Is your managing agent ripping you off?

See-saw

Once you've bought a property, it's not just paying the mortgage, council tax and utility bills you have to worry about. Owners of certain types of property can be hit with a raft of other charges.

Flat owners, whether the property is leasehold or share of freehold, will have to pay "service charges" for their share of the upkeep of the communal parts of the building.

Owners of some freehold houses don't escape, either - in many cases they'll have to pay fees of several hundred pounds to the developer to alter or extend their property even if they don't need council planning permission.

Service charge: flats

Leasehold ownership of a flat means you own the flat but not the building or land it stands on - that's owned by a separate 'freeholder' or 'landlord' which may be an individual or a company.

The freeholder is obliged to maintain and, if necessary, carry out repairs to the communal parts of the building such as the roof, stairwells, gutters and gardens. In most cases, the freeholder will employ a managing agent firm to do the legwork in the running of the building. The agent will work out what work needs to be done, when, and by whom.

However, it's the leaseholders who foot the bill by way of annual service charges. The fancier your building is – for example, if it has a gym, swimming pool or lift – the more you'll have to pay.

Neither freeholders or managing agents are regulated and have free reign to subcontract work as they see fit, often to other companies they own. As a result, leaseholders frequently complain about rip-off service charges.

As well as regular service charges, flat owners also face ad hoc bills for "major works" such as internal or external decoration. Major works bills can be thousands or tens of thousands of pounds, so it's no surprise that complaints about these bills are common too.

However, there are rules under the Commonhold and Leasehold Reform Act that freeholders must stick to when issuing bills. Chris Macartney, associate solicitor at Bishop and Sewell LLP, explains: "Service charges must be reasonable and correctly demanded. If they are not correctly demanded, the tenant can withhold payment until they are. If a lease specifies an 'on account' payment in advance, that amount must also be reasonable.

"There is an obligation on freeholders to consult when they intend to either carry out major works that will cost more than £250 per leaseholder or if they intend to enter into a qualifying agreement to provide services for a term of more than 12 months."

On top of service charges and major works bills, leaseholders will often also have to pay the freeholder money if they want to alter their property or sublet it to tenants. When it comes to selling the property, there will also be charges for transferring the lease to a new owner and answering questions posed by the buyer's solicitor.

Some blocks of flats are 'share-of-freehold', which means flat owners will each own a share in a freehold company which they will run themselves. This set- up gives flat owners more control over expenditure and how the building is run, so this type of property is generally more desirable (and expensive). Many share-of-freehold developments employ a managing agent to do the day-to-day work such as collecting service charges and paying bills, but with owners retaining control over decision making.

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Disputes

Leaseholders can take disputes with freeholders or managing agents to the First Tier Tribunal Property Chamber (previously called the Leasehold Valuation Tribunal), which has the jurisdiction to decide whether or not service charges and other fees are reasonable and payable.

However, some critics claim tribunals can be daunting and expensive for leaseholders up against freeholders with expert legal teams. Even if they win a case, leaseholders can often end up paying the freeholder's legal costs, which can often legally be added on to future service charge bills.

Also, if a freeholder "tries it on" by inflating routine or one-off maintenance costs, the tribunal can only determine the reasonableness of the charges and order for them to be reduced. It can't levy a penalty on the freeholder for trying to exploit leaseholders or compensation for the stress this may cause them.

Service charges: new build estates

Service charges on new-build leasehold flats are commonplace but if you buy a freehold house on a new-build estate with shared services or communal areas, you may also have to pay service or "estate" charges. For example, the estate might have an electric gate, perimeter fence, private roads, grass verges and trees.

When freeholders buy their house, they will sign a legal document called a deed of transfer explaining the contribution the homeowner will have to pay towards the cost of maintaining the estate.

In most cases, a managing agent will be employed by the developer to collect the service charge and organise maintenance.

On some developments the deeds may impose certain restrictions on what homeowners can and can't do to their house without permission, so it's important buyers read this before proceeding with a sale.

The most common restrictions include external decorations and alterations, although some estates will also have rules banning satellite dishes and parking on the roads. When it comes to getting permission for alterations, there will be a fee to pay.

One Moneywise reader, (who didn't wish to be named) was shocked to find there were a number of fees he had to pay the managing agent to build an extension to his own property on his own land.

He bought a new-build freehold house from Barratt Homes in Brighton and wanted to build an extension into his garden.

"Just to apply for permission costs £224 plus VAT. Then the managing agent wants more money for solicitor costs to prepare a formal licence for alteration, even though I'm altering my own property (and I don't even need planning permission because it's a permitted development). It also might want additional fees to come and inspect the property," he says.

When he challenged the charges with the managing agent, he was told it was "common market practice" to charge for consent to alter a property and that the agent considered its costs to be reasonable. Mark Sandall, joint managing partner at property expert Andrew Granger & Co, says it's important to know where you stand from the beginning when you buy a new-build house.

"These kinds of arrangements, like having rights of way on your land, are quite common, and as long as the property search has been done properly, it should be clear on the title documents and they should be flagged up to you, together with any covenants on the land you will own yourself, well before you sign a contract to buy a property," he says.

"Far from being a negative, many people choose to buy into the communal living lifestyle, and arrangements such as shared electric gates and common land are part of that. The lesson is do your homework before you buy."

Despite lobbying from the Association of Residential Managing Agents (Arma), owners of freehold homes can't take a case about estate charges to the First Tier Tribunal Property Chamber in the same way that leaseholders can when disputing service charges. This leaves them with little option than to try to reach an agreement with the managing agent or estate developer directly.

"You should complain to the managing agent in the first instance, if one's been appointed. If the agent is a member of Arma, you will have the right to complain to an independent ombudsman," says an Arma spokesperson. "But remember that the managing agent reports to the directors of the management company. If the agent is following lawful instructions, then it might not be at fault."

Published: 15 September 2014
Last updated: 28 May 2017

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