Why all managing agents should practice practical property management– Part 2

In my previous blog, I talked about how important it is for a property manager to practice Practical Property Management in order to “Make it Happen”, concentrating on the Lease and collecting service charges. In this blog, I will be focusing on the need to examine the maintenance covenants and long term planning required in order to maintain a property.

Reviewing the Lease

When carrying out a Lease review of the service charge provisions in a Lease I am always on the lookout for two things:

  1. can you collect a reserve fund? and
  2. can you collect a special levy?

And should I be advising on what Lease covenants to include in a new lease?

I would always recommend that these are both included to ensure that funds can be collected in advance and can also be collected ad hoc should they be needed. Sadly, older leases are likely to lack one, or both of these which can make carrying out major works to a property and collecting the funds for these, very, very hard work!

Maintenance Covenants

Most Leases will include a maintenance covenant as to the frequency when works should be carried out. When reviewing the budget, consideration should be given as to how to collect these funds. If the works are due in the next year or two and a sinking or reserve fund is allowed in the Lease, then a budget figure should be included for the works to supplement what you would hope is already a healthy sum collected. In order to arrive at this figure, a property manager should review the costs of works carried out previously at the property and this coupled with their experience should give an initial indication of what is to be collected. The amount can be firmed up during the year when the specification for the works has been sent to tender and the tender report has been prepared.

This is a best-case scenario, however, the issue arises in this case when a conservative amount of funds has been collected previously and the tender report indicates that the works are likely to cost way beyond what had been suggested. At the same time, as works are due, it is likely that the Lessees will demand the works are carried out regardless.

What are the solutions?

There are two solutions to this, the first, is that the works are delayed and further funds are collected. However the property is subject to further deterioration and if the Lessees are not happy that the works are delayed, that they have paid towards are not going ahead- the result is the Lessees are unhappy with the decision made and ultimately you as the property manager who is advising on this.

The second being to phase the works with the most urgent works being undertaken that year and a more realistic budget put together for the second and/or third phase of the works that the Lessees can afford.

Although this solution is not ideal, it means that the most urgent works are carried out and that the Lessees are able to see that the money already collected is being put to good use. It also provides a bit of a buffer for Lessees in respect of funding, giving them the opportunity to budget for the next phase of the works accordingly.

A special levy and the issues

Although the above is not ideal, a far worse situation is where a Lease does not allow for a sinking fund or special levy. A special levy is an amount collected in addition to the service charge fund for specific works.

Most leases are silent on the collection of a special levy, with silence being considered the same as a prohibition. On the basis of the above, if additional funds were required, and all works were urgent, but the Lease did not allow special levies then the works would have to be postponed to the following year- not ideal if there are health and safety issues.

Of far more concern is where installations within a property such as a boiler or a lift suddenly break down and emergency funds are required to reinstate these. Regardless of whether the Lessees can afford to pay out these funds, you are unable to demand them and therefore you would need to wait until the new financial year.

However, the funds can only be collected as per the Lease provisions so even then you can’t collect the funds in advance to carry out the works in any case. At the same time, you may have extremely disgruntled Lessees who have no hot water or are having to carry their dogs down the stairs without the use of the lift and are vociferous in their criticisms.

Again I can think of two options available:

  1. Apply to the First-Tier Tribunal for a special dispensation to vary the Leases in order to collect the funds, however, this will take time and will not resolve the problem immediately. It is also likely that costs will escalate in trying to maintain services at the same time- whether it is a temporary boiler or an additional person to help people up the stairs.
  2. The other option is to look at reserving the budget to include the sums required to carry out the repairs and ask Lessees whether they want to pay contributions in advance or make a loan to the service charge. Although not an ideal solution it does get around the issues of the Lease and in view of most lessees wanting to get their services back would seem a practical way of getting things moving.

Again, this is a practical approach to difficulties in the Lease but perhaps the most efficient way of ensuring that works are carried out cyclically and budgeted for correctly is to start the management with a preventative maintenance plan setting out the likely issues that may arise over 5 years and then collecting against this. MIH can help with this.