Is self-managing a multi-let property a good idea?

Posted by Knight Frank Newcastle on 25th November 2019 -

Jason Wall, Partner at Knight Frank, shares his expertise on property management.

It’s not uncommon for property owners to want to self-manage their own multi-let commercial or residential buildings. Usually it’s because they think it will save them money or that they can do it better themselves. 

I’ve been managing properties for 20 years and I’m also called in as a consultant and a dispute resolver when building management goes wrong. I’ve seen many landlords self-manage with varying degrees of success. I’m not saying it can’t be done but you need to be 100% certain that you are capable of managing the property and you’re aware of all of the potential pitfalls.

Managing a building yourself can be a false economy because there are so many ways it can result in increased costs, disputes and breaches in legislation and regulations.

And in most cases, the cost of a RICS qualified property manager is recoverable from occupiers meaning there are limited costs to landlords, depending on the services provided.  

I’ll talk you through some of the questions and issues to consider if you want to self-manage a multi-let property:

Do all leases contain service charge provisions and are all costs recoverable?

Landlords often assume that, as a lease contains a service charge provision, that all of the landlord’s costs are recoverable.

This is often not the case. You need to take great care to ensure that you are only recovering costs from the service charge that are in accordance with the lease. An experienced property manager who is a chartered surveyor - a Member or Fellow of the Royal Institution of Chartered Surveyor (RICS) - is skilled in interpreting a lease and advising correctly on what can and cannot be recovered.

Can you recover the costs of a property manager from the service charge?

If an RICS qualified surveyor is managing the building, then yes, their fees are usually recoverable from occupiers as part of the service charge – as long as it says so in the terms of the lease.  

However – and crucially - if a surveyor is asked to advise on disputes and issues arising out of poor self-management, these costs are usually not recoverable. In most cases, it’s therefore more cost effective to employ an RICS qualified property manager to manage a property from the outset than employing a surveyor to deal with disputes that are consequence of bad management.

The common issues: 

• Incorrect apportionment of service charges – in most cases, service charges should be apportioned by the percentage of the building area that each tenant occupies. You also need to take into account that occupiers may be liable to contribute to different services, or the costs associated with different parts of a building.  

It is often the case that building areas are incorrect or calculated adopting inconsistent methods of measurement. This can be a particular issue in mixed-use buildings.  

Retail and office space is usually measured on a Net Internal Area (NIA) basis and leisure and residential on a Gross Internal Area (GIA) basis. On service charge accounts where there is a mixture of these uses, errors and disputes often arise. We recommend that, where there is mixed-use, GIA should usually be adopted on all lettable parts of a building unless there is a valid reason to adopt a different approach. This is a major area for potential dispute and I have given expert evidence in both court and in arbitration arenas on precisely this issue.

• Not using protected bank accounts – all RICS accredited firms are required to comply with its regulations in relation to the holding of client and service charge monies. And when it comes to the case of service charges this provides a very important function.  

It‘s really easy for the ownership of service charge monies to be misunderstood. There is a danger that service charge funds could be held in the landlord’s own bank account, or in an account that wouldn’t be protected if that landlord were to become insolvent.  

Therefore, it’s imperative that service charge monies are held in protected accounts. A RICS accredited firm will be able to provide this service and reduce the risk to both the landlord and the tenants.  Occupiers of self-managed buildings should check with their landlords where service charge monies are being held and ensure that they are protected.

• Late budgeting and reconciliation – we often find that self-management results in service charge budgets either not being provided at all or being provided late and, again, it’s the same scenario with service charge reconciliations. Best practice is to provide budgets a minimum of one month before the start of a service charge year and to provide reconciliations within four months of the service charge year end.

Further issues can arise where there are residential leasehold interests within a building as there are statutory time limits on the recovery of some costs. I have seen long-running disputes over incorrect apportionments on commercial premises in a mixed-use property that have resulted in costs - which should have been allocated to residential parts - being unrecoverable.

• Mistakes with service charges for residential units – where there are residential long leasehold interests, service charge recovery can often be restricted unless statutory processes are followed around consulting with leaseholders. Building owners are often unaware of notice provisions and limits to recovery. A RICS qualified property manager is best placed to advise on the ability of a landlord to recover costs from long leasehold owners.

• Overlooking health and safety – a major source of risk to a lay property manager is health and safety. There are a multitude of risk areas that are often overlooked by self-managers. Compliance is key to reducing risks by ensuring you are in line with all legislation on: fire safety; asbestos management; legionella risk; working at heights; electrical testing; lifting operations and lifting equipment regulations (Loler) and general health and safety risk management.

• Being inadequately insured – a property manager needs to make sure that they are insured to provide the services they do and not to leave themselves open to a claim. 

In summary, it is perfectly appropriate for a landlord to self-manage its own buildings if the property is not complex and if the landlord is fully aware of and confident they can manage all the issues.

I would, however, advise caution where there are common parts and facilities which require management and particularly where there are service charges to control. 

Jason Wall is a chartered surveyor with over 20 years’ property management experience covering all of the major asset types including: multi-let offices; business parks; industrial estates; shopping centres; retail parks; leisure property and mixed-use property. He also provides other services including: valuation; lease advisory; dispute resolution; compulsory purchase and bespoke consultancy advice.