No1 – Gaming the leasehold system – Undeclared commissions from contractors

This is widespread practice throughout the industry and is wholly unethical if not downright illegal. I know several contractors across five counties who do work for managing agents and they report that they are asked to add 10%-15% or more to any invoice they produce (which is paid for out of client funds) and they are then sent a “rebate” invoice by the managing agent payable directly to the managing agent.

In February 2021, I wrote to Dr Nigel Glenn, then Chief Executive Officer of the Association of Residential Managing agents summarising the reservations I had about my firm, Common Ground, becoming a member firm.

A copy of that letter can be downloaded here and Dr Glen’s response is here

In Dr Glen’s response, he included the following statement:

Unfortunately, there is no official industry regulator and ARMA has been strenuously campaigning for one to be established for over two decades, and we continue to take every opportunity to push for one. In the absence of Government action ARMA introduced in 2015 ARMA Q – losing over 25% of its membership as a result and significantly damaging ARMAs finances, requiring drastic and painful action.

That statement tells a story, doesn’t it?

In my view taking commissions like this is a breach of the following sections of the Landlord and Tenants Act 1985:-

– Section 19 – Reasonableness of Service charges.

How can it be deemed “reasonable” that an invoice is marked up by a contractor to enable the managing agent to levy the same contractor a “rebate” invoice payable directly to the managing agent? The mark up is not part of the costs of the services or goods for which the contractor was employed and therefore does not pass the “reasonableness” test. It is merely a way for the managing agent to cream off monies from the service charge account in a manner that does not show up in the end of year service charge accounts.

– Sections 21 and 22

Contractors’ commissions are monies that are, in effect, taken from the service charge account (by way of mark-up) and then paid to the managing agent. As it stands, this back handed means of extracting additional revenue from the service charge has no audit trail that could be followed under current legislation. Do you seriously believe that any managing agents engaged in this practice will declare this in the summary of expenditure (section 21) or any requests under section 22? Not a chance. In effect, when agents engaged in this practice respond to section 21 and 22 requests, they are actually concealing the truth.

Perversely, given that it is so difficult to prove that managing agents are taking commissions from contractors, it is also difficult to prove that they are not; a situation we find ourselves in at Common Ground. Our approach is to give RMC/RTM directors 24/7 access to the finances (we use Xero to achieve this and have been a Xero partner since 2010) so they can audit us in real time. All original contractors’ invoices are uploaded to Xero and directors can directly contact those very same contractors.