Liz Hodgkinson is an experienced property developer, landlord and journalist. Over the past decade she has bought, renovated and rented out or lived in many flats of all kinds, from new-build to Victorian, from purpose-built 60s and 70s blocks, to conversions and mansion blocks. She contributes a regular landlord and tenant column to the Evening Standard and also writes for the Mail on Sunday, The Lady, Saga, The Independent and Daily Mail.
Another way in which blocks of flats differ from separate houses is that apartment buildings have to be ‘managed’.
This means there has to be somebody to collect service charges, prepare accounts, chase up late or non-payers, organise major and minor jobs and generally be responsible for the day-to-day and future smooth running of the building. That same person or company will also have to answer questionnaires when flats are sold, as well as providing three years’ worth of accounts and any other information a new buyer might require.
It is a complex job and really needs to be done by somebody who knows what they are doing. Management also has to be undertaken by somebody who is totally trustworthy. If the building has enfranchised, and has therefore become a limited company, accounts have to be filed annually to Companies House, and there must be a Company Secretary.
Where there is an outside freeholder, that person will be responsible for the management of the block and will usually appoint a firm of managing agents, but if the residents have collectively enfranchised or won the Right to Manage, they will either have to manage the building themselves, or appoint their own managing agents.
If the building is owned by an outside freeholder, there may still be a Residents’ Association which will hold meetings and discuss affairs to do with the block.
Where a block has not enfranchised or secured Right to Manage, and is happy with the management provided by the freeholder, it may not be sensible to rock the boat. If the residents, in the main, are not happy with the current management, they can take the steps outlined in the following chapter.
Make no mistake, residential block management is complex and time-consuming and nobody should underestimate the work and effort involved.
Many leaseholders do run buildings themselves and, indeed, for several years I was a Director of a block of flats which did undertake its own management. But ask yourself: do you really want to spend every weekend in the office, filling in questionnaires, answering queries, getting plumbers in to mend leaks, collecting money from recalcitrant payers – all for nothing?
Plus if you are in dispute with a neighbour, you are always in danger of meeting that neighbour on the stairs or in the lift. When residents are also undertaking the management there is always the risk of personalising the situation.
Resident management companies
Leaseholders should be aware that if they do have a resident management company this does not mean they can do exactly as they like. Au contraire, as Del Boy might say. A resident management company, even when run by the leaseholders themselves, is subject to exactly the same legal duties as an absentee or commercial landlord.
Duties of managers involve inspecting the physical fabric of the building, and maintaining and decorating it to the right standard. Managers must also have an intimate acquaintance with every aspect of the lease. In addition, those running the building will have to cope with disagreements and personality clashes when they arise. They must also have a thorough knowledge of every aspect of current and future leasehold law.
Maybe the most difficult aspect for resident management companies is dealing with arrears. Whereas a professional managing agent will handle this as part of the job, residents can feel distinctly uncomfortable taking a neighbour to court.
ADVANTAGES OF OUTSIDE MANAGEMENT
Where there are six or fewer units in a block, it may be cheaper and easier to manage the building yourselves. When I lived in a block of four flats where everybody owned a share of the freehold, each owner took it in turns to manage the building, and it worked perfectly well.
But with such a small building, there was no caretaker, no lift, and very little day-to-day management required. When major works were indicated, such as when the building developed a severe dry rot problem, we had meetings in each other’s flats and raised the money between us. It was all perfectly amicable, but this kind of ad-hoc management would not work in a larger block.
Wherever there are eight or more separate flats, I would say it is imperative to go for outside management, as then the workload becomes too great for amateurs, however well-meaning they are.
Management of buildings containing a number of self-contained units requires proper accounting procedures, an understanding of buildings and how they work. People management skills are useful in that there are often splinter groups within a block – almost always to do with payment of charges and fees.
Where residents run the block themselves, they are usually unpaid and part time. By contrast, a firm of managing agents deals with all the issues that crop up on a full-time basis and employ full-time staff for that sole purpose. Also, they have purpose-bought IT for account handling and they have ready access to lawyers, professional bodies and fidelity insurance cover, none of which individual lessees may be able to match.
Fidelity cover to protect client funds is something that the self-managing lessees cannot probably obtain. Agents also have a separate professional indemnity cover to protect them and again, self-managers might find it difficult to obtain such cover.
The Landlord and Tenant Act 1985
Those managing the building must also be aware of the requirements of the Landlord and Tenant Act 1985, as amended by the Commonhold and Leasehold Reform Act 2002 – regarding ‘reasonableness’ of costs and formal consultation procedures. It was on such technicalities that we were constantly tripped up by our barrack-room lawyer. Legal documents constituted his bedtime reading, and he constantly sent threatening letters to all the Directors accusing them of malpractice.
Troublesome residents are less likely to bombard a firm of managing agents with this kind of correspondence, as they are too remote and neutral. I would also say that wherever there are difficult owners, outside management is essential, otherwise it becomes a nightmare living in your own home.
For instance, the landlord must, at the lessee’s request, provide summaries of service charge costs, details of insurance requirements and make available for inspection all relevant invoices and documents. Our litigant obtained a court order to photocopy several years’ worth of accounts and paperwork, all at the expense of the company, that is, us. No wonder there was nothing left over for essential maintenance.
There are many problems you can land yourself with when you attempt to save costs by self-managing. We were constantly being tripped up by our ignorance and niceness. Our litigant kept winning in court by his knowledge and nastiness. The fact that nobody else in the building spoke to him, and most held their noses when passing by him, saying there was suddenly a nasty smell in the air, did not concern him in the least.
He was secure in the knowledge that he was living in the building at everybody else’s expense, and revelled in it.
APPOINTING A MANAGING AGENT
The next questions are, how do you appoint good managing agents and how to find them?
In most towns of any size, there will be several firms of managing agents. Sometimes they are dedicated firms or they can be an offshoot of an established estate agency. If you are in the process of appointing new managing agents, contact them and ask for their brochure or prospectus and scale of charges.
Otherwise, log onto the ARMA (Association of Residential Managing Agents) website, where you will find a list of members in your region. Usually their individual websites do not give fees, but they will outline the services they offer.
The next step would be to contact, say, three companies, and ask for a scale of charges and list of services. You, the lessees or representatives of the Company, have to consider which duties you wish to be performed by the agents, and those that you prefer to retain. For instance, you may prefer to go it alone when tendering for major works.
Most managing agents offer a range of services, and you can choose to leave everything to them, or instruct them to take on specific tasks such as collection of service charges. You can decide, for instance, whether the lessees will share cleaning and gardening, or whether the agent should arrange this. Don’t forget that every extra service comes at a cost, and this may have to be added on to the existing service charges.
The agents will be directly responsible to the Board of Directors who have full powers of hire and fire, although frequent changes of manager will inevitably disrupt continuity of service provision. It is worth doing some thorough research in advance, rather than chopping and changing agents. When our block was in the process of appointing managing agents, we went through two companies in a few months, before appointing a firm who suited our needs.
The paperwork involved
Never underestimate the sheer amount of paperwork generated when running a block of flats. Any handover from one manager to another takes time and it is quite a complicated procedure.
Lessees who have recently enfranchised and who may not know much about management, can initially ask a surveyor to draw up a formal specification for duties, for discussion with prospective agents.
In any case, you should agree the basic list of tasks before approaching agents. What do you want to offload and what do you want to keep for yourself, either to save costs, or because there are perfectly competent people in the block able and willing to do certain jobs?
For instance, somebody might agree to take over the garden because they like gardening. Somebody else might take on the job of keeping the interior decorated.
What must be outsourced when appointing outside agents are the following: collection of service charges and following up late payers; responsibility for annual accounts; drawing up tenders for major works; completing the managing agent’s questionnaire when flats change hands and paying bills to contractors and suppliers. Usually cheques must be countersigned by an appointed Director, and this represents a safeguard for the residents.
A typical list of what you might ask an agent
- What arrangements are there for general maintenance inspections?
- How are minor repairs attended to?
- How are service charge monies collected?
- What are the banking arrangements?
- Is there any provision for emergency out of hours call-outs?
- What commissions would the agent receive from any contracts? All such commissions should be declared in advance.
The Royal Institution of Chartered Surveyors has produced two standard contracts; one for purpose-built blocks of flats, and one for other types of property. The Association of Retirement Housing Managers has a contract especially for retirement housing, as this differs in some important ways from ordinary housing as regards management and service charge payments.
Meetings and qualifications
It is usual for the agent to attend meetings of the Board of Directors, which must be clearly minuted. Most managing agents will attend one or two meetings a year at no extra cost; attendance at others will be billed accordingly. The agent cannot take instructions from individual flat-owners and the position when dealing with requests from individuals must be made clear at the outset.
There are no specific qualifications for managing agents, but membership of appropriate professional bodies is a good start.
In blocks that have enfranchised, the usual thing is for the Board of Directors to be responsible for appointing and liaising with managing agents.
Typical charges and services
Below is a list of typical charges and the range of services offered by an ARMA member in 2006:
Initial set-up fee:
Basic management fee:
£150 per annum per unit
ARMA audit of client account:
£250 per annum
£800 per annum
Company secretary duties:
£500 per annum
Commission on major works:
12.5 per cent
In addition, individual lessees would be charged for consent for alterations, unpaid cheques, late payments and completing managing agent’s questionnaires when selling.
All of the above fees would be subject to VAT.
Where the building has enfranchised, this is the usual arrangement: the Shareholders own the Management Company which appoints the Board of Directors which appoint the Managing Agents who run the management on behalf of the lessees – who are also the Shareholders.
So, as you can see, it is a circular kind of affair where the lessees are also the shareholders who own the management company.
The managing agents do not own the company, as some lessees imagine. They are merely employees of the company. But they are given powers by the Board of Directors to run the day-to-day affairs of the building.
Where the building has not enfranchised, landlords or freeholders may also act as managing agents.
The agents have no contract with individual lessees, and their services are limited to those agreed with the Board of Directors and to which a management fee is payable. They will not do any additional work at no extra cost.
It is also the case that any complaints by lessees concerning management must be addressed to the Board of Directors and not to the managing agents.
It is usually the case that individual lessees will contact the managing agents on all sorts of issues, but the agents have no duty to respond unless the request is part of their agreed remit.
All of these are reasons why it pays to appoint managing agents who are members of ARMA, because then any dispute over management can be taken to a higher authority.
WHAT A GOOD MANAGING AGENT WILL DO
I told you it was complicated!
First, the agents must make their fee structure very clear at the outset and also give the Board of Directors a list of other services which may come at extra cost. They cannot just add on costs as they see fit.
In any case, they will agree to manage the client’s property in compliance with all applicable legislation. This means they must be aware of any current and future changes in the law. They must be fully conversant with the leases, the Articles of Association (where applicable) and Company Law relating to enfranchised blocks.
The ARMA Code of Practice states that managing agents must provide as cost effective a service as possible. This is obviously a difficult one to quantify, as what constitutes cost effectiveness? All managing agents are plagued by difficult residents, who tend to complain when their lengthy, time-wasting letters are not answered. Ask what their policy is with this type of resident, and whether they charge extra for every letter sent out, over and above the usual correspondence required.
Agents are also responsible for getting quotes for insurance cover, and fully understanding the insurance requirements of the block.
Accounts and funds
So far as money is concerned, agents must ensure that clients’ money is kept in a separate, dedicated account and that individual client accounts can be separately identified. This is most important, as funds in one client account must never be used to finance another client’s property. The funds must be held in a recognised bank or building society and clearly designated ‘Client A/C.’
Cheques must have the block name printed on them, for example ‘Fairview Apartments Ltd’. This is so that you know your block has its own separate account.
Any funds or levies raised for major works must be kept in a separate interest-bearing deposit account, away from the day-today service charges.
Detailed records must be kept of all transactions and expenditure from the client account suitably authorised.
Agents must also ensure that annual accounting is carried out promptly and be able to supply all paperwork relating to drawing up those accounts which, in the case of a limited company, must be submitted to Companies House by the required date.
Where there is a Residents’ Association, managing agents must consult regularly with members. They must also declare an interest in any contractor or business employed to provide services at the property. For instance, if a managing agent also has a construction company, this must be known before the company is invited to tender for works.
CODE OF PRACTICE
All managing agents who are members of ARMA will have a Code of Practice, which can be given to the Residents’ Association on request. It should be noted that the profession, if you call it such, of managing agents is unregulated, and there is no requirement for them to become members of ARMA. This does not mean they are no good, but there may not be a grievance procedure, or any higher authority to whom to appeal if things go wrong.
As ever more blocks enfranchise or gain the Right to Manage, it is important to appoint a thoroughly professional company to manage the property, especially as the likelihood is that residents themselves will not know much about running the block.
Please also note that any managing agent, however conscientious or reliable, is just doing a job. The building is not their home and as such, they are never going to take as much interest in it as you do.
To me, the most important aspect of appointing managing agents is that they take all the emotion out of running a block of flats. They should be calm, detached and professional, whereas when leaseholders run their own block, emotions tend to run very high.
FORMING A RESIDENTS’ASSOCIATION
Where the block has not enfranchised, it is always worth forming a properly-constituted Residents’ Association.
Where it has enfranchised, leaseholders will be members and shareholders of the company, so there is probably not a lot of point in adding another layer, as the whole purpose of the Residents’ Association is to form a collective voice when it comes to spending money and keeping up the standard of the block.
A brief outline of Residents ‘Associations’ purposes
Detailed information can be obtained from the Federation of Private Residents’ Associations, but here is a brief outline of the function and purpose of such Associations.
- They can make the landlord or agent carry out regular inspections, and have a say in the expenditure of their own money.
- They can meet the landlord or agent to discuss the needs of the residents and negotiate with either residents or landlords and assist in resolving disputes between residents.
- They can apply for a determination of the reasonableness of service charges (most important) and make sure they are consulted on major works.
It is often useful to form a Residents’ Association in advance of trying to obtain collective enfranchisement. In any case, it makes sense for any lessees who have an outside landlord to form an Association. This can be exercised in both the private and public housing sectors, but there is, as always, a right and wrong way to form such an Association.
First, all residents have to be circulated, excluding the landlord and any employees such as a caretaker, with a letter giving a brief history of the block and a tear-off form to be sent back to the organiser. It is a good idea to include a stamped addressed envelope, as nowadays it seems it is too much trouble for many people to buy an envelope and a stamp and find a letter box.
Ask some supporters to form an Acting Committee. One person should also be designated an Acting Chairperson. Then call an informal meeting of the residents, explaining what the proposed new Association is all about.
The best way of setting up an Association
At an early stage, contact the FPRA (Federation of Private Residents’ Association), a non-profit making body, which will advise on the best ways of setting up such an Association. There will have to be an annual subscription, and when the group is up and running, an Honorary Secretary has to be appointed, who is responsible for taking minutes and keeping records. There will also be a subscription charge to the FPRA, and a charge for their very useful booklets and instruction manuals.
After the initial meeting, the new Association should apply to the landlord for recognition. Again, the FPRA can help out here, as you will need a Constitution, which can be quite lengthy and involved, but which is necessary if the Association is to be properly run.
Once the Association is formed, with a Chairman, Secretary and Committee, meetings must be held. These usually consist of an AGM (Annual General Meeting) and possibly a number of EGMs (Extraordinary General Meetings), to discuss more urgent issues that cannot wait for the AGM. With EGMs, the same procedure has to be followed as for an AGM.
Outside landlords and recognised Residents’Associations
It is always a good idea to have a Residents’ Association in a block of flats where there is an outside landlord. And such Associations can have legal force, as they may seek statutory recognition from the landlord. Again, the FPRA can help here with its explanatory pack. Recognised Residents’ Associations have more power than informal ones and they are entitled to be consulted about the appointment of managing agents; be notified of works proposed by the landlord and receive a copy of estimates; submit the names of alternative contractors; obtain information about service charge accounts and appoint their own surveyor.
Where it might be too difficult to enfranchise or go for Right to Manage, a recognised Residents’ Association may be the next best thing. It is easier than the other options and, in many cases, can work just as well.
Robert Levene, Chief Executive of the FPRA, explains further:
We advise our members on all issues relating to living in a flat and also lobby governments and make representations on legislation.
The biggest issue is always payment of service charges as many flat owners believe these are optional. One reason for this is that few solicitors or estate agents ever point out what the covenants are and how they are enforced. Very many people buy flats believing they don’t have to pay Service Charges if they don’t want to. We are hopeful that the new Home Information Pack will change this attitude.
Most managing agents, he adds, don’t themselves live in flats because they know only too well what the problems are.
WHERE YOU HAVE ENFRANCHISED
All residents in possession of a membership certificate – given to you when you buy the property – are members of the Company and as such will be invited to attend the AGM. Although attendance at AGMs is not required, it is compulsory to hold such a meeting, which will be chaired by the Chairman and the Company Secretary will take the minutes.
The AGM will consist of approval of accounts, the Chairperson’s report, updates on debtors, reports on major and minor works and any other changes since the last year and, finally, Any Other Business – which is usually where the fun starts. It is the Chairperson’s job to keep order – and a firm hand will often be required.
There may be matters on which members may vote, such as the appointment of new managing agents, a new Chairperson or new Directors and the usual thing is, one vote per flat. This means that if one person owns three flats, they get three votes, but if four people live in one flat, they only get one vote between them.
Debtors or those in arrears may attend the meeting but will not be allowed to vote. Friends or relatives of members may be allowed to attend the AGM (should they wish to) but must remain silent. They are not allowed to offer opinions and comments, or to vote.
There may also be one or two Extraordinary General Meetings (EGMs) throughout the year, such as when emergency major works are indicated, and cannot proceed without a majority vote from members.
AGMS and EGMs must be minuted, which does not mean that everything has to be taken down verbatim. The gist of what was said is good enough, although it must be accurate.
Occasionally, there may also be Directors’ meetings and these must also be minuted. The managing agents will usually attend these meetings, but there may be an extra fee for such attendance.
These are the formal aspects of management. But the main aim in a block of flats is to make sure everybody gets along – and this is often more difficult to achieve than the formal aspects.