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Competition inquiry into property management sector - what does it mean for house-builders and developers?

22 April 2014

The property management sector has been put under the spotlight by the announcement of a consultation focusing on how well it is working for purchasers and users of their services.  

The study, which was announced on 4 March and will be carried out by the Competition and Markets Authority (CMA) (formerly the Office of Fair Trading or OFT), will look at services offered by companies who provide maintenance services to leasehold properties across England and Wales.

It will consider the views not only of residents and leaseholders, but also the managers themselves and freeholders (including developers and house-builders). 

Why is this important for house-builders and developers?

In our experience, we have found that many house-builders and developers have been unhappy with the levels of service provided by property managers. There is a feeling that poor levels of service and high fees can reflect badly on their brand. It is possible that the situation could be improved with more competition and a higher number of providers.

What are market studies?

Market studies aim to make markets function effectively and responsively 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. 

Separately, a number of leasehold developments have faced rising service charges, leading 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.

What aspects of the market will be examined?

The following have been identified as 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, and
  • whether it works well in practice when leaseholders exercise their right to manage their own properties.

These will be the focus of the consultation and the subsequent report which the regulator will issue.

Next steps

A public consultation has been launched and the CMA 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 developers which engage property management companies, this is a valuable opportunity to influence the direction of the inquiry. This is a good opportunity for house-builders and developers to influence the direction of the management industry and to urge the regulator to take steps to improve standards and boost competition. 

From our contacts with the CMA, we understand the regulator is aiming to complete the study in five months' time. They advise that the best time to input into their work will be in the next two months.

For more information please contact Thomas Moran, Paul Henty or Suzi Gatward using the details provided.