Robert Plumb , chief executive of managing agents HML Holdings, which is accredited to LKP and is a member ARMA, considers ARMA-Q and the complexity of transparency for residential managing agents
Growing leaseholder empowerment and awareness combined with the immediacy of communications will inevitably mean that managing agents will require a thorough understanding of what it means to be truly transparent. In leasehold there are many complex permutations of the relationship between landlords, their managing agents and their leaseholders. It is, of course, the leaseholders who actually pay the bills, but often landlords who take the decisions. Given the historically poor level of transparency and the variety and complexity of leasehold structures there is significant scope for misunderstanding. In fact put more harshly there is significant opportunity for a lack of transparency and the use of “smoke and mirrors”.
An understandable and fundamental principle that we should anticipate is that in the minds of leaseholders they should be able to trust the impartiality of their managing agent. They would like to believe that the agent (whose fees they pay) will act in their best interests when deciding which supplier or contractor to use for their building. In relying on their managing agent to select the best value for money supplier (and best of course is not always cheapest) they would naturally want the agent not to be compromised by the agents own financial interest in the transaction or in the supplier. One can’t help observing that the downward pressure on property managers’ fees that occurs in difficult economic times, such as we have had recently, has had the effect of keeping base management fees artificially low. This may well have contributed to agents having to look at other ways of making money in order to survive. It is these additional income streams in particular that require additional transparency.
As we contemplate the consumer charter set out by ARMA under the ARMA-Q initiative, it would be valuable to have ‘impartiality’ and ‘transparency’ fully understood.
ARMA have used entirely appropriate words in describing their consumer charter. ‘Honest and fair’ and ‘avoid conflicts of interest’ are unquestionably worthy standards. We could extend our consideration of those standards and examine a little more precisely how they work in the context of related parties.
Landlords, managing agents and the disclosure of their relationship or ownership.
It could be argued that it is beyond ARMA’s remit to make their members responsible for their client landlords’ obligations to disclose their conflicts of interest to leaseholders. Others might argue that managing agents are responsible for the collection and disbursement of leaseholder money under trust law. This would mean that regardless of the terms of the lease managing agents would have an obligation to disclose any conflict of interest (including their own).
It should, at the very least, be a requirement for a managing agent to disclose to leaseholders if they are a related party to the landlord.
This should cover specifically both possible arrangements; i.e.
the managing agent owns the freehold or
the managing agent is wholly or partially beneficially owned or controlled by the landlord.
The agent’s need to disclose the nature of their third party relationships
In being fair and honest with leaseholders, managing agents should describe the nature of their interest in any services used and paid for by leaseholders.
There are many ways in which an agent can be “financially interested”.
It could involve a simple payment by the supplier to the agent for having selected the supplier or it could be that the participation is more involved e.g. a “volume discount” that results from the placement of many buildings contracts and one in which both agent and indeed the leaseholders benefit.
The managing agents could legitimately charge a fee for managing the project that includes procurement. Adequate disclosure would have been achieved if the managing agent’s fee is separately billed (and not in the form of a rebate from the supplier).
The financial relationship could exist because the managing agent owns the supplier (or has common shareholders). Such ownership should be disclosed to leaseholders (not just landlords).
Disclosure of the Landlords’ supplier relationships
Leases often dictate quite clearly (and indeed for good reasons) that the landlord has a duty to procure services (such as insurance and repairs) on behalf of leaseholders and raise money from leaseholders to pay for those services. Similarly leases can provide no process in which leaseholders can voice their opinion as to the selection of contractors. (i.e. sometimes referral to the LVT may be the only available route to getting disclosure). There is, of course, nothing illegal about the landlord employing his or her own company to supply services to undertake work on the property. It is nevertheless understandable that leaseholders would wish to see that there is good value for money in selecting the landlord’s contractor and they are entitled to rely on their managing agent to ensure that this is so. It would be good practice if managing agents disclosed to leaseholders which contractors have been used that are related to the landlord.
Written terms of business
ARMA-Q encouragement of written terms of business is very important. It is a managing agent’s opportunity to be very precise about what services are included in the management fee (set out in the written contract) and what are not. Our professionalism as managing agents is greatly enhanced by preparedness to have this clarity and transparency.