What is a Management Fee?

Brett Williams, Partner at CP Bigwood in Birmingham, provides insight and clarification on an often contentious issue.“I personally pay the managing agent of the block of leasehold flats where I live a £1,800 management fee each year – isn’t this excessive? What do they do for such a fee?” This is a genuine question that was put to us at ARMA and we receive many like it each year.

The initial answer is that the £1,800 is not the management fee. It is the service charge which lessees are committed to pay under the terms of the lease they have entered into when they bought the flat. This charge will often include insurance, lighting, cleaning and repairing of common parts, maybe gardening, the cost of estate staff as well as a possible contribution to a reserve fund. The charge will also include, where the lease permits, a management fee for the agent, which will only be a fraction of the total service charge and will usually include VAT.

Even with this clear in their minds, many lessees still question the management fee and how it is arrived at, often because they are not party to the contract that employs the managing agent. People often fail to realize that the management fee is the managing agent’s only source of income. Without the fee, there is no other way that they could pay for the offices, salaries and training of staff they rely on to operate and deliver the services it promises.

Bear in mind

Lessees now and again approach us for guidance on what is an average or reasonable fee and in reality we cannot answer them.
Firstly, because as a trade body we wish to see open market forces on fees not a ‘going rate’. Secondly, every block of flats is different in terms of size, age, estate staff, mechanical installations etc. and every managing agent will operate in a slightly different way providing varied service levels. But lessees should bear in mind that, say, a £175 p.a. per flat management fee equates to about 50 pence a day to have most elements of their ‘home management’ dealt with – I am not sure you could get anywhere near such a deal if this related to the management of a freehold house!

At the same time, many lessees will have seen their management fees increase over the last few years. This is because our sector is hit with direct and fringe legislation, which affects the way we have to manage buildings. So I have a word of warning for lessees – ‘beware of cut price management fees’. Yes, look at the cost but also look to see if the managing agent can deliver the service that you want at that fee. In fact cost should not be the issue, it is whether the fees offer value for money.

Because the confusion over how management fees are arrived at and what they consist of is all too common, ARMA has published a Lessee Advisory Note, Management Fees, which you can read on the next page and also download from www.arma.org.uk. This explains the requirements of the recognised Codes of Practice, what fees might be payable over and above the annual day-to-day management of a property, and the need for transparency on such matters as commissions.