Freehold Management: Service Charges

Richard Fuller Excerpts

Thursday 20th April 2023 Commons Chamber

[Richard Fuller (North East Bedfordshire) (Con)]

I am grateful to the House for being able to call this debate to draw attention to the problems with the current framework of legislation and regulation covering estate management and service charges that are placed on freeholders. I do so on behalf of the thousands of homeowners in my constituency who are being charged for services that ordinarily might be covered by their council taxes, who frequently are not given easy access to the scale of charges they face and who have inferior rights of legal challenge or redress when something goes wrong. I do so to support the efforts of local councillors, especially Councillor Jim Weir, from Great Denham, in my constituency, who has done so much to draw attention to these issues, and to support the efforts of those in local resident associations, such as Tom Middleton, the chair of the New Cardington residents’ association. He has doggedly pursued estate management companies to get clarity and promote accountability. I also do so on behalf of 30 other Conservative colleagues who cannot be here today but joined me in writing to the Prime Minister to urge action. I want to put on the record my thanks to the Minister for her thoughtfulness in listening to the concerns I have raised with her ahead of this debate. I look forward to her response to some of the points I wish to make.

Let me set out a bit of the background. Freehold service charges can cover the provision of a variety of services on housing estates, such as the upkeep of play areas, communal gardens, unadopted roads and communal parking areas, such as parking courts. The requirement to make a financial contribution is most usually defined in the deed of transfer when the property is first sold by the developer. Alternatively, a liability might arise as a result of an estate rent charge that forms part of a purchase contract. The developer then usually enters a contract with a management company to organise the necessary work on the estate and to recover costs from homeowners. Sometimes the developer will set up a residents’ management company to take ownership of the communal areas. Where that happens, the residents’ management company can appoint a management company to work on its behalf. That may sound a little confusing, as it did to me as I said it. I was surprised to learn that in what one might think would be a single housing development area there can be 10, 20 or 30 individual companies handling small areas, such as little parts of roads or smaller communal areas. For my constituents, that is a confusing issue if they ever want to follow up with an inquiry. I am going to talk about some of those problems in this debate.

Based on my research, what is clear to me is that after the completion of a purchase these costs to homeowners can often increase significantly; that there is no clear or effective accountability; and that these arrangements have created a mini-industry of companies providing services of varying quality and charging often high fees, many of which relate to administration rather than to the services provided themselves. For the homeowner affected by estate management charges, these raise some pertinent issues that I know the Government are considering.

First, the notification to home buyers of their future liability for charges is not made clearly. Secondly, when bills arrive, it is often unclear what the charges relate to or why they are being applied to a particular property. Thirdly, it is often difficult for residents to obtain information about the charges, to challenge their reasonableness or to effect change when the work is being completed inadequately. Fourthly, the regulation or oversight of the practices of the management companies is very weak, creating problems for homeowners and, increasingly, creating reputational damage to many of our major housing developers, which it would be wise to address now.

It is also clear to me that the voice of homeowners is absent at a crucial stage. It is right at the start, while planning approval is going on, when the developer and the local planning authority determine who is responsible for the costs to maintain shared areas in the proposed development. In the room, there is the local authority planning authority and the developer. The people not in the room are the homeowners who will subsequently have to pay those charges. That structure means that the incentives are stacked too heavily for the developer and the local authority to stick the bill to those not represented—the homeowners themselves.

[Fiona Bruce (Congleton) (Con)]

My hon. Friend is making an excellent speech on an issue that affects many of my constituents. Does he agree that another issue is that, when the local authority is in the room at the start of a development, there should be some way of agreeing a time-bound point at which that local authority takes over, making certain the services or the facilities within some of these developments, otherwise a situation can arise whereby the residents can be responsible, for years sometimes, for covering the costs through service charges that should actually be taken over by the local authority?

[Richard Fuller]

My hon. Friend, with her great expertise in these and other matters, is absolutely right. This question of the timeframes in which certain common services might be adopted can create a number of concerns. This issue was raised for me by Councillor Phillipa Martin-Moran-Bryant, who has a number of residents affected by this issue. There is also the period of time that it can take for an estate management company to be handed over to the residents themselves. There is a double source of risk of delay, and my hon. Friend is absolutely right that the Government should consider whether there is a reasonableness in terms of the time limit that could be put in place.

[Fiona Bruce]

There is also the situation of some homeowners buying early on in a development and then finding that they are bearing charges for the subsequent development of the site or the maintenance of the site during its development, which, realistically and fairly speaking, should be borne by the developer itself.

[Richard Fuller]

I am grateful to my hon. Friend for saying that. I know the Minister will be listening, because she has been listening to all the points that I have previously made on these issues.

Just to cap the concerns, at the end of it, a person might want to sell their property. What we find increasingly is that, as they are going through the sales process, they hit a snag, because the estate management company is saying, “You haven’t paid charges.” Sometimes, they are charges that the homeowner was not even aware that they were liable for. This is the reality for many homeowners living in areas with estate management charges: they have no voice, no explanations, no transparency, no redress and, potentially, no ability to move house.

Let me give a couple of specific examples to bring those points to light for the Minister—they will largely be from my constituency, but they occur in many places. I return to Councillor Jim Weir in Great Denham, who conducted a survey to which 300 residents replied, and which identified multiple instances of excessive administrative fees. A number of my local councillors have done the same.

In one scheme, the anticipated maintenance work to be carried out and the charges for electricity comprised 30% of the total charge to the residents, while 70% of the charge was fees, reserves and overheads. In a second scheme in his ward, the anticipated maintenance was 10% of the total charge, with 90% of the charge going on fees, reserves and overheads. In a third scheme, the estate manager had just one job: the management of seven lamp posts. Jim and his team compared the costs charged per lamp post with the standard cost of the local council for doing the same job and found that the management agent is charging twice the standard rate.

When residents challenged the estate management company to see the electricity bills, they were informed that the bills could not be shared electronically and someone would have to visit the offices of the agent 170 miles away if they wanted to inspect them. One good resident said, “I’m up for that,” and that he would go and have a look. He arranged an appointment, which got cancelled and cancelled and cancelled. After more pressure from residents, the company finally admitted they did not have any electricity bills to show. No individual should have to go through that level of turmoil to try to find out something so simple about why they are being charged something in their own area. It is ludicrous.

I have a couple more examples from New Cardington of other issues relating to handovers and conflict of interest. Tom Middleton, the chair of the New Cardington Residents Association, wrote to me:

“Residential management companies (RMC) are set up by developers to look after the various open spaces not placed for adoption. The directors of the RMC are usually senior directors at the developer. This means the managing agent is effectively the developer’s client until handover. This is usually prolonged. Here in New Cardington the RMC was incorporated in July 2010, 13 years later the developers are only NOW starting the handover process. This means for 13 years residents have paid a service to an agent of some description but over which they have had no control.”

My hon. Friend the Member for Wyre Forest (Mark Garnier) has a similar problem in the Silverwoods development in Kidderminster. He cannot be here today, but he wrote to tell me:

“Multiple iterations of the estate management company has resulted in absolute opaqueness in accounting and use of funds generated, whilst failure to enforce planning conditions by Wyre Forest District Council has passed on a financial burden to rectify failures onto residents. This is not good enough.”

There is a further point about conflict of interest that, on balance, I want to make. The Association of Residential Managing Agents has 10 standards in its consumer charter, the seventh of which is, “Avoid conflicts of interest”. Concerns have been raised by the New Cardington Residents Association that their estate management company, RMG, has created a conflict of interest by establishing a wholly owned subsidiary, Osterna Ltd, to conduct annual fire risk assessment processes.

I have kindly been copied in to a letter from RMG that explains its rationale, and I am in no way asserting that there is any wrongdoing here, but it clearly changes the arm’s length nature of an estate management company hiring services if some regular services, such as fire risk assessments, go untendered to related companies. Will the Minister write to companies reminding them of their obligations and calling for greater accountability and transparency?

I will canter quickly through the history of Government reviews. In July 2017, there was a consultation on tackling unfair practices in the leasehold market. In December 2017, the Government said that they would legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed-use estate can access equivalent rights as leaseholders to challenge the reasonableness of service charges. In October 2018, the Government confirmed their intention to

“replicate consultation requirements and obligations on the provider of services to provide information to the freeholder.”

In June 2019, the Government committed to equal rights for freeholders and the right to manage for freeholders. In December 2021, the then Minister told the House:

“The Government also intends to give freeholders on private and mixed tenure estates equivalent rights to leaseholders to challenge the reasonableness of estate rentcharges, as well as a right to apply to the First-tier Tribunal to appoint a new manager to manage the provision of services. In addition, we will ensure that where a freeholder pays a rentcharge, the rentcharge owner is not able to take possession or grant a lease on the property where the rentcharge remains unpaid for a short period of time. We will translate these measures into law when parliamentary time allows.”

May I ask the Minister to confirm, first, that there has been no dilution of those commitments by the Government, and secondly, that it is the Department’s desire to include this long-promised legislative change in the next session of Parliament? I say “Department” because, of course, it is the Prime Minister who has to balance the multiple claims on parliamentary time. That is why I—along with thirty of my colleagues—wrote to the Prime Minister to ask him to include the legislation in the King’s Speech.

The Prime Minister kindly wrote back and included the following comments:

“The Government believes that it should be made clear to potential purchasers what the financial arrangements and their responsibilities are for the upkeep of communal areas. It is also important that we hold these estate management companies more accountable on how they perform and how homeowners’ money is spent.”

He went on:

“These changes will be introduced when Parliamentary time allows, and I will carefully consider your call for it to form part of our legislative session for the next Parliamentary session.”

I put on the record that I am very grateful that the Prime Minister wrote back. I hope that he understands the purpose of this debate and the calls by 30 of my Conservative colleagues, including the contribution from my hon. Friend the Member for Congleton (Fiona Bruce). It is the time for the Prime Minister to take the action that has been promised for so long. We know that the issues preceded his time, but he has a great capacity for understanding problems and finding solutions. We are close—I think the Minister will be clear that the Department is ready to move—and I hope that the Prime Minister will take further consideration and action to help my constituents and those in many other places around the country.