Property service charge: why you're paying too much

If you own a property and pay service charge, then I'm prepared to bet that you're paying too much. Over the last few months, I've learnt how despicable the property management industry is and how most UK leaseholders are being ripped off within this very opaque sector.

I'm currently going through the Right to Manage (RTM) process so that I can oust our property's managing agent, this will give us control over our property's running costs and let us choose who runs our building. If your property isn't run by an RTM then it's highly likely you are paying too much service charge.

5 reasons your service charge is too high

After digging into the RTM process and speaking with solicitors and prospective new managing agents, I learnt how managing agents and freeholders profit at the expense of leaseholders. Listed below are 5 ways most leaseholders are paying too much service charge. If you're not part of an RTM, then these are points you should bring up with your managing agent.

1. suppliers and conflicts of interest

In my building, most of the services provided are by companies owned by the managing agent. The managing agent hasn't gone into the marketplace to get the best deal for cleaning services, gardening and the like. No, instead, they use companies that they profit from.

One of the biggest complaints in the building where I live is with the cleaners, needless to say, the cleaning company will never be replaced. Our managing agent (and many across the UK) aren't incentivised by providing good service to leaseholders, their aim is to make as much profit as they can at the leaseholders' expense.

Therefore ask to see the company names of your building's service providers. You can use the companies house website to look up and see if there are any relationships between directors. Also, ask them outright if they are paid a commission or benefit financially from any of your building's suppliers.

If the managing agent where you live is a member of RICS (Royal Institution of Chartered Surveyors) or ARMA (The Association of Residential Managing Agents) then they are supposed to disclose any commissions or relationships they profit from, but from my experience, this doesn't happen. I'm now in the process of reporting my managing agent to RICS and The Property Ombudsman due to non-disclosure -- do the same if your agent isn't being honest.

2. buildings insurance and secret commissions

I never understood why I paid my buildings insurance premium to the freeholder and not the managing agent. Well, I recently learnt one of the tricks of the trade, freeholders and managing agents split commissions with the broker, often for thousands of pounds.

The reason my freeholder wanted to charge us for the buildings insurance instead of our managing agent, is because they want the annual commission instead of the managing agent getting it. It's easy money and a highly lucrative money stream for your freeholder or managing agent.

"Leaseholders pay up to 60% more for buildings insurance because of secret commissions" is a quote based on a report in The Times. If you suspect you're paying too much for your buildings insurance, you probably are. There are no win no fee law firms that can look into this and potentially get you compensation ...something I'm now looking into.

In the Times article, Sir Peter has described the behaviour of freeholders and their managing agents who deliberately levy sky-high insurance premiums on captive lessees as "corrupt".

"We believe unfair service charges cost leaseholders hundreds of millions of pounds each year with secret commissions on buildings insurance"

Sir Peter Bottomley

3. managing agent fee

If your building isn't run by an RTM then your managing agent knows it's difficult to replace them. This means their fee will be uncompetitive and often increases annually above the rate of inflation. Do some shopping around on the internet, a reasonable annual fee (in London) should be around £200 -- £265 inc VAT per flat.

4. arranging unnecessary works

Managing agents often arrange extensive works that doesn't need doing. The managing agent will obtain a high, medium and "low" quote. The lowest quote coming from a financially linked contractor.

Another trick is for managing agents to charge for works that were never carried out, so always analyse your annual accounts statement (which are normally vague and lacking detail).

5. hidden charges and fees

Managing agents will charge leaseholders ridiculous fees for all kinds of work. The managing agent where I live is always writing letters, I used to wonder why they didn't just send us emails but it's because there are fees associated with letter writing.

Some other examples include charging fees for buildings insurance claims and project management. It makes you question what your managing agent's "management fee" actually covers, it seems this is just for the very basics such as accounting, the occasion site visit and calling out Otis when the lift breaks down.

Summary

My opinion of managing agents has always been pretty low but what I've learnt over the last few months has put them in an even dimmer light. Not only do managing agents provide terrible service, but they also rip you off.

When I reviewed our building's annual accounts, I used to think the line item labelled "management fee" was all the managing agent was being paid. This was naive of me. Managing agents and freeholders are profiting from millions of leaseholders across the UK from commissions and supplier relationships.

These unscrupulous practises are analogous to the PPI scandal, maybe worse. We are being ripped off in broad daylight.

However, a guaranteed way to lower your service charge is to start the RTM process so you can kick out your managing agent and choose the suppliers and buildings insurance yourself. I would expect your service charge to decrease by a minimum of 10% and up to 40%. I know the RTM process can be off-putting, but once you start, you'll realise, it's not that difficult and it's highly satisfying to take control over who manages your building and how your money is being spent.