The law requires all charges levied by a landlord for services provided to be “reasonable” and “reasonably incurred” and to have been arrived at after a prescribed consultation process. Unfortunately, however, notwithstanding successive legislation over the last twenty years, it is still easy for unscrupulous landlords and managing agents to exploit what is still an inadequately regulated sector, particularly where older residents are concerned.
A growing number of residents are asking how they can tackle these issues with a view to preventing further exploitation. If you think you are being overcharged, the first thing to do is to request the invoices for the previous year, or more if you wish. These will be supplied by the Area Manager, from Head Office, and will include an audit trail. You should receive original invoices and bank statements. You may also find that the Managing Agent has sorted out anomalies, including duplication of payment, and you may be very surprised by individual amounts claimed for items such as cleaning the smoke alarm. We suggest you look at every invoice, and also suggest that local contractors are used (to cut down unnecessary travelling costs by Peverel preferred contractors). You may find that a local small contractor is not VAT registered – this makes a difference of 20% to the final bill. Always insist on obtaining multiple quotations for maintenance if you want to keep the costs down from local well recommended businesses. If you find looking at this documentation too daunting, try asking your children or a friend who has a bit of financial experience to help you. Make a list of questions with regard to the charges you feel are too high, and press vigorously for answers.
The principal, and recurring, issues that we see are:
1. House Manager Flat rentals. In many developments landlords provide flats for Resident House Managers, the rent for which is charged to the Service Charge account. It is not unusual to see these well above the market rate for the local area. Fairhold Homes, and its Managing Agent Peverel, has been particularly conspicuous in this respect, charging rents up to three times the local open market rate. By challenging these charges, our members have obtained substantial rent reductions and rebates, either by negotiating a private settlement or by going to a Leasehold Valuation Tribunal. Fairhold try to justify their high rents by spurious references to all the many “valuable benefits” that a tenant would enjoy. These are already paid for by leaseholders through the high service charges so there is no justification for a premium rent. Remember also that market rents are inclusive of service charges and ground rent, neither of which are paid by Fairhold. In the case of the service charge element, this is already paid by the leaseholders via their own service charges. Following a complaint from one of our members, The Association of Retirement Housing Managers (ARHM), who sets the operating standards for its members, has ruled that Peverel must in future ensure that Fairhold’s rents are “reasonable”. Currently, Peverel’s proposal is to subsidise rents that it considers to be too high but without disclosing how it will determine this. It has no intention either of paying rebates for historical overcharges. We believe this is unacceptable, depriving leaseholders of their rights, and have filed a further complaint with the ARHM.
2. Insurance Premiums. There is clear evidence that premiums are inflated by excessive commissions shared between landlords, brokers and managing agents, with the connivance of insurers. A recent report by The Royal Institute of Chartered Surveyors (RICS) (see RICS report on transparency page and link to report on that page) confirmed that the way things are presently operated causes significant “consumer detriment”. There is no inducement to landlords to negotiate lower commissions; the higher they are, the more money they make, at leaseholders expense. In the case of Fairhold, Peverel and Kingsborough (their in-house broker) all parties are part of the same group. As a consequence “commissions”, and therefore premiums, are unnecessarily high for the minimal amount of service provided. It is common for the commission to be in excess of 33% of the total premium. These have been challenged are now being reduced to 14%, still too high. If there are commissions to be received, these should be for the benefit leaseholders themselves for whose benefit the insurance is arranged..
3. Emergency Monitoring (“warden call”) services. These are available from a large number of providers, all members of the “Telecare Services Association”. In a number of cases, however, Managers use their own companies. Cirrus Careline, for example, the exclusive provider of monitoring services to Peverel-managed properties, is owned by Peverel and their contract rarely comes up for competitive tender. If Peverel lose the development’s management contract under the “Right to Manage”, Careline provide significantly lower quotations to the incoming manager to retain their business. Cirrus Communications Systems, again Peverel-owned, maintains and services the physical equipment in each retirement development. The Telecare Services Association can provide alternative, more competitive suppliers in your locality from 45p per flat per week approximately, in comparison with Cirrus who charge £1.50 per week per flat.
4. Contracts with connected parties. A number of landlords, Fairhold being the largest, are members of integrated groups providing the majority of services and supplies to residents “in-house”. This is inherently uncompetitive since contracts are rarely put out for competitive tender and costs are higher than they should be. It is hard to believe that group companies are always the lowest cost, or best, providers of the service in question. Once in control of a development, landlords in this position can, and do, act as quasi-monopolies and charge monopoly prices. The law requires that there must be at least two quotations for qualifying contracts, one of which must be from an unrelated party, a requirement that it is not difficult to circumvent. A requirement of the ARHM’s Code of Practice, that Managers should disclose any corporate connections they have with contractors, is frequently ignored. Peverel, for example, changed the service provider of the House Manager’s office phone and the dedicated Careline link from BT to BNS Telecoms, a company which, at the time, was connected to Peverel’s parent company, Consensus. This connection was not disclosed to leaseholders and Telecoms charges subsequently increased. Following a number of complaints, Peverel were obliged to rebate the excess charges.
5. Unfair terms of leases. Many leases include clauses that create an unfair imbalance of powers and rights between landlord and leaseholders. One of the most exploitative is the obligation of leaseholders to pay a “transfer fee” to the landlord if the flat is sold or let. These fees, for which the landlord usually provides little or no service, range from 1% to anything up to 10% of the flat’s capital value. Leaseholders who have to go into care, or their relatives, who need to let the flat to produce an income to help with costs, have to pay this fee every time the flat is re-let, often making it uneconomical to do so. In April 2009 the OFT declared the 1% transfer charge levied by McCarthy and Stone to be “Unfair” and M&S undertook not to enforce it. However, M&S had already sold most of its freeholds to Fairhold Homes or Peverel to whom the OFT undertaking does not currently apply. The OFT is now investigating the whole retirement leasehold sector to outlaw this practice across the board. In the absence of similar voluntary undertakings, it is likely to have to take the matter to court for a definitive ruling. Charges raised for granting “permission” for many trivial internal changes to flats, with no material impact on the property or other residents (replacing a bath with a shower for example), are also totally unnecessary and just another way of extracting money from leaseholders.
6. Resident or Non-Resident House Managers? While many residents may be happy with a resident manager, these come at significant extra cost. Fairhold, via Peverel, claim that they are obliged to provide resident managers where one has been provided from the opening of a development. This is unlikely to be the case, Fairhold’s motivation being more likely the preservation of the excessive rent they obtain from providing a flat than any concern for leaseholders’ wellbeing. The lease only requires the landlord to use his “best endeavours” “as far as is practicable” to provide a “house manager”. This obligation can equally well be satisfied by providing a NON-resident House Manager. A Leasehold Valuation Tribunal has expressed the same opinion (see link to this case on LVT links page: MAN/00CA/LSC/2005/0003, Mayhall Court, Liverpool). Due to changes in the House Managers’ contracts of employment, following the European Working Time Directive, the services provided by a resident House Manager are now the same as those provided by a visiting (non-resident) House Manager, further weakening the distinction. HMRC now treat the flat as a taxable benefit since it is no longer necessary for the performance of House Managers’ duties. This tax charge is passed on to leaseholders as an additional cost of employment of the resident House Manager. The House Manager is, however, protected by law against unfair dismissal. In practical terms, therefore, the opportunity to switch to a non-resident House Manager only arises when the incumbent agrees, resigns, dies or is legally dismissed (due to misconduct, dishonesty etc). If the Managing Agent (the employer) is changed by exercising the Right to Manage, and the House Manager wishes to stay in his or her position under the new employer, the terms of employment would be protected by law (The Transfer of Undertakings (Protection of Employment) Regulations) (TUPE) and would stay essentially the same as they were under the previous Managing Agent.
7. Threats to introduce car parking charges. Don’t be intimidated; the landlord is most unlikely to have the right to do so if the lease does not provide for such charges.
8. Right of First Refusal. The law gives leaseholders the right of first refusal if the landlord plans to sell the freehold. This is routinely circumvented by sellers exploiting a loophole in the law, selling the company that owns the freehold rather than the freehold itself. Legally speaking, therefore, the freehold has not been sold. The first that leaseholders know of the change of ownership is when their next ground rent or service charge demand comes under a new landlord’s name.
9. Misuse of leaseholders funds. S. 42 of the 1987 Landlord and Tenant Act established that Managers holding funds on behalf of leaseholders do so as trustees, bound by trust law. They may not therefore profit from this role beyond a reasonable fee for their services and must act at all times in the interests of leaseholders in dealing with their money. The view has been expressed by lawyers that if the Agent, or related companies, gain financially from the placing of contracts paid for by leaseholders, they are acting in breach of trust. This has not yet been tested in court however. Certain “registered social landlords”, such as “not-for-profit” Housing Associations, are “exempt” from the provisions of S.42. The status of funds held by them for leaseholders is less clear and capable of manipulation in the wrong hands. We are aware of more than one case where leaseholders’ contingency funds have been invested in inappropriately risky assets, the extra return on which is retained by the managers while the risk lies with the leaseholders. The SFO is believed to be investigating such activities.
10. Failure to consult leaseholders on major works. The law requires Agents to follow a prescribed consultation process with leaseholders before long term contracts (over 12 months), or those for higher cost works (over £250 per flat), are entered into. This is frequently not followed, particularly where the Agent is determined to see his own group company, or preferred supplier, win the business, in which case leaseholders are not obliged to pay the full cost of the works incurred without their proper consent.
11. Contingency Fund (CF). In response to questions raised by several leaseholders querying the CarlEX view on Contingency Funds, as per the video and other media statements, CarlEX wishes to make it clear that Contingency Funds are extremely necessary and we fully support payment into these funds on a regular basis and we have no problem with the 1% to CF on sale. We also bring to owner’s attention that sometimes these funds are too low. We do have a problem with mismanagement of the CF. Many of them have a huge amount of money in them and interest manipulation and spending from these funds ought to be totally transparent to the residents.