Why does a building need to be managed?

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.

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.

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. These responsibilities arise in three areas: covenants in the lease, statutory requirements and codes of management practice.

COVENANTS IN THE LEASE

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 that 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.

LANDLORD’S COVENANTS OFTEN INCLUDE:

Insurance, obtaining and arranging the insurance at the building

Repairs, maintenance and major works – upkeep of the structure of the building, to maintain it in a proper condition for the residents

Provision of services – heating, lighting in common areas, cleaning, grounds maintenance etc; caretaker, scheme manager or porterage services. Particular care needs to be exercised in the employment of staff who will have statutory employment rights.

Enforcement of tenants’ covenants – regulation of the use of the flats, application of covenants against sub-letting, business use etc, enforcement of lessees’ rights of quiet enjoyment (peaceable occupation) in the event of disturbance by other residents.

Each lease will set out the particular covenants applying. Leases are often complex in form and language, and not readily accessible to the lay person. There is no general standard model lease and leaseholders looking to manage their own buildings should seek advice to ensure a full understanding and application of the landlord’s covenants. Breach of the landlord’s covenants can lead to legal action by the lessees against the defaulting landlord.

STATUTORY REQUIREMENTS

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, reasonableness 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 flatowners 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 (as amended) 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’ inspection 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.

Under further amendments made by the Commonhold and Leasehold Reform Act 2002, (but not yet commenced, see page 32 for the latest update) the RMC will be required to issue summaries of service charges to all leaseholders on a yearly basis, whether requested or not. In case of failure to provide the summary, the leaseholder has a statutory right to withhold payment of the service charge. If the RMC is unable to comply with this requirement, it will thereby endanger the future service charge income. As from 1st October 2007, 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 flatowner 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; provisions of the 2002 Act will require these funds to be held in designated accounts to which the leaseholders have full rights of information and inspection. 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.

The information in this article has been taken from the booklet “appointing a Managing Agent” produced jointly by The Association of Residential Managing Agents (ARMA), The Association of Retirment Housing Managers (ARHM) and LEASE, the Leaseholder Advisory Service. For more information on appointing a managing agent visit www.arma.org.uk