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The OFT homes in on residential property management services

1 April 2014

On 4 March, the OFT announced a market study into how well the property management sector is working for consumers. The study will look at services offered by companies who provide maintenance services to leasehold properties across England and Wales.

A public consultation has also been launched, inviting comments from interested parties on their opinions and experiences with the sector. 

What are market studies?

Market studies aim to make markets work well for consumers by promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive.

Typically, market studies look into the causes of why particular markets are not working well and lead to proposals on how they might be made to work better.

They take an overview of regulatory and other economic drivers in a market and patterns of consumer and business behaviour.

What has prompted the study?

In 2009, a similar study by the OFT into such services in Scotland found "significant problems" and concluded that the market was not functioning well for consumers.  The study said that:

  • many people did not understand their complex legal rights and are unsure about the standard of service they should expect
  • there was limited scope for redress when things go wrong, and
  • owners rarely switched property manager - and there is little evidence of active competition between property management companies to attract business.

The study found that a high proportion of leaseholders (one in three) were unhappy with the property management services they received. There were also considerable difficulties in changing manager, for example, because leaseholders need to act collectively to substitute their property management company. 

This means they are 'saddled' with the same provider and cannot select a new one easily if services are unsatisfactory. 

Since the study in Scotland, the OFT also uncovered a bid rigging cartel involving, among others, property manager Cirrus (a member of the Peverel Group) and competitors, which enabled Cirrus to win tenders for the installation of access control and alarm systems in retirement properties (a neighbouring market). 

The investigation followed a barrage of complaints to the OFT from pensioners and the OFT's decision to grant leniency from fines to Cirrus proved highly controversial. It is possible that the finding of the cartel influenced the OFT to look at the sector further.

Separately, a number of leasehold developments have faced rising service charges, which has led in some instances to legal battles. 

In one recent case, a resident won a legal ruling from the Leasehold Valuation Tribunal against property manager Solitaire, requiring the manager to refund around £200,000 to leaseholders in the claimant's estate (http://www.theguardian.com/money/2011/feb/12/peverel-tenants-fighting-back). 

What aspects of the market will be examined?

The OFT identified the following potential issues in relation to the proper functioning of the market:

  • whether managing agents and freeholders have the same interests as leaseholders in, for example, keeping down costs for maintenance work or buildings insurance
  • whether leaseholders have sufficient influence on decisions taken by freeholders or others on the appointment of managing agents and the supply of residential property management services
  • whether there are barriers to switching and whether competition between property managers more generally is working well
  • whether managing agents' and freeholders' choice of contractors and services may be influenced by links with associated companies and the availability of financial commissions
  • whether it works well in practice when leaseholders exercise their right to manage their own properties.

Next steps

A public consultation has been launched and the CMA (which replaced the OFT from 1 April 2014) will now collate answers and decide on next steps.

These could include a clean bill of health for the industry, recommendations to business or Government, investigation and enforcement action or a more in-depth market investigation reference. 

The latter two options would be the most draconian. Enforcement actions against specific companies could lead to the imposition of financial penalties of up to 10% of group turnover, as well as compensation claims. 

A further investigation of the market could lead to a number of remedies being imposed to promote competition, such as the break-up of companies adjudged to hold too high a share of the market. 

This fate recently befell airports giant BAA, which was required to sell off Stansted and Gatwick Airports in order to promote competition.

For leaseholders and companies which engage property management companies, this is a valuable opportunity to influence the direction of the inquiry. It is also important for management companies to have their say, in order to ward off the more undesirable potential outcomes of the study.

This article was written by Paul Henty.

For more information please contact Paul on +44 (0)20 7427 6506 or paul.henty@crsblaw.com