had disastrous consequences for their reputations. However the CMA should note the worrying trend of making the freeholds more valuable simply by increasing the size of the ground rent. What may have been ground rents of £250 some years ago have recently grown to £500 or more? This cost which is purely arbitrarily set by the landlord can never be challenged once the flat is sold.
All now have changed their practices and either use in-house property managers (with the obvious risks involved in that) or, in the case of Berkeley, use a variety of property managers which in the past would never have been appointed to their sites.
Missing from the CMA findings is an acceptance of the fundamental unbalance in taking legal action. A leaseholder takes action by default they have no right to recover their costs at the Tribunal. A landlord by default under most leases will be contractually entitled to his costs in defending any action taken by the leaseholder and will only be limited if the Tribunal limits those costs under a s20c order. We are also seeing a worrying trend where the “no cost” Tribunal looks to follow the “costs follow the event” rule of the normal courts if the landlord’s arguments prevail. If the landlord initiates an action via the county court for non-payment they are automatically entitled to their costs under most leases regardless of the court’s decision.
This gives a wholly one sided cost regime where at best the leaseholder may recover some of the unreasonable costs imposed by the landlord/freeholder with almost zero chance of obtaining their legal costs. In contract the landlord/freeholder will in the majority of cases have the right to obtain costs and may even pass them on when the Tribunal seeks to limit those costs (the Tribunal having no direct powers to enforce such an order).
The position is exacerbated still further as the party whose costs are protected is the only party looking to make a profit from the contractual relationship. There are is no facility for fines for over charging under the Tribunals powers nor does the redress scheme or the voluntary codes provide any form of financial penalty for exploitative behaviour. In such circumstances it seems unclear why the CMA concludes the sector not suitable to market review. Under any economic model the managing agent seems obliged to behave in a way detrimental to the consumer to maximise their own profit. That profits maximisation is most likely to occur if unreasonable charges are made.
Some relevant tribunal cases revealing management practices
Pensioner wins £67,000 over rent for house manager’s flat
Tribunal reduces insurance commissions to zero, and rules out inter-connected company contracts
Pensioners reduce service charges
Two years of legal gamesmanship to delay pensioners right to manage, won two years before
Inter-connected companies, commissions, no tendering, blatant exploitative practices in Charter Quay ruling.
St George’s Wharf settles for £1 million after being overcharged
Freeholder spends £74,000 but fails to stop a residents’ association being recognised
Forfeiture of an £800,000 flat over a £7,000 dservice charge dispute
£42,000 bill for failed right to manage
Right to manage delayed by two years by freeholders’ legal team
£28,000 legal bill to oppose right to manage slashed to £2,800
£30,000 bill for failed right to manage, while solicitors sue each other
Freeholder with criminal conviction buys freehold for £68,000 and dreams up £950,000 of major works. Reduced by tribunal by £600,000
Head of property tribunal apologises after a tribunal panel member (and property manager) is removed from judicial appointment
The following are points we make in assessing the CMA update paper
LKP welcomes the OFT’s concerns that some leasehold managing agents are overcharging, providing poor quality services and spending money on unnecessary works. These points are made in CMA’s update paper Point 1.2.
This is self-evidently true and has been established many times in the Property Tribunal. It is unfortunate that the CMA has not consulted the court records for its study.
We note in Point 1.6 that there is no intention to propose a market investigation reference, and that issues can be addressed through working with government and the industry.
LKP is sceptical that working with the industry will result in the voluntary discontinuation of lucrative commissions and other revenue streams that abound in leasehold management.
It is welcome that Point 3.3 recognises that the freeholder appoints the managing agent.
LKP suggests that the CMA considers the client base of the larger property managers: ie that they are large solely because they have been appointed by developers or commercial freeholders.
In these circumstances, the leaseholders are in no sense the “customers”. They are the payers, but the property managers’ customer is the freeholder who hires and fires their services.
The CMA notes that under the current leasehold system there is a clear “allocation of responsibility” with a freeholder appointing a managing agent. It makes the general point that there can be differences of opinion among the flat-owners.
Indeed, there can be. But the rest of the world outside England and Wales manages to run apartment blocks without leasehold tenure. Abuses are established and widespread, as the court record demonstrates.
In England and Wales, a minimal investor in a block can buy the freehold and then systematically monetise the site causing misery and upset by playing the leasehold game.
Freeholds are eagerly bought at auction and residents who fail to get organised and buy them are regarded as having “missed a trick”.
Few monetising enthusiasts – even the large co-operate players – buy freeholds simply for the ground rent.
The preponderant power over a site, the revenue stream of commissions, the reversion of leases and opportunities to mine value out of a site by issuing new leases or development also form a part.
CMA reports 4,954 RTM companies and 80,523 RMCs. Where is this source reference to the second figure?
The CMA claims that RCMs are “often established to administer new developments”. In fact, they are often not established at all – by Barratt, Berkeley Group and McCarthy and Stone, for example.
Developers often see the advantage of selling a freehold to investors that can be managed by a non-resident interest for financial gain.
The larger property management firms have grown up to be as big as they are because of being given contracts by developers.
Points 3.9, 3.10, 3.11, 3.18, 3.19
The CMA identifies the misaligned interests of commercial freeholders and residents. Points 3.10 and 3.11 correctly point out that freeholders buy freeholds for their “profit making opportunities”.
Few buy freeholds just for the ground rents.
In Point 3.16 it is certainly true that leaseholders’ interests may be “diverse and may be poorly aligned, making it difficult for all leaseholders to be satisfied with outcomes”.
The same point could be made about democratic government: the worst system apart from all the others.
Again, other countries do manage this system. That is, the rest of the world. England and Wales are anomalous.
Point 3.18 that leaseholders may not understand or be able to evaluate the information, is true. But they must have a try and perhaps make a few mistakes. That is better than predatory freehold operators, who understand the system only too well, making all the decisions.
Point 3.19 acknowledges that without the threat of switching management companies, there is little incentive to have “efficiency and innovation and better meeting customer needs”.
But it is completely incorrect to consider leaseholders the customers at all: the customer of a managing agent appointed by the freeholder is the freeholder. Leaseholders are not the customers: as in insurance contracts, they pay, but are not a party to the arrangement (and have no right to information concerning it).
This indicates that the CMA commissioned a survey from Ipsos MORI of 1,050 leaseholders. It is not known how many of those polled live in retirement leasehold properties. Nor is the questionnaire made public by CMA.
Addresses the findings of the Ipsos MORI poll. Or, rather, the “early findings”.
The purpose of the poll was “to gain a representative view of the perceptions of all leaseholders”.
The CMA says that leaseholders’ “perceptions need to be treated with some caution”.
Again, LKP is surprised that the CMA puts such store on a poll of a minimal amount of leaseholders and is not scrutinising the easily accessible and written rulings of the Property Tribunal.
However, LKP is relieved that the following blindingly obvious truth is confirmed by the poll:
Point 5.7 claims that leaseholders with an RTM or RMC are more likely to be content (78%) than those without an RTM / RMC (46%).
RTMS / RMCS can certainly be badly run or dominated by self-interested cliques, but the scope for systematic, large-scale monetising does not exist. (Individual criminality and skulduggery does happen, however. This is because leasehold tenure gives opportunity to a minority who are informed to exploit a disorganised majority who are not.)
The sector will find this point an inconvenient truth, and it is good that it is confirmed in the CMA’s poll.
Owing to the repeated scandals in the retirement sector, LKP wants all retirement sites to have RTM and to change management companies which have repeatedly been found to have exploited them by the courts and OFT.
Point 5.9 repeats the industry’s cherished and oft-repeated view that problems in leasehold stem from ignorant leaseholders being unaware of their communal obligations.
LKP is doing its best to inform leaseholders how exploitative practices operate in leasehold and what residents can do to fight back.
This has resulted in some changes to leases in the retirement leasehold sector.
Point 5.10 The CMA has noted that there is a low level of switching between managing agents but does not differentiate between market sectors. The latest accounts from Peverel (press release attached) indicate retention rates of 99% in the retirement sector for both 2013 and 2012 compared to retention rates of 93% in 2012 and 85% in 2013 the residential sector. It should be noted the lower levels or retention in the residential sector are not primarily driven by RTM or RMC cases but by the developers dissatisfaction with the performance of Peverel. As the CMA is aware a not unreasonable proportion of the London developments have moved to other agents only because the developer freeholders have allowed it.
Omitted from the report is consideration that developers place contracts with certain managing agents with a clear obligation of supressing service charge fees at the point of sale placing the leaseholder in the position where they are then disadvantaged in subsequent years
Point 5.12 indicates that there is increased competition at new developments for the management business. But there is competition among managing agents to serve the interests of the developer – ie by paying the developer for the management contract at a block of flats.
The interests and views of the leaseholders are unimportant in this process. The management contract is not in their gift in most new build blocks.
It is simply wrong of the CMA to consider leaseholders as consumers in these scenarios: they pay, but they are impotent.
We have several issues with Point 5.16, which claims that “some concerns expressed at the outset of the study have not been supported by the evidence we have collected:”
LKP has asked the CMA which concerns were raised that have not been supported by evidence. It has not received a serious answer and the reply we did receive, gives grounds for further concerns.
The CMA finding that those in “retirement properties had higher levels of satisfaction than other leaseholders with property management services” is loosely worded and unhelpful.
This assessment was repeated to LKP several times by retirement house builders at a meeting at the Home Builders’ Federation on August 12.
As the OFT’s own two reports into the retirement sector have demonstrated serious grounds for dissatisfaction – leaving aside, again, the extensive court records which the CMA is not consulting – we are surprised that the point is made.
Again, LKP questions the number of retirement leaseholders who were polled.
Assuming not more than 300 of the total 1,050, this figure would amount to the daily total number of visits to the website on the most conservative assessment (Google Analytics).
If retirement leaseholders are content, why have there been 14,867 page views in August (to August 28)? There are 15,895 page views on LKP.
It is, yet again, regrettable that the court record is forming no part of the CMA study.
LKP fully agrees with the CMA that switching property managers more easily, as stated in 6.3, is desirable.
There is absolutely no incentive for a property manager appointed by a freeholder to provide a good service to leaseholders.
A property manager must do the freeholder’s bidding, or face the chop.
The freeholder is the customer in most instances.
The CMA favours “targeted measures” and “the market does not warrant widespread reform”.
LKP strongly disagrees, believing that statutory protection is required for leaseholders’ funds. It does agree with the CMA that there is no appetite for this in government at this stage.
Table 1 concerning remedial actions:
Using the titles as listed in Table 1:
“Separation of control”
1/ LKP is very pleased that CMA is considering “measures that would allow leaseholders to easier recourse to RTM and encourage the use of RMCs.” It should be easier and residents seeking RTM should not be subjected to major litigation where minor issues in the regulations can result in a failed RTM action. Failed RTMs can result in residents facing huge legal costs, the highest to date being £43,000.
2/ We are apprehensive about: “We are also considering options which allow leaseholders influence over the appointment property managers without the extent of acquiring RTM.”
Monetising freeholders / managing agent are tenacious in preserving their powers over a building which can produce lucrative revenue streams.
Freeholders’ investment in a building is minimal, compared with the collective value of the leases. Yet the power they exercise is decisive.
Power in a block of flats should lie with those who have the greatest investment in it: the leaseholders. If it lies with a minority investor who, by some means has hoovered up the freehold, opportunities to monetise will become apparent and may be exploited.
3/ LKP is cautious about this section: “We are also considering measures to increase transparency so that property managers can be more easily held to account with recourse either to redress or means to allow leaseholders to influence their freeholder, RTM or RMC to market test the property manager.”
The leasehold sector is absolutely expert in producing codes of practice, customer charters etc and have exhausted the use of the word “transparency”. There is provision at present for property managers to tender for a site, and no obligation whatever for a freeholder to appoint the preferred company of the leaseholders.
A fudge proposal that appeases the interests of monetising property management, but does nothing to address the imbalance of power between freeholders and leaseholders would not be welcome.
Mediation, ombudsman schemes, ARMA-Q regulator etc have a place in disputes where the quantum is sub £1,000, or where a professional code has been breached.
In other cases, leaseholders are better off fighting it out in the tribunal, where the decisions are public.
It is surprising that the CMA makes this point. In the experience of LKP, very few freeholders are uninterested in the activities of the property managers that they employ. If the aim is to monetise, then the property managers will not lack instructions.
LKP would be interested in concrete proposals, that cannot be ignored or worked around.
LKP is eager top learn how the good intentions here can become substantive.
Table 2: Remedies Proposals
Leaseholders could certainly benefit from more information regarding their liabilities as a leaseholder before purchase.
LKP is appalled at the carelessness of conveyancing solicitors in not pointing out onerous and disadvantageous clauses in a lease.
This is particularly important in retirement properties where families are often making a decision on new housing in a hurry.
Often solicitors are on a panel of firms recommended by developers.
It cannot be emphasised too strongly that a law firm recommended by a developer is IN ITSELF cause not to use that firm.
“Co-ordination problem between leaseholders”
Property managers employed by enthusiastic monetisers have every incentive to discourage leaseholders exchanging information and acting collectively.
This case shows a freeholder spending £74,000 to resist the formal recognition of a residents’ association.
It would be useful for leaseholders to have access to information giving comparative costs for works to their block. LKP would be a natural and trusted source of such information.
“Misaligned incentives / information asymmetries”
LKP applauds the CMA desire for insurance commissions and costs to be open. The CMA states that this information is not subject to FCA regulation. This is obviously wrong.
These regard unnecessary works. The CMA seeks fixed fees for certain works. How this would work effectively is very difficult to see.
Regarding vertically integrated companies. It should be mandatory in all existing codes for affiliated companies to be declared.
The proposal of re-tendering every three years is an interesting idea. LKP would support an annual process of re-tendering.
However, where the management companies are appointed by the freeholder the tendering will inevitably address the freeholder’s interests in a site.
It is also unclear to what extent – if any – a freeholder would have to take into account the views of the leaseholders in the tendering process.
“Separation of control”
Allowing leaseholders to veto/approve a choice of managing agent is an interesting idea. But LKP questions how likely this is without primary legislation.
LKP seeks to make RTM easier and cheaper to achieve. It is absurd that leaseholders have had bills of more than £40,000 for failed RTM actions owing to legal gamesmanship in the courts.
The 25 per cent commercial portion as a bar to right to manage is set too low. If leaseholders have the largest financial stake in a building – compared with value of the freehold and value of the commercial leases – they should have the opportunity to control it.
Regarding membership of regulatory schemes. Many good managing agents decline to join professional bodies and strongly disapprove of them.
For example, the respected Nottingham firm Walton and Allen will not rejoin ARMA because it feels the worst property managers in the sector are members.
It has publicly given its reasons here: https://staging.leaseholdknowledge.com/why-we-resigned-from-arma-by-lkp-managing-agent
Other small and very efficient management firms also refuse to join ARMA.
Membership of ARMA is of very little reassurance to leaseholders, in the experience of LKP.
Regarding cheaper alternatives to FTT. LKP strongly urges the property tribunal to be firmer on freeholders lawyers who are playing the leasehold game through the courts.
The prospect of huge costs is used to browbeat leaseholders and derail right to manage and challenges to major works.
Late submission of documents to the tribunal by legal firms are quite routine in the tribunal – and seldom subject to criticism.
Leaseholders are routinely undermined or derailed by experienced freeholders and their lawyers exploiting what was always envisaged as a low-cost, informal tribunal service.
There is widespread criticism of the property tribunal among leaseholders.
It is indicative of the complacency of the Property Tribunal that a controversial managing agent, with a string of rulings against his firm, could serve for 10 years as a tribunal panel member. He was ejected solely because a very determined LKP activist took this further to the JCIO.
The property tribunal requires reform and other forums for dispute resolution are only appropriate for sub £1,000 disputes.
LEASE attempted a mediation service in the past, and it failed. It has very little to offer leaseholders and those operating in the sector anything beyond neutral legal advice on the law.
It is not necessarily the “leaseholders’ friend” and LKP would be appalled at any suggestion to increase its role or budget.
LKP comments on Table 2, which are important points, have been given in tabulated form, which has to be downloaded as a Word file to read. Click here:
LKP believes that the statutory regulation of managing agents and the protection of leaseholder funds is essential.
“Other remedies identified”
Statutory regulation of agents
LKP notes the wide support for statutory regulation of managing agents, and shares that view.
We fully agree with “we found limited and mainly anecdotal evidence to support the allegation that non-trade association property managers are responsible for the majority of problems”.
It is a nonsense favoured by the trade bodies that rogues are to blame for the abuses in leasehold. Those bodies seek to gain a marketing advantage over those who choose not to joint.
We know the repeat offenders, as seen in the court record, are members of trade associations and are often the largest managing agents in the country.
These managing agents have grown large solely because of historic developer and commercial freeholder appointment.
None of these companies is large as a result of the choice of leaseholders.
Although it is asserted statutory regulation would impact smaller companies adversely, drive up cost and produce barriers to entry. The reality is these costs will depend entirely on the model adopted. Which estimated that £700 million was being overcharged per annum. Even if statutory regulation saved 10% of that figure it would produce enough to fund a regulation system many times over.
The CMA may also wish to consider one other group who act as managing agents who do not fall within the normal voluntary codes. Solicitors. There are an unknown number of firms who also act as managing agents. A number of the most serious cases coming to LKP involve these sites. If the leaseholder falls into dispute the landlord as a solicitor clearly has huge resources to enforce their will. Litigation is all but hopeless.
New unified code of conduct
The CMA may wish to consider if there has been some misunderstanding on the current codes. Currently all private residential properties are subject to the RICS code regardless of who manages the site if a matter reaches the Tribunal. They will judge the managing agents performance by reference to the RICS (or where relevant ARHM code). The old and new ARMA codes have always been complementary to the main RICS code over recent years. Although the RICS code of course applies to those sites administered by firms of chartered surveyors the organisation itself still deems the code voluntary.
In the case of Benjamin Mire reported in numerous LKP articles as a ex-judicial office holder who has had 24 recent Tribunal findings against him. RICS current position is that breach of the RICS code does not constitute a breach of their bylaws and there is the possibility he will face no disciplinary action for his multiple breaches of the code.
In the retirement sector the ARHM code applies and this like the RICS code has statutory approval by the secretary of state.
The proposed review of the Codes by DCLG does provide the opportunity to consolidate and perhaps even consolidate the relevant codes which apply in the social sector (including to those properties privately owned.
This would not the case of producing a new code but to avoid the need for managing agents working in what might be the residential retirement and social sectors having to work to three different codes.
LKP would welcome a single code with addenda for issues specific to particular parts of the sector. We would hope both DCLG and CMA recognise it is time to move on from the sector producing these codes for themselves. There is an urgent need to have much stronger leaseholder input and for some of the backdoors in the existing codes to be closed.
There seems to be considerable economic benefits to a single code with statutory approval giving a set a minimum standard. ARMA has produced a practice code to sit alongside the current RICS code and LKP has its own code for managing agents willing to commit to particular set of ethical standards.
Requirement to hold a relevant property management qualification
There are a range of relevant qualifications within property management be they CIH or ARMA or RICS or other. We would support the idea that a mandatory obligation on individuals may not be relevant but part of any statutory regulation needs to include evidence of appropriately qualified staff being used to carry out certain types of work. We would note that while the IPRM qualifications may be well regarded in the sector and welcome the efforts to promote positive standards, however, we are also aware some of the more egregious behaviours are from some of their members.
Decent Homes Initiative
It should be noted that although DCLG has recently introduced a cap of expenditure this does not apply for some time it also excluded non-owner occupiers and those who own the property as other than their principle residence.
There is also considerable variation in the funding models. A number of authorities will not allow phased payments for those who it deems as investment landlords.
Given some local authorities reputations for poor budgetary management and cost-control, some mechanism needs to be put in place to protect leaseholders. We are fully aware of costs of over £40,000 being incurred and demands for the money being produced with little knowledge. A recommendation the CMA may consider if the HCA should consider its powers in reviewing these charges. We have seen costs of £16K per flat to replace a centralised boiler system, costs for roof works not needed, costs where it is somehow deemed efficient to let 10 year contracts. Contracts where the local authority gets a payback on depending on the size of works allocated to the contractor and for those paybacks not to be discounted back to the leaseholders.
Prohibiting vertical integration/use of related companies
CMA states that “there can be strong efficiency arguments for vertical integration”. Who claims this?
It would be hoped that the collusive tendering case would give a strong example of just how wrong things can go and for how long. We would remind the CMA the case only came to light because of the work of three relatives of those living in retirement homes. Over the 5 years the scheme ran we are not aware of a pensioner having understood fully what was happening
We would accept some benefits can arise from partial vertical integration. We cannot see any merits where that integration links the freeholder to the managing agent. The managing agent always has the freeholder as his client. If the client is the owner of the managing agent it puts them in a fundamental conflict of interest with the leaseholders. The Tchenguiz example is followed by smaller landlords, such as Avon Estates. It is also understood both the current and prospective ARMA chairman face this conflict.
We hope the CMA has noted with concern the dilution in the ARMA-Q proposals on vertical integration
Database of benchmark charges
It is disappointing the CMA rejects this as too costly. As it will be aware RICS produce a number of standard costings for use by their members some of which might be used to produce a simplified guide. It is self-evident that a number of costs may not be easily or directly comparable between sites but there is an important subset where it would not be an excessively difficult task.
It was practice of the LVT some time ago to be able to use its expert knowledge to consider if a cost reasonable or not using an informally accepted set of costs on certain issues. Following the legalisation of the Tribunal to be more like a court the tribunal’s expert powers often seem to have been replaced with legal debate.
One issue particularly suited to benchmarking is insurance. The basis on which valuations are conducted follows a fairly standard formula which might well be used to give some approximate upper/lower bound per square metre costs. Concierge and cleaners costs are also fairly standardised by region
Utilities also is an easy issue to benchmark even if the utility companies do their best not to have in contract prices known/
Private sector provision of PRMS to local authorities
There is considerable anecdotal evidence that local authority ALMO performance is not particularly effective at controlling costs.
If a standardised code came into existence that required certain tasks to be tendered to third party organisations this would aid transparency and efficiency. If an ALMO wishes to provide services itself there should at least be some form of best value test. We note that a number of local authorities’ still clam comparison with the private sector is not possible because they account across their estate not on a block basis. There is some concern this justification is used to cover up inefficiencies and the overly close relationship with some of the very big suppliers in this sector of the market.
Throughout the document the term freeholder has been used. Unfortunately leasehold is riddled with difficulties of nomenclature and homophones. The terms tenant landlord and freeholder should be clearly defined to the point where the sector uses common terms. The freeholder may not be the landlord in certain cases, which will inevitably lead to criticism by some of the nomenclature in the CMA report.
Conversely in DCGG terminology, there are conflicts in the use of the term tenant which they more normally apply to refer to rental either private or social rather than leasehold owner. Strong consideration should be given to standardising the terminology in the sector. There are a number of cases which come to the attention of LKP where it is clear that MPs have not understood that a tenant in a leasehold property may be the owner of a lease not a rental tenant.
Action is also needed move away from the implicit assumption the leasehold landlord somehow has a major investment in any site.
For decades the systems have been structured around those who directly represent the landlord or who work for them rather than those who hold the major investment in the sector.
For example the leasehold round table held by Mark Prisk in 2013 just one out of the delegates represented what might be seen as leaseholders interests while those representing the landlord/freeholders interests numbered seven or eight. The same position applies with the property tribunal and LEASE.
We note some potential errors on the MORI analysis of the size of the sector which has been superseded by the detailed analysis undertaken by DCLG. We did not speak to MORI but will be updating our report based on the additional DCLG data on leasehold houses which will show the total sector including social rented is approximately 6.6 million dwellings of which 4.1 million are privately owned in England as per the DCLG data. A full analysis of the MORI work and its potential weaknesses will follow.
Leasehold Knowledge Partnership
September 17 2014
07808 328 230