A3. Why should a leaseholder be considered as a customer of a Residential Property Manager when there is no direct legal agreement between the two?

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1 reproduced here as a guide for students and the examiner has commented on the answers accordingly. It is not reproduced as an example of the correct way to answer the questions. IRPM Part II Examination Model Answers to the 23 February 2005 paper PART A of the paper contains TWELVE questions. The requirement is to answer TEN questions in the first hour. Part A A1. Explain what is meant by an assignment of a lease and what are the implications for the residential property manager acting as agent for the freeholder(s). In the event where a leaseholder sells his flat, the new leaseholder takes over the existing lease with the freeholder. The legal transfer of the lease between the initial leaseholder and the buyer of his flat is known as a deed of assignment. As the assignee takes over the responsibilities of the lease covenants, any arrears outstanding become his responsibility. The residential property manager may have to provide pre-contract information to assist the assignee in his purchase, will have to amend his records at the appropriate time, and will have to ensure that financial matters are dealt with appropriately, with particular regard to arrears at transfer. The lease may provide for prior landlord s consent to be obtained, usually not to be unreasonably withheld. Examiners comments This is a very full answer and considering the stress that some people experience when taking an exam it is written in very clear English with complete sentences and little or no shorthand (it was also legible). The key gap in the answer is the expression unexpired term in relation to the transfer of rights and obligations that is associated with the assignment. A2. What are the new consultation requirements on Major Works proposals under Section 20 of the Landlord and Tenant Act 1985 (as amended by the Commonhold and Leasehold Reform Act 2002)? The new consultation requirements have varied the financial limits and the way in which the consultation is conducted. Firstly, the consultation requirements apply to any one-off works where the cost of works including VAT is to exceed 250 per any one leaseholder. There is a different limit of 100 in respect of longterm contracts (one year or more). There are now three stages to the consultation process for any proposed works which fall over the 250 limit. Firstly, the leaseholders must be served with a proposal notice setting out details of the work to be undertaken (including detailed schedule/specification, or informing of a time/place where such specification may be inspected). Leaseholders have 30 days to respond with comments regarding the scope and nature of the works, and to nominate contractors to be considered. The landlord must obtain at least 2, or preferably more, quotations, at least one of which must be from a contractor nominated by leaseholders. A notice B is then sent out, detailing the quotations obtained, and setting out the landlord (or agent s) recommendations for preferred option. The leaseholders have a further 30 days to respond. The landlord (or agent) must then make an informed decision, and if the quotation chosen is not the lowest, or from a nominated contractor, must send a statutory notice of advice to leaseholders within 21 days setting out reasons for the decision. If the work is urgent, an application under S20ZA can be made to dispense with consultation to the LVT.

2 Examiners comments Again this is a very full answer (as they all were from this candidate). It sets out a logical pathway through the Section 20 process. In relation to the comment at the end of paragraph 3 leaseholders may not nominate any contractors and so this would only be required if they did. The answer is accurate on the financial levels and the key steps required. Note that the paragraph B statement does not require the landlord s recommendations or preferred option but it may be prudent to include this for clarity of what is being proposed. There are marks for questions in this section and the comments on the financial limits and the key steps would have secured maximum marks so no additional marks were awarded for the information on section 20ZA. If the candidate had been short on time and could only have answered by using bullet points, such as; Major works of over 250 inc VAT for any one flat and long term agreements of over 100 for any one flat Consultation Step 1- Proposal notice setting out details of works to be done and allowing 30 days to respond Step 2 Get quotes including leaseholder nominee, if provided Step 3 B notice detailing quotes received Step 4 Award contract Step 5 If not lowest or leaseholder nominated contractor then notice of reasons for decision to be sent out within 21 days I would have to give full marks for this type of answer. A3. Why should a leaseholder be considered as a customer of a Residential Property Manager when there is no direct legal agreement between the two? Whilst there is no direct legal agreement between leaseholder and residential property manager, the RPM acts as agent for the lessor, who does have a legal agreement with the leaseholder in the form of the lease. The RPM must ensure that all the lessor s responsibilities are fulfilled. The RPM has control over finances belonging to the leaseholder (held in service charge trust funds), and also holds information about the leaseholder (Data Protection Act implications). The RPM is contracted to the lessor, but the majority of his responsibilities have a direct impact on the leaseholder. The RPM thus has legal responsibilities to the leaseholder in the form of Landlord & Tenant legislation, as well as the Data Protection Act, Health & Safety legislation etc. In addition, with increased leaseholder powers, particularly Right to Manage and appointment of a manager, it is in the interests of the RPM s business that he treats his leaseholders as valued customers they ultimately pay for his services and have powers to change the way their development is managed. Examiners comments - The legal relationships through the lease and the managing agreement (which ARMA and RICS require to be in writing) could have been better answered but the points about increased leaseholder power and the payment for services provided are well made. A4. What is the purpose of a reserve fund or sinking fund within the context of managing a residential block and what key difference is there between the two? A reserve fund or sinking fund is to enable funds to be built up towards the cost of an item of significant expenditure, thus enabling the cost to be spread over several years, easing the burden on leaseholders. A reserve fund collects money for general usage, so that monies held therein could be used for repairs or decorations or unforeseen expenditure. A sinking fund is collected in respect of a specific item, such as replacement of lift equipment, or roof renewal. The sinking fund cannot be used for any purpose other than that for which it is intended. Any interest paid by the bank in respect of reserve or sinking fund accounts must be retained for the benefit of the leaseholders, and not by the RPM. Examiners comments The definitions of these two types of funds frequently overlap but I think this answer clearly identifies the commonly understood key differences and the overall purpose is well described. It is always important to have regard to the particular lease terms which may contain specific definitions of funds or limit their uses to specific purposes.

3 A5. The FSA has introduced a new regulatory regime for property managing agents dealing with insurance. When did this new regime commence? What are the basic requirements of this regime? As from 14th January 2005, any RPM dealing with general insurance business must be registered with the FSA. Insurance companies are unable to deal with unregistered RPM s, unless they are purely dealing in their capacity as company secretary for a residents management company. General insurance business includes arranging cover, paying the premium, dealing with claims handling, etc. A registered firm must have clear written procedures in place, a written complaints handling procedure, and should be able to demonstrate if so required that staff acting in insurance business have the experience/qualifications to do so. Any commission earned in respect of insurance must be declared. Examiners comments A good answer. The key information is in the first sentence of this answer and is accurate except to add unless they are acting purely as an Appointed Representative. The supplementary information is also accurate and conveys a deeper understanding of the topic. Note that whilst legislation does not currently require the declaration of commissions earned, it is a requirement of the Code of Practice of the Association of Retirement Housing Managers and is recommended by the RICS Code of Practice upon request. It may, therefore, be considered good practice. A6. As residential property manager acting as agent for the freeholder(s) what courses of action would you take to recover outstanding monies on a service charge account? There are two major choices open to the freeholder, either forfeiture, or a claim through the county court. In either case it is important to ensure that the leaseholder has been correctly invoiced for the service charge and that all items charged are actually recoverable under the terms of the lease. Under CLRA 2002 forfeiture action cannot be commenced for small claims (under 350) less than 3 years old, and determination of breach of covenant must be sought and obtained before S.146 Law of Property Act 1925 proceedings can be commenced. An alternate route is to pursue a claim in the county court (small claims court). In either case costs are not recoverable from service charge funds. Examiners comments The answer goes straight to the final stages of collection without commenting on the initial stages of reminders and personal contact. Some agents use debt collection agencies, other solicitors. The Section 146 process is a notice served on a leaseholder to allow them to act to stop forfeiture, the financial and time limits are correct, forfeiture is now very difficult under the current constraints but is still a legitimate course of action and mention of it is required in this answer. With reference to the final paragraph; costs may be recoverable as service charges but only if the lease makes specific provision for their recovery and the payability and reasonableness could be challenged by a leaseholder at a LVT. The use of initials, such as CLRA for the Commonhold and Leasehold Reform Act, would not lose any marks. A7. What responsibilities can the residential property manager have in relation to Employers Liability Insurance? Employers Liability Insurance is a statutory requirement for anyone who has employees and must cover all places of work. The two main areas of responsibility are firstly for the RPM to ensure that his own company has employer s liability insurance for his own employees. The second area is that where an estate/block has directly employed personnel, such as cleaners, gardeners, etc, the estate will need employers liability insurance. This is usually automatically provided under a block of flats policy, but should be checked. The certificate must be displayed at the place of work. Examiners comments All the important information is provided in clear English and in a logical manner. A9. What extra powers does a Leasehold Valuation Tribunal have in relation to service charges following the Commonhold and Leasehold Reform Act 2002? The LVT can determine any question relating to service charges. This can include reasonableness, quality of work undertaken which is charged to service charges, whether the lease provides for recovery of a specific item, whether S.20 consultation procedure has been correctly followed, and apportionment between units. The determination is legally binding but only on the parties involved and does not create a legal precedent. It can also award costs up to the value of 500. Previous to the 2002 Act, LVTs were only able to examine the question of reasonableness and so their powers have been greatly extended.

4 Examiners comments The main point here is that the LVT can decide on whether or not the charge is actually payable, this expands their previous powers on whether the charge was reasonable. The financial adjustments to S20 would also come into play here. The comments on who is held to the decision of the LVT and the quality of work undertaken are accurate but not within scope of the question and do not collect additional marks. A10. You manage a block of flats for a client freeholder. What Health and Safety responsibilities do you have? As RPM there are a number of Health & Safety responsibilities involved. Firstly there is a responsibility for the RPM s staff, as an employer, under the Health & Safety At Work Act 1974 and subsequent updating. A health & safety policy statement, risk assessment and safe working method statement must be produced and updated at least annually and a statutory poster displayed at the workplace. Additional duties in respect of welfare and first aid provision apply, and an accident book must be maintained. The RPM also has a duty of care to contractors working on site, and they should not be employed unless they can demonstrate an awareness of health & safety issues, including production of a safe working method statement. The RPM also has a duty of care to visitors and leaseholders using communal areas. A risk assessment should be undertaken of each estate/block annually and action taken on the findings. Specific responsibilities also subsist in relation to such matters as control and identification of asbestos, and control of work at heights. Examiners comments This answer clearly demonstrates an awareness of the requirements of managing H & S effectively as a managing agent and employer. Again it is well structured, a full answer in clear English which distills the essence of the raft of legislation and regulations covering this area. For a question of 4 marks it would not be reasonable to require the actual regulations involved (Control of Asbestos at Work Regulations 2002). I would not be picky about the word subsist (exist?) and the candidate would not lose marks for this. A11. Outline the rights of leaseholders (of residential flats) to obtain an extension of their lease? As the long lease nears its end this may impact on the saleability of the flat in question. Under the Leasehold Reform, Housing & Urban Development Act 1993 leaseholders have the right to apply for a new lease on the same terms and conditions for a period of 90 years at a peppercorn ground rent. This is often referred to as lease extension but in fact a new lease is created. Any variation in terms must be dealt with as if the matter was a lease variation under section 35 or 37 of the Landlord & Tenant Act Examiners comments Another very good answer. This answer correctly identifies the correct Act of Parliament and the term and ground rent of the extension and that it is in fact a new lease. The information on the L & T 1987 is accurate but does not provide any additional marks.

5 PART B of the paper contains SIX questions in THREE sections. The requirement is to answer ONE question from EACH SECTION in the remaining one and a half hours. Part B Section 1 1. You have managed Barrack Court since all the flats were first sold on a long leasehold basis 4 years ago. It is a block of 20 flats on five floors with a lift. The financial year runs from 1st January until 31st December. Ground Rent is payable annually in advance on, 1st January, at 50 per flat. Cleaning and grounds maintenance are both carried out on separate 5 year contracts at a cost of 1,000 per annum each. The last three electricity bills received for the communal lighting have been 75, 85 and 80 respectively. The Buildings Insurance policy is due for renewal on 1st July and last year s premium was 1,850. A reserve fund is in place for major repairs, renewals and decoration. This has so far accumulated 4,000. Redecoration is due within the next year and is anticipated to cost in the region of 4,500 (including fees). i. Construct a budget from the information given for this residential block which shows how you calculated the service charges and ii. Take the information you have and present it as if it was a service charge demand for the leaseholder. Where the information is NOT given you may make appropriate assumptions. Please state any assumptions you make. 1.1 BARRACK COURT Service Charge Budget for the financial year to 31/12/2005 Item Total Cost Recovery Cleaning flats = 50 per unit Grounds maint flats = 50 per unit Electricity (note 2) flats = 16 per unit Insurance (note 3) flats = per unit Managing Agent fees (note 4) flats = 100 per unit Lift maint & elec. (note 5) flats = per unit (upper floors only) Accountancy Charges (note 6) flats = 20 per unit Transfer to reserve fund flats = 50 per unit Service charge total for year Planned expenditure to be met from reserves:- Redecoration 4500 Summary of recovery:- Recoverable - 4 ground fl. flats at = upper fl. flats to inc. lift = = Assumptions:- 1) All costs shown include VAT which is not recoverable 2) Electricity. Quarterly bills last 3 average 80. Assume 4 x 80 3) Insurance currently reasonable to assume 5% increase. ½ of 1850 = 925. ½ of = Total on accruals basis: = rounded for ease of recovery 4) Man. agent s fees: 100 per unit = ) No lift info supplied. Assume 1000 total p.a. by 16 flats (not payable by ground floor) 6) Accountancy charges for certification are recoverable 7) Barrack Court is owned by a 3rd party landlord 8) Assume small misc. items of maintenance met by reserves, and no other expenditure planned or contracts in force. Managing Agent s name, phone no. and address here:- REQUEST FOR PAYMENT Mr A. Leaseholder 20 Barrack Court

6 Barrack Lane Anywhere 1 December 2004 Re:- 20 BARRACK COURT Service charge on account of year as per attached budget summary Ground rent Total payable by Under the terms of your lease a 5% surcharge may be levied on late service charge payments. This will be added to your next demand for payment. Receipts not provided unless specifically requested. Name and address of landlord for service of notice: Assumptions:- 1) Lease provides for admin. charge of 5% late payments. 2) Demand prepared for ground rent due and not covered by provisions of CLRA 2002 Commencement Order 28/2/05 for demanding of ground rent. 3) Budget already agreed. Copy attached hereto. Examiners comments This candidate provided the information required in well set out columns with clear heading. The working out of figures was easy to follow and the resulting amounts for the leaseholder clearly identified. The calculations are accurate. The demand is well set out with clear assumptions detailed. Section Has the law gone too far towards protecting the interests of long leaseholders over those of the freeholders of their residential property? Discuss. Illustrate your answer with reference to legislation and other relevant examples. There has over the last 20 years been a move towards correcting the former imbalance of power between lessor and long leaseholder. The majority of measures have been put in place to increase leaseholder participation in the running of their estate and to improve transparency. Some of these measures have, in the process, placed restrictions on landlords, and some would argue that the process has gone too far. However, the majority of measures would only seem unreasonable to a landlord who was not acting with probity. The 1985 Landlord & Tenant Act introduced the right for an individual leaseholder, or the secretary of a recognised Residents Association, to view the service charge records and take copies of the same. There was at the same time a requirement for accounts relating to 4 or more units to be certified by an independent accountant. The requirement under the 1987 Landlord & Tenant Act for service charge funds to be held in trust funds separate from landlord s money also improved leaseholder s rights in relation to their service charge funds. As landlords are not supposed to obtain any benefit from service charge funds these measures would seem entirely reasonable, and only rogue landlords could possibly have any objection. At the same time, Section 20 of the 1987 Act gave leaseholders the right to be consulted about major works, with particular regard to the costs to be incurred. Any works which would cost 1000, or 50 per unit fell within the remit of S20. There were in practice several problems with this. Firstly, long term contracts, such as gardening or even managing agents fees, were not included, and these often amount to a significant proportion of service charge expenditure. The Commonhold & Leasehold Reform Act 2002 (CLRA) completely rewrote consultation procedures and made provision for any long-term contracts which would cost any individual leaseholder over 100 per year would fall under consultation requirements. Another problem with the 1987 provision was that over the years inflation meant that very minor works were having to be consulted on, leading to a slowing down of the maintenance process. The 2002 CLRA amended the major works limits to 250 per any leaseholder, which for all but the smallest developments has focussed the consultation process where it belongs on items of major cost. The CLRA has also increased the rights of leaseholders regarding consultation on the nature of the work and to nominate contractors. These changes are good for both lessor and lessee. For the lessor, the consultation requirement is limited to more major works, and the increased level of transparency means that they are more likely to

7 be able to deal with any queries before the work has been carried out and costs incurred. They are also able to apply to the LVT for dispensation under S.20ZA if the work is particularly urgent. For the leaseholder the opportunity to comment on the specification and to nominate contractors is good although they should be reminded that contractors are not only chosen on cost grounds, but also on workmanship and health & safety grounds. Certain parts of the legislation do seem to benefit lessees far more than the lessor. For example the right to collective enfranchisement under Leasehold Reform, Housing & Urban Development Act There is mechanism in place however for the valuation of the freehold to include 50% of the marriage value where there is less than 80 years to run, and thus the landlord would achieve a higher price than if he were to sell the block to another 3rd party landlord. On the whole then, leaseholders have benefited significantly from legislation over the last 20 years. The benefits for landlords have been somewhat mixed; on the one hand there is far greater clarity about their role, whilst on the other the leaseholders have collective rights which may not please the landlord. Ultimately it would seem that the person who will benefit most will be the residential property manager as legislation becomes more complex both professional 3rd party landlords and residents having freehold responsibilities for the first time will wish to appoint a professional manager. A business opportunity not to be missed! Examiners comments In general this is a good answer, especially as the evidence supporting the answer is reproduced under exam conditions. There could be a different emphasis and inevitably it contains some errors. To avoid confusion for future students these are highlighted. The legislation is more about protection than participation (para1) The answer could better balance out the interests of leaseholders and freeholders as a result of the legislative or case law change, the answer is not clear in explaining the shift in power but the final paragraph does attempt to cover this in general. S20 relates to the 1985 Act not the 1987 Act. It would be an overstatement to say the 2002 Act completely rewrote the consultation procedure. The value to a 3 rd party freeholder would not necessarily be less than under collective enfranchisement and may be more; because of the inclusion of hope value to reflect the possibility of selling new leases in the future, the possibility of future enfranchisement etc. The reasonableness of service charges and leasehold extension are not addressed and the powers of the LVT to appoint a manager and the more recent Right to Manage are omitted. Section A Residents Management Company has decided to appoint a new managing agent to manage their block of flats, of which they own the freehold. The block consists of 120 flats on 6 floors with two lifts and a door entry system. The residents would like to consider the option of having a concierge service to improve security in the block. Three Residential Property Management companies have been invited to make a presentation about their services. What would be the key elements that you would put into the presentation for your company and why? You may make appropriate assumptions; please state any assumptions you make. As part of a professional well-established firm my main concern would be to present a polished image together with an exploration of the RMC s requirements. RMC directors frequently have differing ideas about the extent to which they wish to be involved in the management of their block, and I would use examples of contrasting directorial styles in RMC blocks currently within my management. Whilst the basic schedule of services available tends to remain the same, there are variants, such as whether they also require company secretarial services, how much input they require into the decision making process, and how much they wish to undertake in respect of day-to-day occurrences such as talking to gardening contractors, key-holding, etc. I would stress my experience not only of property management, but also the particular requirements of RMC s. Obviously the fees which would be chargeable are of great concern to RMC directors, and this would have to be touched on in the presentation, but far more important is the sense of rapport of being someone with whom they can do business. Mention of the codes of practice, both ARMA and RICS, is important, and membership of professional bodies and ongoing education suggests a manager who knows the job well. Financial control is an important part of management, and the way in which service charge funds are held and administered is vital in creating a sense of trust. Insurance is another key issue in property management, and registration with the FSA is an important issue. The firm for which I work has a policy of not earning commission on insurance, instead giving the lessees direct cost reduction, and this would clearly need to be explained, particularly as other

8 agents may earn commission and charge more extra fees but have a lower fee for routine work. As the RMC have made particular mention of their consideration of a concierge service I would have prepared a preliminary brief report on the advantages and disadvantages of such staffing, the costs involved, and other possible options for improving security within the flats. Again, an experience of supervising staff, of administering lift and security contracts would be important issues to stress, as well as other general maintenance considerations. I would also touch on the management staff team who would service their property, and what procedures we had in place for dealing with leaseholder queries, problems, complaints and out of hours emergencies. I would leave with the directors the lease, ARMA leaflet on appointing a managing agent together with printed information about my firm. I would also check that they understood the implications of S20 consultation under CLRA 2002 on long term agreements, and advise them that a managing agent should not supervise the consultation of their own appointment, but if they had any queries about the matter they should consult their company solicitor. I would leave a model management agreement with them for information and express a willingness to answer any further queries they may have either by telephone or face-to-face, either with the directors or with all leaseholders. My presentation would rely entirely on my firm s abilities, qualifications, experience (providing references if required), professional membership, and would not make comment about any of the other firms being considered. Examiners comments This answer demonstrated the basic service which could be provided by the managing agent and correctly highlighted the importance of good financial control, rapport, responding to different client needs, experience and depth of expertise. The information provided (and left with the directors) would be valuable. The candidate may have made more of the report on the concierge service but this was addressed adequately, indeed a proposal of this nature might detract from winning the business and it would be good to separate out the two issues. The final point is well made. O o O o O