Well that’s a provocative title but let me give you some context.
This article explores the conflicts of interest managing agents have when they are appointed by a property developer.
The reputation of many property developers is in tatters and rightly so. Refusal to cover the costs of fire remediation works and poor build quality are two major factors, but the managing agents appointed by these shysters are complicit in making it difficult for affected leaseholders to hold developers to account.
This article delves into how this cosy relationship negatively impacts leaseholders and also provides some remedies to try to mitigate some of the risks that this developer/managing agent alliance poses.
So what are the conflicts of interest?
Service charge budget (especially year 1)
It starts before you’ve even bought the lease. Developers want the service charge to appear as low as possible to make the flats more saleable. Managing agents are “encouraged” to make the initial service charge artificially low. This could be through understating costs, not including provision for cyclical expenditure (internal and external re-decoration springs to mind) or the provision of any kind of reserve fund.
Once the last flat has been sold, the developer checks out. They now want to count the profit and will often be resistant to laying out any further funds. Often, managing agents are asked to put snagging issues through the service charge account, a clear breach of section 19 of the Landlord and Tenants act 1985 (Reasonableness of service charge expenditure).
There is a lot of misunderstanding about building guarantees in that developers will sell the concept of a 10-year guarantee, but this only covers major building issues such as problems to the underlying structure. Minor snagging type items are typically only covered for 2 years. Many managing agents make it difficult to progress these issues seeking to time them out.
Longer term build quality issues
Often, issues relating to poor build quality take longer than two years to become apparent. Again, the developers appointed managing agent will not seek to compromise the promise of future new-build management contracts by pushing the developer to deal with these issues.
This starts before you have purchased the flat. Don’t assume your conveyancing solicitor will analyse the budget for you. They almost certainly won’t. Pertinent questions to ask at this stage include
- Has provision been made for internal and external re-decoration in the first 5 years?
- Does the budget include a reserve fund?
- Does the reserve fund identify the items it is being accrued for? Items with moving parts will always wear out and/or need upgrading. e.g. electric gates, lifts, water pumps, sewage pumps
Managing agents are required to make available a summary of costs within 6 months of the end of the service charge year but these don’t tell the full story. Under sections 22 & 23 of the landlord and tenants act 1985, you can demand to see all of the paperwork that underpins the summary of expenditure including access to original invoices. Serving a notice under section 22 will provide the opportunity to identify suspicious invoices (where managing agents have appointed contractors to carry out snagging works).
If you don’t want to wait until 6 months after the service charge year end then a minimum of two leaseholders can demand a management audit pursuant to Section 76 of the Leasehold Reform, Housing and Urban Development Act 1993
If you do find any suspicious invoices, you can apply to the First Tier Tribunal under section 27a of the landlord and tenants act 1985 to determine if they are payable.
Common Ground’s position
Whilst Common Ground doesn’t rule out working with ethical property developers, we have a very strict code of conduct which we announced on 11 October 2022 – Please see Services for property developers
This expanded on our previous code of conduct and now requires our developer clients to vest the freehold interest in a resident’s management company. This resulted in us terminating agreements with our last remaining developer clients.
Common Ground is committed to the abolition of the leasehold system and its replacement with the Commonhold system so we will not work with developers that continue to perpetuate the feudal enterprise that is the leasehold system.