The Office of Fair Trading has identified a number of causes for concern about the supply of property management services. Lynn James examines the CMA’s recommendations for regime change
The residential property management sector has for some years been subject to scrutiny. The Office of Fair Trading has identified a number of causes for concern about the supply of property management services (“services”) which led it to announce a market study of services for leasehold schemes in England and Wales. The aim was to consider whether services are working for leaseholders and, if not, whether there is scope for improvement.
The study was subsequently launched and the conduct of it was taken over by the Competition and Markets Authority (the “CMA”) on 1 April 2014. Information has been gathered from leaseholders, property managers, freeholders, developers, local authorities and housing associations.
Although the study is ongoing, an update paper was published on 1 August outlining the issues and suggesting possible solutions.
The scope of the study
The study looks at whether services are being conducted effectively and whether there is an acceptable level of competition in the market. It considers the provision of services in blocks of flats and/or retirement properties where the freehold is owned by:
- someone unconnected to the leaseholders and where the services are provided by a property manager;
- the leaseholders collectively and the services are provided by a property manager engaged by them; and
- a local authority/housing association which supplies the services themselves or through a property manager.
The current system and structures
In many cases, responsibility for maintaining and insuring a building lies with the freeholder, who may then appoint a property manager to carry out this function. The cost of the services will generally be recoverable from the leaseholder under the lease.
In other cases the responsibility for carrying out the maintenance function may fall on the residents’ management company (a “RMC”) or right to manage company (a “RTM”) which again will usually appoint a property manager. However, statistics show that the number of RTM companies is relatively low. While there are more RMCs, these are often inactive or have participation issues.
Issues identified in the report
The report identified a number of issues relating to the provision of services:
Separation of control/misaligned incentives. When a property manager is appointed by a freeholder, they are accountable to the freeholder although it is the leaseholders who pay the relevant cost. As such, the drivers for the freeholder and leaseholders may not always be aligned. The limitations on leaseholders to influence decisions can often cause ?friction.
Co-ordination issues. Each leaseholder may have its own objectives and these may not be the same as other leaseholders in the block. This lack of co-ordination often causes RTM companies or RMCs to struggle.
Information asymmetries. It may not always be easy for both the freeholder and the leaseholders to monitor the property manager’s actions or to assess the quality of the services being provided.
Weak competition. Pressure to replace a property manager tends only to arise where there is significant discontent with the services being provided, leading to weak competition and a lack of incentive to provide efficient services.
Property law safeguards. Legislation is in place aimed at protecting leaseholders. However, many feel that these safeguards are inadequate as they do not require sufficient information to be given to the leaseholder at the point of sale and that there are weaknesses in terms of regulation and redress.
Local authorities/housing associations. Concerns were raised that public bodies may cross-subsidise other activities from the service charge and that some practices may be less robust than in the private sector. There was some concern about the lack of sinking funds for local authority schemes leading to large bills being levied on the leaseholders.
Early findings
During the study, it was apparent that many leaseholders are happy with the services being provided and that current procedures can work well.
However, the CMA believes that there is reason for concern regarding some practices in the industry. In particular, there are complaints of excessive and unnecessary charging for services, little transparency, poor communication, flawed section 20 procedures under the Landlord and Tenant Act 1985 (the “1985 Act”) and poor value for money. There is also a general lack of understanding among the leaseholders of their obligations under the terms of the lease.
Proposals for remedial measures
The CMA indicates that widespread reform in the industry is not necessary but there are measures that could be taken to improve services. Certain protections are in place such as legislation, legal redress (to the Ombudsmen and the First-tier Tribunal (Property Chamber)) and self-regulation (through ARMA-Q when it comes into effect) and codes of practice followed throughout the industry.
The remedies proposed by the CMA are extensive and focus on changes to legislation and developments in self-regulation but in summary its recommendations are:
- better information at the conveyancing stage and early engagement of the leaseholders in collective action;
- provision of clear information on future costs and improvement of the information given to leaseholders about their rights. Property managers/freeholders will have a crucial role in terms of educating the leaseholders and providing key information in an accessible form;
- promoting RMCs and making it compulsory for a freeholder/property manager to recognise a residents’ association;
- using fixed fees for routine management and management of major works;
- full disclosure of links between the freeholder, property manager and contractors they use;
- requiring the provision of more information on benchmarking and levels of performance by public sector freeholders;
- putting services out to tender every three to five years and, where the leaseholders have a 50% majority, to re-tender on request. Where leaseholders have a 50% majority, they are allowed to approve the choice of property manager;
- a review of the section 20 process under the 1985 Act; and
- encouraging a higher level of self-regulation and improving the current redress systems.
While there is currently regulation and guidance in place, the recommendations could, if implemented, lead to greater control and transparency for leaseholders. This will require changes in working practices but will hopefully lead to stronger relationships between leaseholders and freeholders/property managers. The CMA’s final report is expected in November.
The update paper is available at: http://bit.ly/1uDWWXOf
Lynn James is a partner in the real estate litigation team at DWF LLP
