Appointing A Managing Agent

Flat-owners may acquire management responsibilities in different ways: through acquisition of the freehold of the building, through the statutory Right to Manage (RTM) or simply by delegation of the management responsibilities from the landlord. Whatever the route, the management is normally exercised through some form of resident management company (RMC). The RMC will assume responsibility for the management and repair of the building, and for compliance with the obligations of the lease and the wide range of relevant statutory requirements. It will have to assess how best to achieve this, through self-management or by the appointment of a professional managing agent.

This guide has been produced as a joint publication by ARMA, the Association of Residential Managing Agents, ARHM, the Association of Retirement Housing Managers and LEASE, the Leasehold Advisory Service.

ARMAis the leading trade body in England and Wales that focuses exclusively on matters relating to the block management of residential property, whether for landlords or resident management companies. Members agree to adopt and comply with the principal objectives of the Association and undertake to follow the Codes of Practice issued by the Royal Institution of Chartered Surveyors. The Association promotes and encourages consistent standards of practice by its members and provides a platform for developing and contributing to public debate on new legislation concerning management issues.

ARHM, the Association of Retirement Housing Managers, is the body for managers and landlords of leasehold schemes for retired people, including resident management companies. Its members agree to comply with its Code of Practice for private retirement schemes and to offer leaseholders access to an independent ombudsman scheme. LEASE provides free advice and guidance to leaseholders and landlords on all aspects of leasehold law, including problems with service charges, forfeiture and rights to lease extension and freehold acquisition. LEASE is funded by the Department for Communities and Local Government and the National Assembly for Wales.

Many leaseholders do manage their buildings themselves competently and successfully, preserving the value of their investment in the flats and saving in management fees. However, before they decide, leaseholders considering this strategy should give serious thought to the work to be done and the obligations arising.without an agent?

A resident management or RTM company is subject to exactly the same legal duties as any other commercial landlord. These duties are owed not only to the leaseholders who are members and participants in the management company, but also to those who are not involved and who may have different views and objectives for the management of the building, including the freeholder. The rights of individual leaseholders are not in any way diminished or suspended simply because the management is through a resident- controlled company.

Leaseholders proposing self-management should appreciate that this will not necessarily give them the expected freedom to manage the building exactly as they might choose; they must be closely aware of the restrictions and requirements both of the lease and the relevant legislation and codes of practice when making management decisions.

The task of management is ongoing and a long-term commitment, it should not therefore be left to one or two individuals alone, or embarked upon without due regard to the future. Are there sufficient members already, willing, able and available to keep an effective management team running indefinitely? Positions held in the management company are generally unpaid and rely upon a few hard- working members. Problems can arise when a key director moves on, leading to sudden skills gaps which could cause management chaos. Disagreements arise from time to time and sudden and unplanned resignations cannot be discounted where, for example, management team proposals prove unacceptable, or where complaints arise as to the way in which individuals fulfil the duties of their office.

Management of a residential block of flats is a largely practical exercise and demands considerable effort, time, organisational skills and care. The physical fabric of the building must be regularly inspected, maintained and redecorated to the required standard and at the required times. Assessment of any necessary work may require professional expertise. Monitoring and approving the finished job may demand a qualified surveyor. Work will not always be properly executed and some members or lessees may well refuse to meet the costs at the expense of the company, which can cause friction and dispute as well as put pressure on cash flow.

Systems must be put into place to estimate and to collect the money required for works and services and the company will need a full understanding of how the lease permits the charges to be raised, in advance or arrears. There must be sufficient accounting procedures in place to provide final accounts and the annual statutory summaries to the leaseholders. Although the company is the landlord, the accounts must clearly distinguish between the financial affairs of the company and those of the landlord; for example, the company cannot pay corporation tax from the leaseholders’ service charge account. In cases where a resident is in default of his or her lease, in non-payment or arrears of rent or service charges or in breach of a clause of the lease and obligations controlling the use of the flat (subletting, for example), the manager will be required to take action; this can include threat, or ultimate use, of forfeiture and possession proceedings. Resident management companies may feel uncomfortable in direct action against a fellow lease- holder and consider such actions better carried out by an independent professional.

However, having made these points, residents should not feel that there is no credible alternative to the employment of agents or that they cannot do the job to the same high standards as those of a professional manager. Leaseholders should choose self-management only where they have a complete understanding of the scope of the manager’s role and the facilities and resources to undertake the task properly. The building is, after all, the joint capital investment of many; profitable investments demand careful handling.

A building will not manage itself, and there is much to be done if the leaseholders are to receive the services promised in the leases and the building kept in good repair; insurance needs to be put in place and renewed on time; bills need to be paid and services maintained; local authority and legal requirements must be met. The leaseholders’ capital investment in their flats must be maintained and their individual rights of enjoyment of the flats ensured. need to be managed at all?

No matter who manages the building, there are certain tasks to be carried out; there is little variation in these whether the building is a house converted into a few flats or a substantial purpose-built block or estate

No matter who manages the building, there are certain tasks to be carried out; there is little variation in these whether the building is a house converted into a few flats or a substantial purpose-built block or estate. Many of these are set out in Appendix 3.

Careful forward planning is necessary in terms of major works of repair, both in the specification and pricing of the work and, perhaps more important, in the financial provision for them. The terms of the leases providing for collection of service charges may not necessarily be compatible with the immediate funding needs of the management company or the building. Accurate planning and collection demands an assessment of the needs for the year ahead, some months in advance of that year’s beginning, when shortages of money for urgent works can be serious.

Whoever is responsible for the management of the building – whether it is the actual landlord or the leaseholders in the form of a resident management company or Right to Manage company acting in the landlord’s place – will have significant duties and responsibilities under the lease and under legislation. It is essential that the manager fully understands and appreciates these responsibilities if the residents are to receive the services due to them and the building is to be maintained.

The lease sets out both the relationship between the landlord and the individual leaseholder and the rules and obligations to be observed. The leaseholders participating in the management company may agree mutually convenient arrangements between themselves for the collection of service charge monies, rent and timetables for repairs and maintenance. However, if these arrangements are in any way contrary to the lease, they cannot be imposed or otherwise relied upon if a single leaseholder objects; in a dispute, the specific requirements of the lease must prevail, no matter how much more convenient the management company’s arrangements might be. It is most important, therefore, to ensure that the management company fully understands the terms of the lease and makes no irreversible decision which might be inconsistent with the lease; this may lead to loss to the company or action against it or against individual directors. Those leaseholders in a position to make decisions for the company must appreciate these restrictions, both in their fiduciary duty to the company as directors, and to the individual leaseholders as the landlord.

The company will need to be fully aware of the requirements of the Landlord and Tenant Act 1985 (as amended by the Commonhold and Leasehold Reform Act 2002) upon the manager relating to information to be provided to flat-owners, reasonable- ness of costs and formal consultation procedures and be able to put them into practice. Even where there appears to be a general consensus of support by the flat-owners to the company’s proposals, say in a vote at a meeting, this will not remove the obligation for compliance with the statutory procedures.

Provision of information to the lessees– under the Landlord and Tenant Acts 1985 and 1987 the landlord must, on the lessee’s request, provide summaries of service charge costs and details of the insurance arrangements, and make available for the lessees’ inspec- tion all relevant invoices, documents etc, including the insurance policy.

Departure from these duties of information can render the landlord liable to litigation and even to criminal prosecution. All demands for service charges must be accompanied by a prescribed summary of leaseholders’ rights. The demand will not be valid without the statement and, again, the leaseholder will legally be able to withhold the payment. (This provision also applies to administration charges).

Consultation on proposed service charge expenditure– the landlord or management company must formally consult the lessees where the landlord, or the company, proposes to carry out works resulting in a charge to any flat of more than £250, or to let a contract for a term of more than 12 months which will cost any flat-owner more than £100 a year. The consultation is a formal process, set in legislation, and the landlord must generally invite comment and observations on the proposals from the lessees and give reasons for the final decision made. Failure to comply with the process can result in the landlord being unable to collect any more than the statutory amounts, whatever the actual cost of the works or the contract.

Service charge monies to be held on trust– all money collected from the leaseholders in respect of any service charge are required by law to be held as a trust. It is most important that service charge funds are kept separate from money belonging to or chargeable to the RMC as a company; the costs arising from running the company may not be deducted from service charge monies unless expressly provided for in the lease.

Demands for rent – whatever the terms of the lease, the ground rent is not recoverable unless properly demanded, in the prescribed manner. The RMC will have to make satisfactory arrangements for the issue of these demands if the rental income stream is not to be affected.

Reasonableness of service charges – any service charges levied by the landlord must be reasonable, in terms of both cost and standards. Collection of the charges is not legally enforceable in the event of either being found not to be reasonable by a court or tribunal. Inability to collect service charges in respect of works done or services provided under contract can have disastrous consequences for resident management and Right to Manage companies operating without substantial cash reserves.

Health and Safety– the landlord has responsibilities in complying with a very wide range of Health and Safety requirements, with serious consequences if they are neglected. The common parts of the building become a place of work for purposes of H&S regulation when there is a workman on the premises and this introduces compliance requirements well beyond the landlord’s contractual responsibilities under the lease. There will be a need to maintain an asbestos register, to carry out inspections and testing of electrical equipment and other machinery in the building and to provide H & S information to contractors. This is an area requiring specialist input.

Statutory requirements go beyond the issues highlighted above and are likely to include the environment, Disability Discrimination and many more.

Management of residential leasehold property should be in accordance with approved Codes of Practice.

The Government has, to date, approved two Codes of Practice, one pro- duced by the Association of Retirement Housing Managers (ARHM) relating to retirement housing schemes and one by the Royal Institution of Charted Surveyors (RICS) relevant to all tenants paying variable service charges not on retirement schemes. While departure from the codes is not, in itself, a statutory offence, it can provide grounds for residents to challenge the management or the service charges. When appointing an agent, always ask the manager to confirm that he complies with the relevant code.

In deciding how to proceed, you will need to weigh up the options as to what you wish to achieve in the management of the building: what duties or responsibilities do the leaseholder managers wish to retain? which duties can usefully be delegated to a managing agent? what arrangements are to be made for instructing the managing agent? Managing agents usually offer a range of services. You can choose to leave everything to them according to your set policy and expenditure controls, or you can elect to have them take on specific tasks such as collection of service charges and issue of payments. You can decide, for example, whether the tenants will share the duties of cleaning or gardening, or whether the agent should arrange this through a contractor. The agent will be directly answerable to the leaseholders acting as manager, that is, to the board of directors, who have full powers of ‘hire and fire’, although you should avoid frequent changes of manager which will disrupt continuity of service provision. choice of management

You should be clear what tasks you want the agent to carry out. It is prudent to set these out in the form of a specification, to be evaluated by prospective agents as a tender. If the leaseholders have become the manager of the building through a process of collective pur- chase, it is likely that they will have employed a surveyor for purposes of valuation; if not, it may be appropriate to consult a surveyor experienced in property management. The surveyor can, under your instruction, draw up a formal specification of duties, for discussion with prospective agents. a managing agent Specification

In cases of small buildings, the input of a surveyor may not be justifiable, but you should then agree the basic list of tasks before interviewing agents. Where the leaseholders are taking over responsibility for management for the first time, for whatever reason, it will be sensible to arrange for a structural and condition survey of the building, in order to be able to assess future repair, maintenance and improvement obligations. This can be carried out in advance of the appointment of the agent, or it could be one of the tasks included in the specified tasks.

There is only one specific qualification for a managing agent, that of the Institute of Residential Property Management, although some managers will be members of the Royal Institution of Chartered Surveyors, or, in the public sector, the Chartered Institute of Housing. However, many agents are members of the Association of Residential Managing Agents, or those who specialise in the management of retirement schemes may be members of the Association of Retirement Housing Managers. The advantages of the appointment of an ARMA or ARHM member is that they will have had to satisfy an independent body of their competence and, as a condition of their membership, will be required to abide by a code of practice and a complaints and disciplinary procedure. Therefore, the management company and individual flat-owners will also have recourse to ARMA or ARHM in the case of complaint about one of their members.

It is most important to confirm the prospective agent’s professional indemnity insurance. If the agent is a member of a professional or trade association, professional indemnity insurance will be an automatic condition of membership. However, the existence of the cover, and its extent, must be checked. Where a resident management company delegates tasks to a managing agent, the residents’ company will remain legally answerable for any neglect, omission or mistake by the agent and must be sure that the agent has the means for compensation or damages.

Experienced managing agents should be able to provide references from the manager, or the residents’ association, of other buildings they manage or have managed. You should seek references in respect of buildings similar to your own. You should seek agents that have previous experience in managing similar schemes to your own.

To start with, you should write to a selected group of agents inviting them to tender for the work. You may know some local agents or you can consult the list of agents available from ARMA, ARHM or LEASE. Unless you are really unhappy with your present managing agent, it may be worth considering them. Ask yourselves how efficient they have been in dealing with your complaints; did they act promptly on minor repairs? Allowing for the fact that they were given instructions by the landlord, did they behave in a reasonable manner where your problems were concerned? You may find that their service will be fully acceptable when they are answerable to you. It is most important that you invite prospective agents to the building, to see it and to meet the management committee. Ideally, in the course of discussion, try to meet the person who will actually be managing the building – the personal relationship is an important element in property management. Similarly, try to visit other buildings presently managed by the prospective agent yourselves, and judge their competence on the ground.

When you interview prospective agents, do not be afraid to ask questions and to negotiate fees. For example:

What arrangements does the agent have for general maintenance inspections? how are minor repairs responded to and in what timescale?

How are service charge monies collected and what are the agent’s banking arrangements – what arrangements are made regarding interest?

How are contractors chosen? what arrangements are to be provided for emergency out-of-hours callouts?

What commissions would the agent be entitled to receive from any contracts arising out of the services to you?

A good agent should declare all such commissions to you. The agent chosen may provide a draft contract or the management company’s solicitor may draw one up; alternatively, the Royal Institution of Chartered Surveyors have produced two standard contracts, one for purpose built blocks of flats and one for other properties, and the Association of Retirement Housing Managers has a standard contract for retirement schemes. The Association of Residential Managing Agents also provides guidance to its members on drafting a suitable contract.

The agent cannot work in a vacuum and it is critical to future management arrangements to establish at the outset: what responsibilities and authorities that agent will have; standards of work demanded; response times and other timescales for action; the authorised lines of reporting and communication. Both the individual leaseholders and the agent must be clear as to from whom instruction is to be received.

The usual and most effective arrangement is for the agent to attend, and report to, meetings of the Board of the residents’ company. By treating the agent as a form of general manager, he or she will provide useful input to policy and take overall responsibility for day-to-day affairs. Meetings should be properly organised and the Board’s instructions to the agent clearly minuted. The Board should set clear lines of communication, understood and observed by both sides.

The agent should not need to interpret unclear instructions, nor should they receive differing instructions from individual members of the Board. Remember that the agent cannot take instructions from the Board that would put him in breach of any landlord and tenant law, code of practice or other statutory guidance, eg Health & Safety legislation. The Board should also establish how the agent is to respond to questions from individual residents and his accountability to those individuals. The residents should be clearly informed by the Board of the identity of the agent, his duties and the limits of his authority. Although the agent will be working for the residents as a whole, his employer is the Board, and the residents must be clear that he carries the authority and support of the Board in all his actions. The agent should not be placed in any position of ambiguity in dealing with individual flats-owners and, of course, cannot take instructions from them.

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