Roger's Blog
Design for life and management
Any homebuilder or developer would put together a new development design team and automatically include architects and lawyers but why not management specialists? The architects will design a good building but do not have to manage it. The lawyers will draft the lease, but will not necessarily get the service charge provisions right because, again, they do not have to manage the building!
So what can managers bring to the party? Their years of skill and service in knowing how the building will run; spot the areas that cannot be cleaned; spot the gaps in the leases that will cause issues at a Leasehold Valuation Tribunal (LVT) at a later date; and make sure the space is serviceable and manageable.
Historically the developer wants the manager to give his or her services for free and merely compile a service charge budget and then the estate agents will come along and want that slashed to make it easier to sell the apartments. This is instead of utilising the manager’s skills in upselling their services, management and making the running of the building a virtue of the added value.
A truly enlightened developer will realise the benefit and the need of bringing the manager into the heart of the design team as early as possible. This is where they can gain value in the apartments and gain value in their sales. Along with making sure the running of the building can and will be smooth following completion.
Is this a pipe dream? No, I believe times are changing and the realism will come to the fore. Chainbow is positioning itself to lead this changing added value service.
Long Term Agreements
Some things in life are simple and do not need much discussion, such as, does the light go off when the fridge door shuts? Long term agreements should fit into the same category when you look at the legislation governing them but you would be surprised how many people would debate this, especially lawyers who want to change black into white.
The Commonhold and Leasehold Reform Act 2002 made it illegal to establish any agreement longer than a year without consultation with purchasers and no longer than five years before the first leaseholder acquires their lease. In both cases the agreement value must be greater than £100 per unit per annum.
Simple, you would think, but lot of developers and homebuilders do not stay up to date with the latest legislation and no one thinks to tell them. Also, renting a door entry system for more than five years would be a huge cost to homeowners instead of a more modest level over 20 years. The trouble is the 20-year agreement gets very expensive, very quickly.
Some enter into the agreements innocently and genuinely think they are doing the best thing to save leaseholders money. However, the unscrupulous will do it for their own benefit. In reality, though, even this is too simplistic.
What is a developer to do if costs are running away on a site and they are staring down the barrel of a huge loss and possibly going bust? From their perspective, removing some costs is a sensible option but the impact this has on the building’s service charge is huge and will probably not have been accounted for in draft budget given to purchasers.
Equally there will be items dropped in the hope no one notices but will need to be installed at a later date. For example, a gate to stop pedestrians accessing a secure car park from a central podium even though a fortune has been spent securing the vehicle entrance!
The additional spice comes when someone argues that an agreement is not a long term agreement which is equally challenging when there is a Right to Manage (RTM) company involved. Right to Manage is the process whereby a majority of leaseholders can decide to take control of the running of the building.
On securing a RTM company, all agreements should come to an end and this is difficult when equipment is rented on a 15 or 20 year contract. At the end of that period the equipment will still belong to the leasing company and the RTM company has two dire choices; either negotiate some better terms or face having all the equipment ripped out. The second option would mean the leaseholders would have to become developers to get their systems back!
So whichever way you look at it, it is always easier to do things right and do things once than look for short cuts, stay ignorant of the law or try for the fast buck.
As an aside on this topic, one issue that is painfully obvious is how our legislators and successive Governments just do not understand property and development. The long term agreements had nothing to do with unfairness in maintenance and everything to do with developers avoiding cost on some equipment or machinery. If a developer can save money on security system, door entry or TV aerial by arranging a rental agreement that lessees will pay for, why wouldn’t they do it? The worst I have ever come across was apartment block lifts rented on a 30-year agreement that would not be owned by leaseholders at the end of the term. This meant the homeowners were actually paying for the lift installation cost and maintenance!
Who pays the piper?
For some reason there has been a long history of confusion regarding who owns service charge monies. There are public property companies that incorporate service charge monies within their turnover and the service charge expenditure within their outgoings. This has the effect of enhancing turnover and hiding the shortfalls in the service charges on buildings they run.
In reality it is very simple - service charge money belongs to the leaseholders who have paid it. It is effectively held in trust until spent and accounted for by the landlord or its managing agent.
It is easy to see this when you look at a correct set of service charge accounts, which show money collected, expenditure, and surplus or overspend.
This is true for commercial and residential property although the sanctions and actions on residential flats are greater than they are in commercial property because of the wealth of legislation and the Leasehold Valuation Tribunal (LVT). However, for the leaseholder it will cost them to get resolution for misspent funds and unreasonable charges. So, in order to prove that something is unjust, fees will be incurred with whoever is acting on the leaseholders’ behalf. Therefore, consideration is needed to make sure that you are not spending a £1 to recoup 1p!
Even when a decision is derived from the LVT some landlords will play so fast and lose to avoid refunding the declared unreasonable charges. There is a school of thought that the LVT, whilst declaring service charge items unreasonable, cannot actually make monies be repaid. If this is true why would anyone ever pay their service charge?
Instead, people would wait until the year end accounts are produced, see what has been spent, decide what the reasonable items are and only pay their contribution to them. If this actually happened it would make every building in the land unmanageable and quickly descend into dirty and unkempt messes.
Therefore, it is common sense that everyone manages for the good of all, seeks reasonableness in all they do and ensure that leaseholder money is well looked after.
This will not stop the hardened minority of leaseholders who always know best and are always right, regardless. For them they will not understand the difference between budget and actual year end expenditure. They view service charge accounts as profit and loss accounts and need a full audit as if it were a FTSE 100 Company’s year end.
Perspectives about accounts have varied wildly and I’m sure they always will. Had the Government enacted s166 of the Commonhold & Leasehold Reform Act 2002 covering service charge accounts and reporting then there could have been some consistency for people to adhere.
For those of us reviewing others’ service charges and challenging unreasonableness, all the while there is an ability to get it wrong, then there is scope for being retained and seeking redress.