The £700m property fee rip off

by John Fitzsimons on 15 April 2011  |  7 comments
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Property service charges can come to thousands of pounds. But there are ways to cut the costs, as guest blogger Steve Wylie explains.

What is your biggest annual expense? Car insurance? Utility bills? Chances are that if you live in a leasehold flat, service charges will be near the top of the list, with some flat owners paying thousands of pounds each year.

What’s more, according to our research, flat owners are being overcharged by an average of £400 a year. Across the country, these excess fees add up to an eye-watering £700 million. Unlike for insurance or utilities, you cannot simply visit a site like lovemoney to help you shop around for a better deal on your service charges.

However, you can still bring the cost down.

Leasehold Vs Freehold: The cause of overcharging

In the UK most houses are owned freehold, meaning that the owner has full control over the property. However, in the case of apartment blocks, a separate form of ownership (known as ‘tenure’) is most common. Residents typically own their property’s leasehold, with the building itself, including the common areas and the land it is built on, being owned by a separate freeholder.

Under the law, however, it is the responsibility of the leaseholders to pay the freeholder for the upkeep of the building through their service charges.

As a consequence, the managing agent at a block of flats is employed by the freeholder, but paid for by the leaseholders. This creates a conflict of interest and a system that is wide open to abuse.

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Practices such as charging excessive commission for buildings insurance, choosing financially-linked companies to carry out works for financial gain, or undertaking unnecessary works are widespread. Many flat owners complain of agents who simply do not respond to maintenance issues. Nevertheless the leaseholders, who suffer all the hassle and costs, often find it impossible to even discover the extent of any sharp practice, let alone prevent it, as the freeholder is the agents’ client.

Lack of transparency over where the service charges are going is a real issue.

Taking Control

The way to end overcharging is to take control of the management of your block of flats. There are two ways to do this, Enfranchisement or the Right-to-Manage (RTM), and you should consult the experts before deciding which the best option is for you.

Enfranchisement is the process of purchasing the freehold of your block. Under the Leasehold Reform, Housing and Urban Development Act (1993), leaseholders have the right to purchase the freehold of their block, provided that more than 50% of the residents support the process. Each leaseholder then owns a share of the freehold.

The alternative is the RTM process under the Leasehold and Commonhold Reform Act (2002), which again requires 50% of the block’s residents to agree to take part, and transfers full management rights to leaseholders. This is also the cheaper option as it does not involve a change of ownership.

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By going down either of these routes, residents can take full control and choose how much involvement they have in the day-to-day running of their block. They can decide to direct the existing managing agent, appoint a new agent or manage the block themselves, giving them the power to choose what work is done and when, how much should be spent and which contractors to use.

The Next Step

Directing the management of your block is vital to bringing down service charges and improving service levels, but in many cases taking control does not necessarily translate into actually having control.

Overseeing the existing managing agent or switching to a new one is not always guaranteed to solve the problem of accountability - it's the business model of the managing agent industry, rather than the odd rogue operator, which is the real root cause of the issues of overcharging and poor service.

For those for whom taking control or removing the managing agent is not an option, we are campaigning for cuts to red tape and improved transparency in the industry. It is about time that all leaseholders were on a level playing field, enabling them to benefit fully from the additional control over their block and protecting them from any unscrupulous managing agent practices.

Steve Wylie is director of Urban Owners, which offers a range of block management services.