Do block managers, freeholders and energy brokers make commissions from energy contracts?

In most cases, Almost certainly but it might not necessarily be the case that all three of these parties are taking a commission.
It does appear that in recent years, more commissions are being paid to more parties and all to the detriment of leaseholders.

Why do managing agents use energy brokers?

The answer may surprise many leaseholders, but the main motivation is based around saving money rather than making it. This occurs on two levels:

1. The managing agent often has many energy contracts across multiple estates under management and can benefit leaseholders with economies of scale
2. The managing agent has a single point of contact for all billing. This is a huge motivation for managing agents in terms of time savings. Managing individual contracts for each development under management with different utilities providers is extremely time consuming

Recent market changes in the energy markets

Historically, brokers might have made a small margin on energy and the cost of standing charges would be whatever rate the energy provider had quoted. This business model was severely dented when Covid hit. With much less energy being consumed, brokers and utilities companies found their margins squeezed so had to adapt accordingly.

This “adaptation” took the form of increased commissions on energy but, more poignantly, on the standing charge as this guarantees the brokers and utilities companies revenue irrespective of whether energy is used or not.

Then, on the converse, we saw the energy crisis of 2021 resulting in hugely elevated utility bills. Energy rates have since come down but many brokers have retained prices over and above current market rates. These rates are a lot lower than during the peak of the energy crisis but still represent “hidden” profiteering by energy brokers and they get away with it as the leaseholder has no rights in law to demand details of commissions being retained by all parties to a communal utilities contract; They are at the mercy of several parties to a contract (managing agent, freeholder, broker) all with a vested interest (commissions) that isn’t necessarily in line with the leaseholders best interests (lowest possible utility bills).

What can be done?

The majority of utility brokers operate a business model of making their revenues via commissions and attract business by sharing parts of these commissions with “customers”, which in this case is not the leaseholders but the managing agents and freeholders who hold the authority to place utilities contracts.
Common Ground Estate & Property Management has provided transparency of service charge expenditure as part of it’s offering since it’s inception in 2008. The above business model has provided something of a challenge in that the service of cutting down on our administration costs is invaluable but the commission element does go somewhat against our values.

Common Ground works with Argent Partnership who have a unique business model in that they don’t take commissions from Utilities Providers.

Argent Partnership are not brokers…..they are Utility Consultants. A small but significant difference because as Consultants they are remunerated entirely by pre-agreed fees (rather than hidden commissions) based on the usage of the meter and receive no benefit, financial or otherwise, from suppliers for placing contracts.

It also means all tender prices presented are 100% transparent and straight from the supplier.
Lastly, unlike a broker who may be incentivised by the levels of commission they are able to agree (and as importantly the speed at which this is paid to them by the supplier), any recommendation that Argent Partnership make with regards to a supplier or contract is objective and a reflection of what is the best deal for that client.

Will the practice of commissions be outlawed?

At the time of writing this article, The Leasehold and Freehold Reform Bill is working its way through the House of Lords having already completed its journey through the House of Commons.

Part 1, sections 57 & 58 are based around outlawing the practice of managing agents and freeholders making commissions on insurance policies and replacing this with a system where transparent administration fees replace these commissions.

Clearly, freeholders and managing agents will still make money on placing insurance but the transparency should ensure a greater level of reasonableness. i.e. fees which reflect the work that goes in to managing the placement of insurance and the subsequent management of the policy (mainly claims management).

It stands to reason that if the market fails to regulate itself and act reasonably and in the interests of the ultimate consumer (leaseholders) then the framework outlined in sections 57 & 58 could easily be applied to utilities.