A new lease of life: - CentreForum

A New Lease of Life::Poor quality / Under-management: Given a fixed setof obligations and management fee, a manager canmaximise profit by minimising the costs of adhering to thelease contract, so may reduce the frequency or quality ofmaintenance. Tenants must go through their freeholderto influence the managing agent but often face problemscontacting their landlord, who may be out of the country,or may simply find it hard to get managing agents tocomplete necessary maintenance.Problems are exacerbated in up to 20 per cent of leases wherethe management fee is a direct percentage of the service charge,which gives managers an explicit incentive to maximise costs. 44 Theaccountability to those paying the service charges is even weakerwhen lessees rent out their properties.Firms seek to maximise profits in all sectors, but particularly in theleasehold management because of two peculiarities: the role of anagent means that there is disjoint between the freeholder and theleaseholder and, because leaseholders may have to go to a tribunalto change a managing agent, there is not a free market.Connected companiesThe fact that managers are appointed by freeholders is particularlyproblematic when management for leasehold houses and flatsis provided by a series of group companies connected to thefreeholder.Investor freeholder can establish a holding company owningfreeholds alongside a series of connected companies which mayinclude a management firm, insurance intermediary and otherservice providers. This is not uncommon; we have spoken to majormanagement companies who confirm that the majority of theirclients are freeholder companies connected to them. 45 This furtherreduces the incentive to be efficient. In fact there is clearly a directincentive to be inefficient, because money stays within the groupand costs are passed down to leaseholders. Although responsibleconnected companies may be able to benefit from economies of44 Based on authors’ interviews with managing agents.45 There is also a risk that a separate managing agent with connection to nofreeholders may deal with connected companies during the provision of services.The growth of ‘investor freeholders’, despite legislation limiting annual incometo ground rent and a management fee, may well suggest that there is potential tomake profit through unofficial methods.28