Mapping the block management territory

When talking about England and Wales' leasehold block management issue, there is often a massive conversational disconnect. This is because there is more variation in arrangements than is sometimes appreciated; people might take a one-dimensional view of a three-dimensional space.

The result is that people will propose "solutions" that would work for some of situations but are a financial death-threat to innocent parties in others. So it's important to get a fuller picture out there. Otherwise it's like trying to regulate road traffic starting from the assumption that only cars use roads, and then throwing up one's hands in frustration when anyone mentions lorries, buses and bicycles.

Dimensions of variation

Three key ways that management of a block of flats, or an estate, can differ:

• is management control mutualised?
• is day-to-day management outsourced?
• is ownership of the premises mutualised?

Since 1985, it has not been lawful to run variable service charges at a profit, though obviously that still happens. It happens orders of magnitude more frequently when management control is not mutualised. Anyone who claims otherwise needs to provide overwhelming quantitative evidence. Good luck with that! Why, even in the abstract, would a group of tenants agree to rip themselves off?

The key problem for tenants is management misconduct; this dwarfs other problems, even serious ones, in its frequency. Specifically, it's that there is no effective remedy for repeated, long-term misconduct by managers other than getting out of the relationship with the manager entirely. Getting out of the relationship could be done by leaving the tenancy, by the unreliable section 24 court-appointed manager, or by obtain control over the appointment of the manager and then appoint a new one.

So the critical first question should always be: can the tenants obtain control over the appointment of the building manager? The remedies to any situation differ radically depending on that answer to that.

Objects cast shadows; we can learn a lot from the silhouette that a 3D object projects onto a 2D surface, but there will a missing dimension.

The whole question of service charge arrears looks very different when the landlord and tenants are the same people wearing different hats. So if you take a two-dimensional view of the three-dimensional situation, and ignore whether the management is mutualised, then you're choosing to ignore the obvious difference between a large institutional third-party landlord with a nine figure balance sheet and a thinly-capitalised cooperative housing association where every tenant has a vote and a few quarters of arrears could mean critical safety repairs not happening.

This leads to the conclusion that, for sites where management control is mutualised, capping or withholding service charges is deeply morally suspect, and effectively is a way of enabling scabs who may be working with the (current or former) third-party freeholder.

On the question of outsourcing management: there are sometimes proposals to impose restrictions on the management of tenant-owned buildings that would not apply to third party freeholders. These are obvious attacks on, among other things, basic property rights and should be opposed on a broad variety of ideological grounds.

Appendix: Concrete examples

As there are three yes/no questions about ownership and management, there must be the following eight situations:

Management control mutualised, third-party ownership, management outsourced

This is the usual situation when a block has exercised the Right To Manage.

Management control mutualised, third-party ownership, management in-house

This is the situation when a block has exercised the Right To Manage and employs its own tenants as staff to manage the building. For larger blocks, this is quite dodgy. But for very small blocks, e.g., fewer than five flats, it can be workable.

Management control mutualised, ownership mutualised, management outsourced

This is the usual situation where a block's tenants have bought the freehold.

It is also the default for "fully mutual" housing associations, such as Sanford Housing Co-operative.

Management control mutualised, ownership mutualised, management in-house

This is the usual situation where a block's tenants have bought the freehold but it's a very small block that does not need a separate manager.

Third-party management control, third-party ownership, management outsourced

The default "OG leasehold" setup.

Third-party management control, third-party ownership, management in-house

This occurs a lot on newbuild estates during construction: the homebuilder initially employs the cleaners and gardeners itself.

Third-party management control, ownership mutualised, management outsourced

There is a block on my own development like this: the tenants clubbed together and bought the freehold under Right of First Refusal when it was being sold on to an investor. However, they have tripartite leases and do not control the estate management company in which the management control is vested, which in turn outsources it to a commercial managing agent.

Third-party management control, ownership mutualised, management in-house

This would be unusual/temporary but could occur for example where a management company has just sacked its agent and in some other situations.

Appendix: Philip Rainey KC on mutuals and service charges

22. Relax the regulatory regime controlling service charges for tenant-owned landlord/management companies

Observations: The panoply of controls on management, service charges and administration charges are designed for an arms’ length relationship between landlord and tenants. It is far from obvious why such close regulation should apply where L and T are the same people wearing different hats. If the tenants in a small block meet around the kitchen table and decide to XYZ, why should they have to serve a s.20 LTA 1985 consultation notice? Service charge disputes are a zero-sum game. Devil in the detail: Those observations are applicable only if the landlord (or management company or RTM company) is representative of the tenants. Enfranchisement can be achieved by a bare 50% of long lessees; that would result in what would be more accurately described as a “neighbour owned” block rather than “tenant owned”. There could be a threshold for relaxation: a landlord wholly owned by all the long lessees in a block (or by an overwhelming majority e.g. all lessees bar one/90% of lessees in blocks with more than 10 flats)

Appendix: social housing

There's nothing specific to "private" housing in the foregoing. There is a separate "Right To Manage" scheme for council housing in parallel to the one for long leasehold, and various types of social tenures are considered in the leasehold and landlord and tenant legislation, sometimes with perks and more often with additional burdens.

To take the road traffic analogy a bit further, there is a danger of trying to make separate rules for private cars, taxis and cars bought on finance, while ignoring articulated lorries, motorbikes and so on. We can't lose sight of the big picture when focusing on specific problems.