OFT to investigate rip-off leasehold charges

The Office of Fair Trading is to investigate the leasehold sector following complaints that property management companies routinely over-charge leaseholders.

Forget letting agents and landlords. The really scandalous part of the property industry is the murky world of freeholders and managing agents.

Ask anyone who owns a leasehold flat and they’ll have a horror story to tell you about managing agents, whether it's overinflated bills, promised work not being done, or spurious demands for cash for routine paperwork.

But finally it looks like something might be done about this part of the property sector, where five-figure bills can turn up on your doormat without warning but with payment terms of 28 days.

The Office of Fair Trading is now looking into this area, and wants to hear from people who can shed some light on why the management of leasehold homes in England and Wales isn't working well.

How leasehold works

With a leasehold property, rather than technically owning the property, the flat owner or “leaseholder” simply has the right to own, occupy and use it for a long period. The land the building sits on and the building itself is owned by a landlord or freeholder. The lease is an agreement which sets out both sides’ rights and responsibilities.

Leaseholders normally pay a ground rent to the freeholder as well as service charges for the upkeep of the communal parts of the building and buildings insurance. Freeholders, in turn, employ managing agents to do the work for them

It sounds fine in theory, but freeholders and managing agents are only in the business for one thing: to make money off leaseholders.

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One rip-off after another

I owned a leasehold flat for 12 years and it was one rip-off after another. But the main issue was always the service charges – an annual bill for the upkeep of the building including cleaning, maintenance and insurance.

If you or I were shopping for these services, we’d only do work that actually needs doing and shop around for the best deal. But managing agents operate in a completely different way.

The freeholder/managing agent decides what work should be done and who by – it might be another company within the same group, their friend, or anyone else they fancy. But it’s the leaseholders who have to pay for it.

The managing agent will also charge a percentage fee on top, so they have no interest in keeping costs down.

Even when leaseholders have paid over the odds for work to be done there’s no guarantee it will be done properly; leaseholders frequently complain of sub-standard work by the contractors picked by managing agents.

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Price fixing

For certain types of work freeholders and managing agents are required by law to carry out a tendering process and collect quotes from different companies for the work, including any recommended by leaseholders themselves.

But one of the biggest property groups in the country has admitted price fixing during the tendering process. Shockingly it has been let off any financial penalty. The fact that it was the OFT which let the company off makes me wonder whether it will be any harsher on other companies that exploit the system when it completes its investigation into managing agents.

The OFT found that Peverel, which manages 200,000 properties across the UK, systematically rigged tendering processes to supply alarm systems and door entry services so that its subsidiary firm Cirrus Communications Systems would win.

Cirrus colluded with Peter O'Rourke Electrical in York, Owens Installations in Dorchester and Glyn Jackson Communications in Leeds to ensure that other bids for work would always be higher.

The OFT identified at least 65 tenders that were affected by the collusive tendering arrangements, with a combined value of about £1.4 million. However because Peverel owned up to the practice in 2009, Cirrus was immune from fines due to the OFT’s “leniency policy”.

Cirrus' partners in the price-fix scam were fined a total of £53,410, but because two of the companies have gone into liquidation, most of the penalties will not be paid.

Leasehold valuation tribunals

Under the Commonhold and Leasehold Reform Act 2002 leaseholders who feel they are being charged over the odds by managing agents, or that they are getting a poor service from them, can take them to a tribunal.

Previously this was called the Leasehold Valuation Tribunal but its name changed to the First-tier Tribunal (Property Chamber) earlier this year, as we explained in First-tier Tribunal: where to go if you're in dispute with your freeholder.

However, many feel that these tribunals are heavily weighted in favour of freeholders and their expensive lawyers. As if that wasn’t bad enough, some leases contain clauses that mean if you take your freeholder or managing agent to a tribunal and you win, the freeholder is allowed to add their legal costs on to future service charges bills.

So even if you win, you lose, as you’ll be paying your own legal costs and the freeholder’s too.

So it’s good news that the OFT has currently got an eye on this part of the property market. But whether it will stand up to freeholders and their bully boy tactics remains to be seen.

What have your experiences of freeholders and managing agents been? How would you like to see the OFT tackle the issue? Let us know in the comments box below?

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More on property:

Five reasons you should never buy leasehold

My leasehold property nightmare

Why you should extend your lease now

First-tier Tribunal: where to go if you’re in dispute with your freeholder