What are management fees?
A management fee is part of the service charge payable to the landlord or manager in return for managing the leasehold property. This fee is the only part of the service charge that goes directly to the landlord or manager and the remaining income received is for the cost of services, repairs, maintenance, improvements, insurance or set aside as a reserve fund. Management fees or similar charges can only be recovered from leaseholders if a term in the lease specifically allows for this.
What services should be included in management fees?
The services that might typically be covered by the management fees are:
- Opening and administering bank accounts.
- Preparing and distributing service charge budgets/estimates.
- Collecting service charges.
- Accounting for service charges prior to examination by an independent accountant.
- Providing information to auditors for the production of annual accounts.
- Collecting routine service charge arrears but not taking further action requiring legal work or appearance at First-tier Tribunals (FTTs).
- Providing management information to residents.
- Liaising with residents’ associations (liaison beyond that which is normal service level may be charged as an extra).
- Providing professional indemnity insurance for the manager.
- Employing management staff (excluding estate-based staff).
- Inspecting the property to check condition and deal with any necessary repairs other than those of a major nature.
- Periodic health and safety checks but not specialist checks and tests.
- Holding annual meetings with residents.
- Regular visits to supervise scheme managers.
- Recruiting and training of scheme managers excluding the cost of advertisements and agency fees.
- Keeping records of residents and tenancy details.
- Keeping landlords advised on management policy when working as an agent.
- Preparing specifications for minor works and services.
- Working with advice agencies and ombudsmen.
This is not meant to be an exhaustive list as the landlord or manager could agree to provide other services within the management fees but the above list would usually be the minimum that leaseholders should expect to receive. In almost all cases there will be a management agreement between the freeholders and the manager which will set out what services will be provided and which ones might be covered by the management fees. The management fees will include the cost of the overheads of the landlord or manager, such as staffing and office space, in addition to a reasonable profit or surplus.
Will management fees increase each year?
It is very unusual for a lease to state that the management fees will be fixed and therefore as the cost of management is included in the definition of a service charge, which may vary from year to year, according to the costs incurred it can be increased. There is a requirement for the level of management fees to be reasonable and any increase should reflect the costs the landlord or managers incur. The landlord or manager will usually find that the costs of providing the services rise each year and that this will be at a rate higher than inflation.
Can the lease be changed in relation to management fees?
If a lease does not specify that management fees can be charged the landlord or managers could make an application to a First-tier Tribunal (FTT) to have the leases varied on the grounds set out in the Landlord and Tenant Act 1987. This application would be made on the grounds that the lease is defective as it does not allow the recovery of expenditure that has been incurred. This is not certain to succeed but the FTT does have the discretion to make an order to vary all of the leases to allow a reasonable management fee to be charged.
In some early leases the management fee is calculated as a percentage of service charge expenditure. This is no longer considered good practice as it encourages a landlord to generate costs, such as maintenance works, in order to cover its fees. Leaseholders can request the FTT to vary a lease to provide a fixed annual management fee.
What standard of management can be expected?
The legislation requires the standard of services provided to be reasonable and consumer legislation implies that the landlord or manager must carry out their obligations with a reasonable level of expertise and care. However, there is only a requirement for the standard to be reasonable and in some cases leaseholders may demand a level of service that might not be possible in return for the amount they pay.
Leaseholders could consider exercising Right To Manage (RTM) if they remain unhappy with the standard of management. (Please see the LA Information Sheet 111 Right To Manage). It should be noted that any professional manager appointed following RTM will charge management fees and in some cases an unrealistically low figure may be quoted initially to gain business. The template management contract offered by the Right to Manage Federation protects against this as it limits increases in management fee to the rate of inflation.
How much should leaseholders expect to pay for management fees?
There is no legal definition of what might be reasonable and if any dispute on the level of management fees cannot be settled between the parties it can be referred to an FTT. In some leases there are clauses that allow the landlord or manager to calculate management fees as a specific percentage of the annual service charge. This method of calculating management fees should still produce a level of fees that is reasonable, as it cannot override the legal requirement for the fees to be reasonable. The government-approved codes of practice do not recommend this method for calculating management fees, unless the lease was drafted prior to their codes being effective.
The government-approved codes of practice say that in order for the landlord to try to ensure that the level of management fees is reasonable they should arrive at the level of fees by estimating their total cost of management, plus their overheads and reasonable profit and divide this figure by the number of units it applies to. This means that management fees might be expected to be proportionately lower in larger blocks of flats as some costs within management fees will not increase in relation to the number of properties managed.
There are few guidelines that can be given on a figure that might be regarded as reasonable and the fees would depend on the costs relating to the management of particular blocks or estates. A maximum management fee is published by the government, which applies to some leaseholders in social housing. This figure for the accounting year 2015/2016 is £418 per property, exclusive of Value Added Tax (VAT) and although the level of fees will depend largely on what services are provided, this can be referred to as guidance by any landlord or manager. However, evidence suggests that in applications to the FTT in respect of management fees this figure is considerably higher than any reasonable annual amount that is determined by the FTT. Average fees currently range between £200 and £380 per flat per year.
Is Value Added Tax (VAT) payable on management fees?
Due to the VAT regulations, if the freeholder or a group company sharing the same VAT registration, manages the block no VAT is payable on the management fees but if a different company is appointed to carry out the management then VAT becomes payable. This is the case regardless of whether it is the choice of the landlord or the actions of the leaseholders that result in a different organisation taking over the management. Although the cost of other services the landlord or manager provides may include VAT, there is no requirement for additional VAT to be levied on the total service charge.
What additional fees might be payable?
Most leases allow additional charges to be made that would not be covered by management fees and details of the most common ones are set out below:
- rofessional fees, which are fees the landlord or manager can recover as part of service charges that would not be regarded as management fees. These fees are the costs incurred in engaging professionals for the supervision of major works or additional services that are of a significant nature. Some landlords or managers will employ professional staff to carry out these specific duties, which they will be entitled to make a reasonable charge for. Even if the lease does not specifically refer to management fees, the landlord would be justified in recovering these professional fees, as the lease will inevitably allow the service charge to include costs and expenses the landlord has incurred.
- Administration fees, which are charged to individual leaseholders for services that are not covered by the service charge and are therefore entirely separate from management fees; for example fees in relation to the sale or transfer of the lease. (Please see the LA Information Sheet 106 Administration Charges).
- Transfer fees, usually in the retirement housing sector, where the lease says a fee is payable as a premium to the landlord each time a property is assigned.
How can the level of management fees be challenged?
Unless it is clear that management fees are excessive, it can be difficult to challenge the level of management fees as the landlord is not usually required to provide a complete breakdown of the management fees. If leaseholders are unhappy with the level of management fees they should first obtain professional advice, perhaps from the Leaseholder Association (LA). LA members will be offered conciliation if deemed appropriate. The leaseholder also has the option of using the complaint procedure of the landlord or manager or if this is unsuccessful by an application to an FTT.
In order for leaseholders to have any chance of success at an FTT they will need to obtain evidence of the level of fees charged by other landlords or managers in respect of similar leasehold blocks. It will also be helpful for leaseholders to establish exactly what services they receive in return for the management fees they pay.
Please see the LA information sheet 101 Glossary for a precise explanation of the terms used in this information sheet. Whilst the above provides general information on this subject it is strongly recommended that leaseholders obtain independent professional advice before proceeding with formal action to challenge the level of the management fees or the standard of management.
Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.
Info Sheet: 104/4/15 ©Copyright