Proper regulation is needed, while far-reaching leasehold reform must accompany changes to the building safety regime
Residential property management is broken and the regulation of managing agents long overdue. Not just from a financial point of view but also operationally, for running safe and compliant buildings. Leaseholders are typically disenfranchised, sometimes dismayed and often confused, while there are repeated reports of overcharging, poor maintenance and breaches of health and safety legislation.
Most property managers genuinely want to do a good job and are admirably trying to address the failures of customer service that are all too common. But the industry is fragmented, poorly regulated and almost exclusively populated by owner-managed businesses, which control about £5bn of service charges and sinking funds with no requirement for protection of clients’ money.
The Association of Residential Managing Agents (ARMA), a voluntary professional rather than regulatory body, states that only a third of all managing agents in England and Wales are members and abide by its standards and code. ARMA’s membership base manages 1.25m of an estimated 4.3m leaseholds in England. This means that millions of homes are under some form of ‘self-management’ by people with no professional indemnity insurance. These blocks are unlikely to have sufficient insurance to cover theft or misconduct, and consequently consumers are vulnerable, particularly regarding health and safety and fire regulations.
Having just moved into their new home, leaseholders tend to overlook the mundane requirements of maintenance schedules to establish sinking funds for longer-term expenditure. Without these, however, when the roof caves in or the 40-storey high-speed lift breaks in 20 years’ time, it’s the people owning the apartments at that specific point who will be entirely liable for the total costs of the repair or replacement. This seems pretty unfair if you only moved in the week before.
For the investor, their relationship with the property manager is vital; they hold many of the cards in protecting the investment and determining its future value. The average term for apartment ownership in the UK is roughly four years, which highlights the disincentive to adequately provision for long-term costs. Sinking funds tied to formal planned preventative maintenance schedules should be mandatory. But what happens then when the sinking fund is non-existent or a current leaseholder can’t pay their legally defined fair and reasonable share of the costs? Consumer insolvency? A stagnant housing market? Negative equity? Mass mortgage default?
These circumstances are magnified by the race to the bottom on management fees and the inherent conflicts of interest that exist in self -managed developments, where a managing agent is effectively subservient to their inexperienced, unqualified leaseholders to keep their instruction. Let’s refer to these people as Jeremy from Number 10.
If leaseholders don’t remunerate managing agents properly, they shouldn’t expect to get a proactive, professional service. This is not a plea for the managers to earn more; it is a plea for transparency. Cost is not value, and society in general needs to understand this, but almost all assets, including residential property, need investment to maintain and hopefully enhance value. Nigel Glen, chief executive of ARMA, says: “It will probably surprise most leaseholders to learn that a managing agent’s profit is probably only £10 or so per unit per year. They would love to be able to offer the level of service that leaseholders increasingly (and understandably) demand. The way forward is an honest discussion of what leaseholders want and what that would cost to deliver.”
Without proper regulation to assist managing agents in following best practice and fulfilling legislative obligations, we as a society cannot expect the care and maintenance of our built environment to adhere to the highest of standards. Duncan Rendall, chief executive of residential property management company Rendall & Rittner, comments: “The focus needs to be on mandatory personal and professional accountability both at a corporate and individual level. It is hard to think of another sector where, in aggregate, hundreds of millions of pounds of client funds can legitimately be held by unregulated entities. The Grenfell tragedy demonstrated the governance of the sector needs serious reform and underqualified, part-time, self-managers should not have free rein to dictate policies which jeopardise the wellbeing of their neighbours, no matter how appealing this might seem to politicians from the popularist standpoint of consumer empowerment.”
The government’s proposed reforms to building safety – based on the recommendations of Dame Judith Hackitt in response to the Grenfell fire – are well thought out, particularly around the concept of a ‘golden thread’ of responsibility that runs through a building’s life, but who do they believe will fulfil the role of ‘responsible duty holder’ or ‘accountable person’? We should all be under no illusion that while these intentionally onerous positions are designed to prevent catastrophes, they are also there to assign accountability in tragic situations.
Managing agents are excluded from performing these roles under the proposals, and so they would need to be fulfilled by either a resident or a professional freehold investor. If ground rents are set to zero or commonhold is made mandatory, professional, experienced, well-resourced institutional investors simply will not invest in the sector. At that point you have Jeremy from Number 10 as your ‘accountable person’: ill equipped, with no formal qualification or credible expertise to discharge this vital role. That is if, indeed, he is even willing to undertake the role once he finds out the responsibilities and requirements to be placed upon him.
ARMA’s Glen comments: “Government policy is now pulling in two opposing directions. On the one hand we have zero ground rents, easier enfranchisement and a move towards commonhold – all aimed at encouraging self-management. But building safety reform under Hackitt requires a named individual who may end up in jail. Which resident would sign up to be a director under that scenario?”
Leasehold reform needs to dovetail with reforming the building safety regime; these things are inextricably linked. The professional freehold industry can be the catalyst for change and deliver the reform and stewardship the government needs to deliver, but there has to be sensible reform of leasehold ground rents to achieve this. A single regulatory body for managing agents, together with reforms to building safety and the leasehold system
