Labour Pledges Crackdown on 'Fleecehold' Leasehold Abuses

Labour's housing secretary, Angela Rayner, has pledged to end the "fleecehold" injustices faced by leaseholders, targeting property managers and estate agents for alleged malpractice. At the recent Labour party conference, Rayner announced plans to cap unfair administration fees and ground rents, and to establish an independent regulator for managing agents. These measures aim to address the practice where freeholders and managing agents can charge substantial fees for routine requests, such as obtaining permission to keep a pet or make home alterations.

Industry insiders suggest that the stated administrative fees are only a fraction of the problem. Many leaseholders may be paying significantly more each year through inflated service charges due to undisclosed commissions and kickbacks. These hidden charges are reportedly much harder for leaseholders to identify and challenge than overt administrative fees.

Understanding Kickbacks

Bosses of two block management firms estimate that a majority of leasehold blocks are managed in a way that involves such practices. Alan Draper, founder of Common Ground, and Darren Bennett of Fortem, state that contractor kickbacks are widespread. A kickback occurs when a freeholder or managing agent inflates an invoice for work or services provided by a contractor. This inflated cost is then passed on to leaseholders via their service charges, with the difference pocketed by the freeholder or agent. The contractor may be incentivized by the prospect of regular work, as managing agents often control numerous properties.

Kickbacks are most commonly associated with building insurance agreements and work carried out by building contractors, but can also involve utility companies. Draper noted that contractors are often asked to add 10-15% or more to invoices, with the excess then paid back to the managing agent through a separate "rebate" invoice. This practice, he claims, lacks an audit trail under current legislation.

Bennett confirmed that while his firm refuses kickbacks, the practice is common. He believes that managing agents with poor ethics may exploit leaseholders for profit, applying kickbacks to all jobs regardless of size. He also highlighted that these costs do not typically appear on the service charge budget, making them difficult for leaseholders to detect.

Financial Impact on Leaseholders

Service charges have seen substantial increases in recent years, with 50% rises over five years not uncommon. While inflation in labor and material costs contributes, there is growing concern that hidden commissions and kickbacks are also driving these increases. Research by the Property Institute indicates that average annual service charge bills for leaseholders range from £1,525 to £8,680. Kickbacks from contractors typically range from 10% to 15% of a job's cost, but there is no upper limit, and leaseholders have limited means to uncover these charges.

Commissions in Building Insurance

Building insurance is another area where freeholders and managing agents may generate additional income. Property managers can receive referral fees, commissions, or administration fees when arranging insurance policies. Often, an insurance broker receives a commission from the insurer and shares it with the property manager as an incentive. Commissions can account for 30% of insurance bills, and in some cases, up to 60% of the total premium, according to Leaseholder Action. This structure incentivizes higher premiums because commissions are typically a percentage of the cost.

A Financial Conduct Authority investigation in 2022 found that the sharing of remuneration between brokers, freeholders, and property managing agents occurred in 68% of cases. For sampled insurance policies, 58% had a commission rate of 30% or more. Between 2019 and 2022, £1.6 billion was paid for insurance, potentially meaning around £538 million was commission based on a 30% average rate. In a notable case in 2023, leaseholders at Canary Riverside recovered £1.3 million in insurance commissions charged by their landlord over ten years, though this was later reduced on appeal. The government has asked the FCA to review leasehold insurance costs, with results expected next year.

Detecting Hidden Charges

Leaseholders can request to see invoices paid by their freeholder or agent under section 22 of the Landlord and Tenant Act 1985 to identify potential commission payments. However, experts like Draper suggest that agents engaged in kickbacks may not disclose them, even when requested. Liam Spender, head of Leaseholder Action, notes that commissions are usually concealed within prices, making them hard to detect, especially when service charges are reported under broad headings like "general maintenance."

Reasons for Accepting Kickbacks

Management firms often argue that fixed management fees alone are insufficient to run their businesses adequately. Bennett explained that low management fees can lead to companies spreading themselves too thinly, resulting in poor service. Typical annual management fees per flat range from £200 to £600 plus VAT. For a building manager overseeing approximately 500 properties, fixed fees alone could amount to a significant sum. However, the practice of basing management fees on a percentage of the overall service charge, rather than a fixed amount, creates a conflict of interest, financially motivating managers to keep costs higher.

Additional fees charged by block managers include those for management packs (LPE1 forms), which have no statutory cap and can range from £150 to £600. Other charges cover company secretarial work, lease enquiries, permissions for alterations, and costs related to Building Safety Act compliance.