SECTION 106 AGREEMENTS AND MANAGEMENT COMPANIES




Planning Authorities and the Avoidance of "Fleeceholding"


Many section 106 agreements rely on private management companies to provide and maintain common infrastructure in development schemes, but this approach is not without its own problems


It is sometimes proposed that the estate roads on a new development will not become highways maintainable at public expense; indeed, sometimes they will not become highways at all. Likewise, it might be the case that public open spaces, on-site drainage and structural landscaping will not be adopted by any public authority.


One of the matters which must then be considered by the local planning authority is that of the future maintenance of these common parts. Given that the local highway authority will have statutory duties in respect of new roads, one would anticipate that they will engage a similar exercise.

If it is proposed that common parts are to be privately maintained, then the arrangement chosen by the developer and the relevant public authorities will often be by way of a ‘maintenance company’.  Unfortunately, a bad choice can have serious repercussions for incoming occupiers.

Estate Management Companies
Maintenance companies come in a number of shapes and forms and it is important to distinguish between them.

One approach is by way of a bespoke private company limited by guarantee where the residents of the relevant estate form the membership of the company and have complete control over the way it operates.

If this is the vehicle chosen by the local planning authority and the developer (and, with new un-adopted estate roads, the local highway authority), then the starting point will often be a section 106 agreement which precedes the grant of planning permission. The agreement will provide that the developer must set up the management company and then make all of the necessary arrangements to ensure that incoming residential occupiers are committed to the future funding of the company (normally by way of annual service charges) and that they are given ex officio rights to take up membership of the management company.  In all probability, the developer will be required to transfer the freehold in the estate road to the management company.

The great difficulty in that this arrangement is the simple fact that incoming occupiers will have had no say in framing it, particularly with a residential development. Indeed, this might be the insuperable flaw in many cases. There is no guarantee that any of the occupiers will, in fact, have any real interest in taking up their membership rights. There is there any guarantee that any of them will be minded to take on the role of director, the company secretary and the chairman. Nor is there any reason why somebody who comes to an estate simply to live there should then get involved in such irksome technicalities.

The running of the company brings with it certain mandatory administrative responsibilities, such as the filing of annual accounts and annual returns and there is always a question of whether or not any future occupier is prepared to take those responsibilities.  If not, then one option will be to pass these matters to accountants who will, of course, expect to be paid for their services. Then there is a question of the day to day management of an on-going maintenance programme in terms of the need to employ those with proper expertise in topics such areas such as engineering, drainage, landscape management etc. 

Unfortunately, this is not the end of the matters are those running the management company. It will (usually on a yearly basis) be necessary to formulate the management programme, then to cost it and then to work out the service charges which must be paid by the occupiers. Even then, this is not the end of the matter because someone must render the relevant invoices to those occupiers, ensure that the money is actually collected and then manage the banking arrangements.

Another alternative is to opt for the use of a professional estate management company at the outset. Unfortunately, this is not without its own problems.

Professional Estate Management Companies
There are many very reputable professional estate management companies in existence and it should be possible to come to an agreement with one whereby the on-going maintenance of the common parts is ensured on the basis that it is funded out of service charges levied on occupiers.

However, there is no doubt that the activities of a few estate managers have reflected badly on others. This state of affairs has given rise to the somewhat pejorative term ‘fleeceholding’.

‘Fleeceholding’
It is, before one can examine the dilemma itself, necessary to sketch a hypothetical example in the context of a newly-built residential estate.

There the local planning authority, local highway authority and developer have agreed that the estate roads and associated infrastructure, public open space and structural landscaping will be maintained in perpetuity by a ‘management company’. 

The relevant section 106 agreement purports to set out the framework and (so far as it provides any particularity at all) allows the developer to transfer the freehold in the common areas to an estate management company. It is highly unlikely that those drafting the 106 agreement will ensure that the developer and the estate manager act at arm’s length.  Indeed, in many cases, the estate manager is an off-shoot of the developer. As each incoming purchaser completes the necessary documents for the purchase of his property, he will be required to sign a deed of covenant. The deed of covenant will provide for the future maintenance of these areas and it will also cover the levying of the service charges by the estate management company. This will be by way of an annual payment from the occupier to the estate management company. The service charge will, not only cover the annual cost of maintenance of these areas but will also cover all the estate management company’s administrative costs.  Given that the estate management company will be operating for the purposes of making a profit, it follows that the service charge will also be sufficient to provide that profit. 

Importantly, neither the section 106 agreement nor the deed of covenant place any controls over levels of service charges or impose any requirements as to the adequacy of the maintenance programme. This can lead to accusations that certain estate managers are using the unfettered rights conferred on them by these deeds of covenant to turn an unreasonable profit by ‘fleecing’ those saddled with uncontrolled service charges.

A number of cases have been decided against estate management companies in Scotland on the basis that the service charges which they were imposing upon residential occupiers were unreasonable.

The responsibilities of local authorities
One of the key questions which needs to be asked and answered is how of the relevant local authorities see their respective responsibilities? This is particularly difficult where the local planning authority and the local highway authority are separate councils. It might be the case that the local planning authority does not see itself as having any great responsibility when it comes to the long-term maintenance of estate roads. It might also be the case that, if those estate roads are going to be maintained privately, then the local highway authority might well see itself as being clear of responsibility.

One could have a case where the local planning authority sees its job ending with the issue of the decision letter and the local highway authority sees its job as never starting in the first place. The person falling through this bureaucratic gap is, of course, the unfortunate incoming residential occupier.

Arguably, it is wrong for local authorities to abdicate responsibility in this way.

Getting it right in the first place
Truth be told, this is not a difficult task. A measure of forethought in the drafting of the estate management clauses in a section 106 agreement can create mechanisms which act fairly between estate managers and occupiers.

It is necessary to choose an arrangement which will have reasonable prospects for success and long term durability and which includes mechanisms which ensure the quality of the maintenance programme and reasonable service charges which provide a fair return for any estate manager.

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