I don’t think anyone reading this article will disagree with me when I say that the onset of this last recession was swift and, although its arrival was not without warning, its impact was far more severe than expected.
The fact that we are now crawling out of this economic downturn is a reason for optimism, but it is also a time for caution and commonsense. For property developers, this means maximising the usefulness of each business relationship, particularly that with the managing agent.
It is essential that the developers of new schemes involve a managing agent at as early a stage as possible so that long-term sustainable management arrangements can be set up. Agents can assist developers to draft leases, decide on how service charges should be scheduled and apportioned on complex schemes, comment on design to reduce capital and service charge costs and recommend what long term governance arrangements make most sense.

A fundamental, but often overlooked, question for agents and developers to consider is, do the sums of the whole complex add up to permit full recovery? One way to stop errors is for every lease of a block to have full schedule of all the percentages or fractions used for that block attached to it.

It is best to make sure that there is an ability to vary the service charge apportionments of all leases to allow for mistakes or for changes to phasing or for delays in the build programme. But it is also not fair to all involved parties if the developer has carte blanche to change apportionments at will. One solution is to give the right to vary to the management company, if one is used in the leases.

Note that new accountancy regulations being introduced do not require an audit or certification of annual statements of service charge accounts; they will require only an independent accountant’s report. Developers and agents should therefore make sure that the leases only require what is needed to comply with the Landlord and Tenant Acts; if you put in that they need to be certified by the landlord or the agent or a surveyor you will need to do this as well as comply with the L&T Act 1985 s21.

The formation of management companies is another key area where agents can assist developers. If a management company is to be set up to take the long-term control of the common areas of a development, then agents should be able to advise on the key actions. These include:

• Setting out in any sales literature the intended timing of when control of the management company will be handed over to the lessees including explaining if there will be any phased hand over
• Making clear in the literature if membership of the company is a pre-requisite of purchase and who are the first directors of that company
• Making copies of the articles of the company available to purchasers
• During control of the company by appointees of the developer, giving to all lessees half yearly financial statements of the company
• Encouraging and allowing for a residents committee to be formed prior to handover to act as a voice for the lessees’ concerns and providing a source of the replacement directors needed at handover.

When the management company is handed over to lessees, the developer should give lessees at least eight weeks’ notice and agree with the lessees how the snagging of communal areas prior to handover will be dealt with.

Managing agents will be able to advise developers on the documents which should be passed to the management company at handover. These include:

• The title documents and copy counterpart leases
• The agreed Snag list and Practical Completion Certification
• As built drawings
• A register of all capital assets
• Warranties and other guarantees, including test records for drainage, water and heating pipe work
• Risk assessments and files for fire safety and health and safety
• Documents relating to planning and Building Regulations.

Finally, and a rather delicate and contentious issue for both developer and agent, is the subject of voids. It is absolutely crucial that both developer and managing agent have a clear view on their approach and position with regard to this subject.

Voids are service charge monies that pay for unsold flats on new developments once the first flat in the block has been sold to a lessee. From the date of the first sale of a flat in a block it is quite clear in contract law that the lessee has the contractual right to receive all the services set out in the lease and to pay only the apportionment of the cost of those services, also set out in the lease.

In addition, it is also clear in statute law that from the date of that first completion in the block, the first lessee and subsequent ones have the statutory rights and protections set out in Landlord and Tenant Acts. So, if the first lessee has been asked to pay a service charge on completion, then that lessee has the right to go to a Leasehold Valuation Tribunal about that service charge and challenge its reasonableness and ‘payability’.

Whether a service charge has been levied initially or not on a new development, any landlord or agent of that development must still act in accordance with Landlord and Tenant Acts and the RICS residential service charge code.

Agents can also assist developers in minimising voids. Key to this will be discussing with the agent the possible construction/sales period and the impact of phasing and possible changes to phasing if market conditions alter. The agent should then put forward a plan which is fair to all parties, complies with the leases, and complies with the Landlord and Tenant Acts and the RICS code of practice.

Agents can also assist with the sale of freehold reversions for developers which, if discussed early on in the development planning stages, can increase revenues and reduce costs of sale.

Whilst there are several other areas where agents and developers can work closely together to maximise the efficiency and profitability of a development, time and space precludes me from detailing them. However, if there were one key message I would highlight for both parties, it would be one of co-operation.
Those developers and property managers who have the vision, skills and flexibility to communicate well and build on their common aim are going to be the ones that will reap continued success in these testing economic times.

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