Managing Agents: Inside & Outside ARMA

Most freeholders (whatever type they are) and resident management companies are highly likely to employ the services of a managing agent, largely due to the logistics involved in self-managing anything larger than a very small block. This makes them central to the leasehold sector so what are they and what do they do?

ASSOCIATION OF RESIDENTIAL MANAGING AGENTS (ARMA)

The Association of Residential Managing Agents (ARMA) states that the management of long leasehold residential property is 'a complex business requiring a full understanding of the structure and meaning of leases, a thorough knowledge of the statutory requirements of various landlord and tenant legislation (there are at least six key Acts of Parliament along with scores of Regulations) and compliance with the recognised Codes of Practice'.

These are the RICS Service Charge Residential Management Code (approved by the Secretary of State under s87(7) of the Leasehold Reform, Housing and Urban Development Act 1993 and backed by Statutory Instrument (SI 2009/512), and the ARHM Code of Practice (for retirement housing).

Note: The former was updated in 2009 to incorporate the provisions of the Commonhold and Leasehold Reform Act 2002 and the latter was revised from its original publication in 1996, again to incororate the 2002 Act.

Both Codes cover the areas of:

1. Accounting and auditing service charges;
2. Ground rent  & administration charges (administration charges may be considered management fees but they are not defined in Landlord and Tenant law because they are neither service charges nor ground rent;
3. Accounting for other people’s money;
4. Reserve/sinking funds;
5. Contractors and repairs;
6. Buildings Insurance;
7. Information provision;
8. Complaints about property managers.

Breaching the code however not a criminal offence, nor does it create any civil liability, but its contents can be used in evidence in court and tribunal proceedings, especially for those where landlords or managers have failed to comply with the Code under s24 of the Landlord and Tenant Act 1987 (LVT- appointed manager) as amended by s85 of the Housing Act 1996.

WHAT DO THEY DO & WHAT DO THEY CHARGE?

There is no hard and fast rule as to what form an agreement with a managing agent should take or the fees they should charge for their services as it depends not just on the size, age and type of property and the management structure but the range of services that the agent is required to provide.

The general areas for which managing agents are employed are those of:

1. Setting the service charge budget to include the forward funding of reserve and sinking funds relating to cyclical maintenance and day to day repairs;
2. Preparing a long-term maintenance plan and advise on the use of specialist professionals and contractors for plant and machinery;
3. Serving notices for s20 major works consultation and long-term quaifying agrements;
4. Preparing year end accounts as best practice;
5. Sending out regular demands and perform the collection of service charges and arrears (including management fees);
6. Providing a periodic budget report of income and expenditure and cash flow (quarterly reports);
7. Ensuring the audit/independent accountants report/certification is prepared on time, or an audit if this is what the lease required;
8. Preparing and distribute notices for the AGM/EGMs and arrange attendance at such meetings;
9. Providing buildings insurance (and other insurances such as Directors and Officers Liability Insurance)
10. Administering insurance claims;
11. Ensuring compliance with the terms of leases and policy agreed with the Board and where necessary, (subject to landlord authorisation);
12. Instructing solicitors in relation to breaches and liaise with company solicitors;
13. Representing the landlord at County Court level, arbitration and Leasehold Valuation Tribunals;
14. Complying with Health and Safety requirements;
15. Providing Company Secretary work (note that not all managing agents will be wiling to offer this service);
16. Regulating the use of the flats regarding sub-letting;
17. Enforcingthe lessees rights to quiet enjoyment (peaceable occupation) in the event of disturbance by other residents. It is however important to note that when the word 'tenant' is used, it refers to leaseholders, not renting tenants.

Standard & Additional Fees

ARMA's downloadable publication 'LAN13 Management Fees', states that any management fee charged under a long residential lease is subject to s19 of the Landlord and Tenant Act 1985 (limitation of service charges: reasonableness). 

The RICS Service Charge Residential Management Code states the basis of fee charging and duties should be contained in the agreement, should be appropriate to the task involved and be pre-agreed with the client whenever possiible.

Ideally the agent should agree two lists of services/duties with the client, the first being the standard management fee, which is normally stated as an annual fee for the whole development in total, with increases fixed against the RPI (Retail Price Index) which as of March 2003 is standing 248.7. This method is considered preferable so that tenants can budget for their annual expenditure, rather than setting it per unit. However, where the lease specifies a different form of charging, this is what will be used by the managing agents.

The second should be for additional fees if carried out such as the handling of major works and qualifying long term agreements under s20 of the Landlord and Tenant Act 1985 (limitation of service charges: consultation requirements) which requires the sending of consultation documents. It is important to note that only the fees for this and those of the standard fee for the provison of services will fall within the definition of management fees used by Leasehold Valuation Tribunals.

Challenging Fees

Leaseholders can challenge the 'reasonableness' and 'payability' of these fees under s27A of the Landlord and Tenant Act 1985 at a Leasehold Valuation Tribunal. This also includes any supplementary fees that could be deemed unreasonable or excessive such as administration charges which are neither service charges or ground rent. Again there are no statutory guidelines on this.

WHY AREN'T THEY LICENCED?

There have been continual calls over the years for managing agents to be licenced because they not only control huge sums of money belonging to leaseholders (estimates put the amount of over £1bn) but there is not a single entry criteria to have to meet to become such an agent. Agents can include those with criminal convictions (or tendencies), those banned from operating in another field (such as an estate agent) or the plain incompetent.

Would Licencing Dilute ARMA's Role?

When David Hewett was Chief Executive of ARMA, Leasehold Life asked whether he thought that the role of ARMA would be seriously diluted if licencing were to ever be implemented.

He explained that ARMA could in fact benefit from such a regulatory scheme being introduced in that it would produce a level playing field by driving out the rogues.

The role of such a scheme would be to not only assess the fitness of all those entities that manage leasehold property or handle service charge funds but monitor performance, oversee complaints and have various sanctions. Such sanctions would include the ultimate sanction of banning organisations/individuals from the leasehold sector.

What it would not do would provide technical advice, support and training, which ARMA members state as the reasons they join. Such benefits are not purely confined to commercial companies but also by the type of Affiliates (who cannot hold themselves out as members) which include RMCs, RTMs, housing associations, local authorities, banks, insurers, lawyers and accountants.

It would have also removed from ARMA its self-regulatory role and expanded its role in supporting all types of stakeholders in the leasehold sector. Losing its self-regulatory activities would release the resources to promote this.

ARMA'S RESPONSE TO LACK OF NATIONAL LICENCING?: ARMA-Q

In their annual conference of 2012 ARMA recognised that the leaseholder is in fact the consumer and they announced the intention to separate their regulation and representation roles. Adopting professional body characteristics of being consumer focused means having
independent people on Boards, client money protection, compulsory qualifications, access to independent redress and effective sanctions.

The conference was called 'Success In A Consumer Focused Future' and it announced ARMA-Q as the independent self-regulatory body for it's members to be headed by the Right Honourable Keith Hill (Minister for Housing and Planning under Tony Blair and former MP for Streatham).

ARMA-Q will address issues around corporate conduct of their agents such as how service charge money is dealt with, transparency over insurance premiums and associated companies and will also commit to a new Consumer Charter and Standards. This will be taken from the Property Standards Board Consumer Charter which they formally adopted in 2010 and which they have specifically re-drawn and revised to reflect the residential management agent sector.

ARMA not only consulted their own existing bye-laws and current Guidance but the RICS Code and Blue Book, all relevant legislation, the ICAEW Accounting Technical Release, and the Property Factors (Scotland) Act 2011 Draft for Consultation (in Scotland all property managers are to be licenced from October 2012) and others.

The Rt Hon Keith Hill, said: "The needs of people living in blocks of flats are at the heart of the new regime so we need feedback from leaseholders to make sure we get it right. If you employ a managing agent and want to influence the way they are regulated, we want to hear from you. This is an important opportunity for leaseholders to have their say. ARMA-Q won't just affect ARMA members but will lead to improvements right across the leasehold sector."

ARMA also launched a two month public consultation (4th December) on their proposals inviting comment from representatives of people living in managed blocks of flats as well all those involved in the leasehold sector including landlords, estate agents, surveyors and solicitors.

BUT WHAT ABOUT AGENTS OUTSIDE OF ARMA?

Both the RICS Residential Management Code and the ARHM Code of Practice also apply to managing agents operating outside of ARMA. Not all agents can (or wish) to belong to ARMA (for differing reasons) some of which can be found in the article 'To Be Or Not To Be An Arma Member', published in 2006 but still relevant today.  Such agents may instead prefer to be members of an Ombudsman Scheme, of which there are 3 that can deal with leaseholder issues if the managing agent has signed up to them:

1) The Housing Ombudsman is an independent service that deals with complaints by residents managed by a landlord or managing agent who belongs to the organisation.

2) The Property Ombudsman (formerly known as the Ombudsman for Estate Agents) was founded in 1990 as the Ombudsman for Corporate Estate Agents but in 1998 it broadened its scope to make it available to all residential estate agents. From June 2006, the OEA extended its services to lettings and property management agents and was the first estate agents redress scheme that was approved by the OFT. It became the Property Ombudsman Service on May 1st 2009 and also has a list of non-ARMA members who have signed up to it as well as those managing agents who are members of RICS.

3) The Ombudsman Service: Property (formerly the Surveyors Ombudsman Scheme), was established by the Royal Institution of Chartered Surveyors (RICS) to handle complaints about its members. They are also approved by the Office of Fair Trading (OFT) to run an estate agents redress scheme.

Accreditation Schemes

Managing agents outside of ARMA may also choose to belong to an accreditation scheme such as  the National Approved Letting Scheme (NALS). This is a government-backed accreditation scheme launched in 1999 for managing (and letting) agents which establishes what the minimum levels of service provision should be. It has a searchable agent membership database and is supported by the Associaton of Residential Letting Agents, National Association of Estate Agents and the Royal Institution of Chartered Surveyors.

Others have signed up to a new accreditation scheme introduced by the Leasehold Knowledge Partnership (LKP) who seek to identify and accredit property managing agents who practice open accounting, charge a clear fee for property management and will not pocket commissions offered by insurers, energy companies and assorted service providers.

Qualified Agent Staff

A number of managing agents outside of ARMA will require and indeed encourage their staff to become qualified property professionals through the Institute of Residential Property Managers which was launched by ARMA in January 2002. The IRPM has a defined Constitution and Rules, and is underpinned by a Code of Professional Conduct. It has a hierarchy of membership grades based on defined criteria which are Fellow, Member, Associate and Affiliate and it is a portable and readily recognised qualification right across the property sector.

PREVALENT PROBLEMS

In spite of the reforms in the Commonhold and Leasehold Reform Act 2002 the sector is still rife with problems. The RICS and the ARHM Codes of practice are not legally binding even though they are Government-approved. Such approval only ensures that due weight is given to them if they are used in evidence at a Lease Valuation Tribunal. In reality, the lack of checks made on agents to ensure that they are abiding by the Codes as a matter of routine effectively makes them little more than 'best practice' guides.

Whilst leaseholders have the right to remove managing agents that are not providing a professional and transparent service, either by appointing a managing agent via the LVT, by the Right to Manage, or ultimately by buying the freehold there are many blocks where such redress is not even available because legal fees cannot be afforded, or the criteria cannot be met.

The legislation clearly states that service charge funds must be held 'in trust'. As the Federation of Private Residents points out, what is not so clear is whether it should be in one trust or client account or individual trust funds for each property.
There is no ‘punishment’ if an agent does not comply and there is no requirement for an agent to clarify where and how funds are held.

Other associations to which managing agents may belong all regulate the holding of client money but again there is no legal requirement to compel them to join. A new agent may not join ARMA for two years after setting up and agents may also fall out of membership unknown to leaseholders.

Renting tenants have their deposits protected by the tenancy deposit schemes but no such regulation is offered to leaseholders for huge sums held by unregulated managing agents. Whlist s156 of the Commonhold and Leasehold Reform Act 2002 would have protected leaseholders from losing their funds it was never enacted.

SUMMARY

In May 2013, ARMA Q becomes open for accreditation, going live in May 2014.
As leaseholders become increasingly well-informed, ARMA will be open to far wider public scrutiny, (certainly by leaseholders) than they may have been in the past. There are however still no plans to follow Scotland's lead and licence managing agents across the board and Government continue to look to ARMA to solve all the ills of the leasehold sector. Which of course they can't but they have committed to major changes within their own organisation.

An initiative by Baroness Gardner of Parkes for licencing managing agents through the the Enterprise and Regulatory Reform Bill alongside licensing the widely-abused letting agency business was overturned by the Government in favour of compulsory membership of an Ombudsman scheme. ARMA already provide that to their members but at least this also includes those agents that are not ARMA members but as always, only time will tell what impact ARMA Q and compulsory ombudsman membership will make on the whole sector.