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Crystal Horwood: Managing your costs

residential property investor rpi
RLA
Written by RLA

“Leaseholders face excessive service charges and inflated insurance premiums, but do have options. Crystal Horwood concludes her two-part feature on block management.”…

“Leaseholders face excessive service charges and inflated insurance premiums, but do have options. Crystal Horwood concludes her two-part feature on block management.

Part two of Crystal Horwood’s RPI articles on block management concludes here. You can view the first half of her contribution here

According to the Leasehold Advisory Service, complaints about residential service charges have risen by 46% in the past two years. This is an all too familiar story, but there is a lot to be said for taking matters into your own hands – or at least, almost!

Let me explain. In my previous article, I explored how leaseholders can take control of the management of their block by going down the Right to Manage path, under the Commonhold and Leasehold Reform Act (2002). Simply, this involves leaseholders working together to form an RTM company giving them greater control over the day-to-day management of their block.

Many, however, are put off by the assumption that forming an RTM company means shouldering the burden of managing their block independently. But there is a solution – a middle ground between individually managing your block and the traditional managed route.

This type of managed service should be equivalent to that offered by traditional managing agents, but with the distinction that owners are in control of management decisions and are consulted before action is taken.

Landlords who own leasehold properties can expect to see a significant reduction in service charges, insurance premiums and related charges simply by taking control, with the day-to-day management of their block overseen by an agency specialising in block management on an RTM basis.

Typically, provided that a suitable agent is appointed, the costs involved in acquiring the RTM are recovered almost immediately. In fact, it is not unusual to save 25% on the total annual block expenditure.

Reducing your charges

The service charge, which as a leaseholder of a flat you are expected to pay to the freeholder for the upkeep of the building, is usually the biggest bone of contention; understandably so, when tenants believe their money is not being spent very well.

Unfortunately, this is all too common. But leaseholders do not have to put up with over-inflated service charges.

Firstly, if you think the service charge you are paying is too high, or you have concerns about how the money is being spent, you have the legal right (under section 21 of the Landlord and Tenant Act 1985) to ask the freeholder or their managing agent for a broad summary of the service charge account.

By law, they will need to show what has been spent on the upkeep of the property, which must be provided within one month of your written request, including receipts.

However, many leaseholders will not want to wade through all of this paperwork. That’s the beauty of acquiring the Right to Manage. A qualifying group of lessees can take over control of the management of their block without having to prove any failure on the part of the freeholder to manage their building properly.

If the Leasehold Advisory Service’s estimates that residential service charges rose by 46% in just two years are to be believed, there must be a significant number of leaseholders who would benefit from the Right to Manage route.

With this in mind, it is also worth digging around to find an agent that will effectively run your block, on your terms. This is really important from the outset, and the service charges (or maintenance charges) will be the first area you should look at.

Any reputable block management agent should be able to demonstrate that they have a long- established network of contractors and service providers, which means they are more likely to offer substantial savings on service charge costs.

The same is true for general maintenance charges for the day-to-day upkeep of your building. A block management agent will have buying power, especially if they are local and manage a number of blocks.

The analogy of ‘look after the pennies and the pounds will look after themselves’ could not be more true. Before appointing the agent, ask them what the costs of the cleaners, gardeners and other maintenance contractors are and compare that to your existing agent’s fees. Remember, you are legally entitled to be able to request receipt of these costs.

To that end, there is no substitute for identifying a managing agent with true local knowledge. Don’t be afraid to ask them how they select their panel of contractors and how long they have been working with them. Similarly, appointing one that is able to deal with emergencies on a 24/7 basis is equally important.

Crucially, and here I am talking as both an agent and as a landlord, it is vitally important that any work undertaken should enhance the value of the block. This will enable you to maximise the capital value of the building whilst maintaining annual service charges at a sustainable and economic level.

Securing your reserve fund

It is important to make sure that the longterm care of the property is planned and accrued for to ensure least strain on leaseholder finances.

Many leases make an allowance for a reserve fund, which is taken from the service charge, with the view that any expensive unplanned works can be carried out. However, all too often leaseholders find these funds are too low, and will not necessarily become aware of this until an expense crops up.

Having a block management agent in place that provides regular updates on the ‘health’ of that fund is crucial.

While it is not mandatory, it is best to make sure that the block management agent you choose offers Client Money Protection (CMP) and is a member of an organisation that offers an independent route to redress (eg NAEA, ARMA or The Property Ombudsman).

Insurance premiums

A block management company will often be able to offer significantly reduced insurance premiums compared to those you are paying your freeholder, as the freeholder may have sizeable commissions built in, and they are not obliged to disclose them – although they should, they often refuse to. You could also approach insurance brokers or companies direct yourself to ensure you are obtaining the best rate possible.

Costs of issuing Legal Notices

Another cost which is often over-inflated is for the issuing of Section 20s.

Section 20 of the Landlord & Tenant Act 1985 (as amended by the Commonhold & Leasehold Reform Act 2002) sets out the three-stage consultation procedure which should be followed when carrying out qualifying works to your building where the contribution from any one lessee exceeds £250, or a qualifying long-term agreement where the contribution from any one lessee exceeds £100 in one financial year.

If as an RTM company you are looking to carry out works, or enter into a long-term agreement of this nature, then consultation must take place with all lessees. This could be a burden if you’ve decided to ‘go it alone’, but under the supervision of a block management company, the process should be straightforward.

Moreover, the agent should be able to broker the lowest price for larger works using its panel of contractors without compromising on the quality of work.

Health and safety

By law, any block of flats with common areas should have regular health and safety and fire-risk assessments conducted, typically on an annual basis. However, the costs of these are sometimes inflated by freeholders or agents with patchy records to say the least.

By taking control and appointing your preferred agent, there should be clear reports as to when inspections were last carried out, together with the costs involved in doing so.

More Information:

Voluntary Regulation Scheme Launched

Residential managing agents are to be regulated for the first time under a new regime. The regime is voluntary, but is also independent, and has been launched by the industry’s trade body, ARMA (the Association of Residential Managing Agents).

The ARMA-Q regime contains a number of measures specifically designed to protect leaseholders and drive up standards of residential leasehold management.

Most significant is the immediate introduction of independent scrutiny of ARMA agents by a regulatory panel led by a former Labour housing minister, Keith Hill.

Hill will be supported by nine lay members, and it will be the first time that managing agents have been subjected to such regulation.

Further measures will be introduced from 2015 when ARMA members will also be required to sign up to a consumer charter and professional standards committing them to providing a high level of customer service.

ARMA has some 300 members working in the business of block management, where there have been many criticisms of rip-off charges, lack of clarity and failure to maintain common parts of buildings to acceptable standards.

Crystal Horwood is a landlord and managing director of a lettings and management firm, Pace, based in Southend: www.paceplc.co.uk

Read Crystal’s first piece for RPI

Further Information

About the author

RLA

RLA

The Residential Landlords Association (RLA) represents the interests of landlords in the private rented sector (PRS) across England and Wales. With over 23,000 subscribing members, and an additional 16,000 registered guests who engage regularly with the association, we are the leading voice of private landlords. Combined, they manage almost half a million properties.

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