What is the Business Model of a Freeholder, or a Freehold/Leasehold Management Company like Pier Management?
As with most things, it is helpful to think about the general business model that most companies involved in freeholds, or the management of freehold/leasehold relationships (similar to Pier Management) work to, when you want to understand why they behave the way they do. Understand the model, you'll understand the motivation.
It works something like this, and to be clear I am describing in very general terms the workings of a residential freeholder and/or freehold management company and not specifically the exact business model of Pier Management (although I happen to think, in my personal opinion and based on my personal experience corresponding with the company, there is overlap).
The 'exact' is not what is important here. You can understand why a footballer wants to score a goal, without knowing the 'exact' details of the offside rule.
Once you understand the business model & motivations of the typical freehold/leasehold/ground rent management company, it can be a lot easier to see why they do what they do, and respond accordingly.
Follow the Money
Following the money involved can be a great place to start.
The reason the freehold/leasehold structure exists is ostensibly because <reasons>, but in reality - in my opinion - appears to mostly be about making money. Specifically, making a return on money invested by investors. Freeholds generate predictable income (more on that later) and predictable income is ripe for investment, or specifically packaging up for investment.
Many smarter people than me will discuss freeholds in terms of cashflow (including discounted cashflow models) and the time value of money - but we don't need to understand those things for the purposes of what follows.
Step 1. Acquire money from investors (or have backers with money/have your own money)
To do this step well you need to promise a return to the investors. If you return £10 per £100 they invest, that is said to be a return (yield) of 10/100 = 10%.
If you promise a higher return (yield) to the investors than anyone else, common sense tells you that those investors will be more likely to invest their money with you than any other investment opportunity, all else (like risk) being equal.
Alternatively if you already have money, you will tend to invest your money in opportunities where the risk-adjusted return (yield) is highest, if all else i.e. the risk is the same. This is all fairly textbook economic (rational) behaviour.
Step 2. Use the money from (1) to acquire freeholds
A freehold typically gives you the right to collect annual fees (£'s) from leaseholders who are beholden to the terms of the lease, which they sign when they buy their individual property. The annual fee is usually 1. constant and 2. increases at set dates, by set amounts. That kind of guaranteed income stream, especially the fact it will increase every so often, tends to get investors and accountants all excited.
An easy way to acquire freeholds is from house builders like Bovis, Taylor Wimpey, Redrow etc. when they build 'new build' properties.
An easy way to acquire a freehold with multiple leaseholders (and therefore multiple fees i.e. multiple £'s to collect each year, which can be appealing to your investors) is by buying the freehold for blocks of apartments/flats which tend to have multiple different owners obliged to pay the fees each year.
Seriously, if there were to be a cat-nip of freehold/leasehold investment strategies, large apartment blocks with 50+ different properties would drive kitty wild. It's 50+ different people to try and collect money from each year, which as we will discover creates potentially a whole load of fun and opportunity. Investors tend to like that, too.
The reason the freehold/leasehold structure exists is ostensibly because <reasons>, but in reality - in my opinion - appears to mostly be about making money. Specifically, making a return on money invested by investors. Freeholds generate predictable income (more on that later) and predictable income is ripe for investment, or specifically packaging up for investment.
Many smarter people than me will discuss freeholds in terms of cashflow (including discounted cashflow models) and the time value of money - but we don't need to understand those things for the purposes of what follows.
Step 1. Acquire money from investors (or have backers with money/have your own money)
To do this step well you need to promise a return to the investors. If you return £10 per £100 they invest, that is said to be a return (yield) of 10/100 = 10%.
If you promise a higher return (yield) to the investors than anyone else, common sense tells you that those investors will be more likely to invest their money with you than any other investment opportunity, all else (like risk) being equal.
Alternatively if you already have money, you will tend to invest your money in opportunities where the risk-adjusted return (yield) is highest, if all else i.e. the risk is the same. This is all fairly textbook economic (rational) behaviour.
Step 2. Use the money from (1) to acquire freeholds
A freehold typically gives you the right to collect annual fees (£'s) from leaseholders who are beholden to the terms of the lease, which they sign when they buy their individual property. The annual fee is usually 1. constant and 2. increases at set dates, by set amounts. That kind of guaranteed income stream, especially the fact it will increase every so often, tends to get investors and accountants all excited.
An easy way to acquire freeholds is from house builders like Bovis, Taylor Wimpey, Redrow etc. when they build 'new build' properties.
An easy way to acquire a freehold with multiple leaseholders (and therefore multiple fees i.e. multiple £'s to collect each year, which can be appealing to your investors) is by buying the freehold for blocks of apartments/flats which tend to have multiple different owners obliged to pay the fees each year.
Seriously, if there were to be a cat-nip of freehold/leasehold investment strategies, large apartment blocks with 50+ different properties would drive kitty wild. It's 50+ different people to try and collect money from each year, which as we will discover creates potentially a whole load of fun and opportunity. Investors tend to like that, too.
Collecting Money Can Be Easy or Hard
So you've raised your investment money (or have your own money to invest) and you've purchased your freehold. This means legally you can now collect the money that the leaseholders are obligated to pay to you, right?
Well, collecting money from leaseholders (who have to obey the rules of the lease they have signed) can be easy, and it can be hard.
Firstly, the easy money.
This is usually called ground rent or something similar, and each leaseholder has to pay that charge annually to the freeholder. It is the fundamental thing that makes all this work. There's no escaping it - if you don't pay it, you can be dragged through due legal process for it (or your mortgage company will be forced to pay it, and then they in turn will charge you + costs). It is essentially inescapable, save some very specific circumstances.
The law is extremely clear - the freeholder has to send you a particular type of invoice, at a particular time, with particular wording (including your rights), and you.. have to pay. Also, the law allows the freeholder to bake in set dates where the ground rent will increase, by a set amount (usually but not always by referring to some published index, like RPI or CPI).
Again this is all fairly tried and tested and essentially eliminates the majority of any risk of not being paid as a freeholder. It's all made clear in the leasehold agreement you sign when you purchase your property, and English law is one of the most highly regarded on the planet. That's why it is easy money, presuming you can acquire the freehold at the right price (I wonder how we can do that?).
Another type of easy money, but not as sexy because it's less frequent and predictable, is the additional charge the freeholder/freehold management company similar to Pier Management will charge when the leaseholder changes. Typically this will be when the property is sold. Essentially (I'm speaking generally), when a house or apartment with a leasehold is sold, the freeholder must give permission for that transaction to happen, and fill in some paperwork.
There is a charge for doing that. It can be quite a large number, too, several hundred pounds, often eclipsing the annual ground rent.
I recently saw a lease exchange (change of owner), where the annual ground rent involved was £1. The fee charged to the buyer by Pier Management, to enter into a 'Deed of Covenant' and take over the responsibility for paying that £1 each year going forwards? That fee was £258.
Since there is no avoiding paying that charge, or even arguing about how much it should be (realistically - you can engage a tribunal if you really feel you have a good case, but it essentially boils down to how much billable work there is drawing up a deed of covenant, or other work involved in the transaction), it is also easy albeit usually far less frequent money for the freeholder.
But then there's the hard money. The hard money is all the other stipulations in the lease that are a little more 'grey' - either they are open to interpretation or they rely on the leaseholder voluntarily contacting you, the freeholder/freehold management company similar to Pier Management, to inform you of something they have done, are doing, or plan to do.
For instance, often you as leaseholder are supposed to inform the freeholder if you re-mortgage your property, and pay them a charge (£50-150 is common) for <reasons>. Another example that might be easier to relate to is cats. We all love cats, well, except the dog people.
If for example your lease states you need to tell the freeholder if you have a pet such as a cat, for <reasons>, and pay them a charge of £50, that is hard money. Setting aside whether or not that clause is fair and reasonable for a moment, if you are a proper citizen you will fess up and pay the £50 to the freeholder/freehold management company for the pleasure of having your cat in your property.
If you're not, or if you forget/don't understand the lease you have signed, then how will the freeholder possibly know for certain about kitty or collect the charge? Or the re-mortgage for that matter.
Exactly - hence, it's hard money. But it's even more hard than it first appears. Since, if a vast period of time passes, and you haven't told them, and then you sell the property, they cannot backdate these sort of charges (unlike the ground rent, which they can).
Why? Because the very same legal argument that is used to justify the charge in the first place (seriously, people go to tribunal to decide what is fair and reasonable a charge to charge for accepting notification of a pet, or a re-mortgage.. it comes down to how much time it takes to receive/process the form, or add it to the computer), does not hold muster for backdating it.
It's also really hard to prove you had a cat in your apartment, 4 years ago. And it gets harder still, since outstanding 'debt', save a few specific examples, has a time period in which it must be chased, else it vanishes into the ether (there are conditions to this, obviously, but that's the gist).
Easy and hard money combine to become the total money collected for a particular freehold/leasehold, which in turn becomes the return (yield) on the money invested - either your own money, or other investors - in order to acquire that freehold in the first place:
Well, collecting money from leaseholders (who have to obey the rules of the lease they have signed) can be easy, and it can be hard.
Firstly, the easy money.
This is usually called ground rent or something similar, and each leaseholder has to pay that charge annually to the freeholder. It is the fundamental thing that makes all this work. There's no escaping it - if you don't pay it, you can be dragged through due legal process for it (or your mortgage company will be forced to pay it, and then they in turn will charge you + costs). It is essentially inescapable, save some very specific circumstances.
The law is extremely clear - the freeholder has to send you a particular type of invoice, at a particular time, with particular wording (including your rights), and you.. have to pay. Also, the law allows the freeholder to bake in set dates where the ground rent will increase, by a set amount (usually but not always by referring to some published index, like RPI or CPI).
Again this is all fairly tried and tested and essentially eliminates the majority of any risk of not being paid as a freeholder. It's all made clear in the leasehold agreement you sign when you purchase your property, and English law is one of the most highly regarded on the planet. That's why it is easy money, presuming you can acquire the freehold at the right price (I wonder how we can do that?).
Another type of easy money, but not as sexy because it's less frequent and predictable, is the additional charge the freeholder/freehold management company similar to Pier Management will charge when the leaseholder changes. Typically this will be when the property is sold. Essentially (I'm speaking generally), when a house or apartment with a leasehold is sold, the freeholder must give permission for that transaction to happen, and fill in some paperwork.
There is a charge for doing that. It can be quite a large number, too, several hundred pounds, often eclipsing the annual ground rent.
I recently saw a lease exchange (change of owner), where the annual ground rent involved was £1. The fee charged to the buyer by Pier Management, to enter into a 'Deed of Covenant' and take over the responsibility for paying that £1 each year going forwards? That fee was £258.
Since there is no avoiding paying that charge, or even arguing about how much it should be (realistically - you can engage a tribunal if you really feel you have a good case, but it essentially boils down to how much billable work there is drawing up a deed of covenant, or other work involved in the transaction), it is also easy albeit usually far less frequent money for the freeholder.
But then there's the hard money. The hard money is all the other stipulations in the lease that are a little more 'grey' - either they are open to interpretation or they rely on the leaseholder voluntarily contacting you, the freeholder/freehold management company similar to Pier Management, to inform you of something they have done, are doing, or plan to do.
For instance, often you as leaseholder are supposed to inform the freeholder if you re-mortgage your property, and pay them a charge (£50-150 is common) for <reasons>. Another example that might be easier to relate to is cats. We all love cats, well, except the dog people.
If for example your lease states you need to tell the freeholder if you have a pet such as a cat, for <reasons>, and pay them a charge of £50, that is hard money. Setting aside whether or not that clause is fair and reasonable for a moment, if you are a proper citizen you will fess up and pay the £50 to the freeholder/freehold management company for the pleasure of having your cat in your property.
If you're not, or if you forget/don't understand the lease you have signed, then how will the freeholder possibly know for certain about kitty or collect the charge? Or the re-mortgage for that matter.
Exactly - hence, it's hard money. But it's even more hard than it first appears. Since, if a vast period of time passes, and you haven't told them, and then you sell the property, they cannot backdate these sort of charges (unlike the ground rent, which they can).
Why? Because the very same legal argument that is used to justify the charge in the first place (seriously, people go to tribunal to decide what is fair and reasonable a charge to charge for accepting notification of a pet, or a re-mortgage.. it comes down to how much time it takes to receive/process the form, or add it to the computer), does not hold muster for backdating it.
It's also really hard to prove you had a cat in your apartment, 4 years ago. And it gets harder still, since outstanding 'debt', save a few specific examples, has a time period in which it must be chased, else it vanishes into the ether (there are conditions to this, obviously, but that's the gist).
Easy and hard money combine to become the total money collected for a particular freehold/leasehold, which in turn becomes the return (yield) on the money invested - either your own money, or other investors - in order to acquire that freehold in the first place:
Remember, if you have a acquired a freehold, then that gives you a base case of all the easy money which will be yours for many years to come (until the rights expire, or the freehold is bought out).
So that easy money in turn becomes the minimum yield you can promise to your investors (or put in your budgeting spreadsheet if it's your own money) in return for investing the money in the freehold in the first place, minus any costs you experience during the administration & collecting.
How you subsequently perform when it comes to collecting the 'hard money', well that is the 'upside' to the investment and your performance here is going to set you apart (or not) from just the regular/average management company. Alternatively it's just going to be extra profit.
Presumably a company similar to Pier Management, if this explanation describes their business model, would want to be the best of the best, when it comes to managing freeholds (textbook rational economics, again), or maximise profit (the profit motive).
Companies and investments that perform well versus expectations (or promised yield) tend to attract more investment money in the future. Pretty obvious, right?
Getting the hard money is hard. We'll take a deeper look shortly.
Everything is about Incentive
The housebuilder in step 2 above is incentivised to create new freehold opportunities and sell them to freeholders/freehold management companies. This is because in turn the housebuilder knows that the money raised from such an arrangement (which is usually agreed before any building has even started, and nearly always before the building has finished) will either:
(A) add to their explicit profit or
(B) allow them to sell the property for less - like a subsidy - which in turn tends to increase the number of sales made (turnover) and improve their profitability in a more roundabout way
Remember that most housebuilders are public companies with shareholders. Shareholders typically demand a return on their investment in the shares of the housebuilder (if it's not clear by now.. the entire world mostly works on 'return on investment').
The extra money generated from the sale of the freeholds tends to make the shareholders exceedingly happy, or at least it did, until the recent PR debacle.
So you can see how it's a bit of a virtuous circle.
The builder is incentivised to create and sell a freehold, to please its shareholders.
The freeholder or freehold management company similar to Pier Management is incentivised to buy the freehold from the builder (to create yield and attract new investment from investors).
The investors are incentivised because they want to earn a return on the money they invest.
(A) add to their explicit profit or
(B) allow them to sell the property for less - like a subsidy - which in turn tends to increase the number of sales made (turnover) and improve their profitability in a more roundabout way
Remember that most housebuilders are public companies with shareholders. Shareholders typically demand a return on their investment in the shares of the housebuilder (if it's not clear by now.. the entire world mostly works on 'return on investment').
The extra money generated from the sale of the freeholds tends to make the shareholders exceedingly happy, or at least it did, until the recent PR debacle.
So you can see how it's a bit of a virtuous circle.
The builder is incentivised to create and sell a freehold, to please its shareholders.
The freeholder or freehold management company similar to Pier Management is incentivised to buy the freehold from the builder (to create yield and attract new investment from investors).
The investors are incentivised because they want to earn a return on the money they invest.
But What About You?
So, we understand the basic incentives for general companies and entities involved in general freeholds (and the underlying leaseholds), which do not necessarily describe the business model of Pier Management. In the general case, it all seems rather splendid and win-win, doesn't it?
But what about the house/flat owner? You know, the guy/gal paying the actual charges each and every year?
What do they get out of all this?
Great question.
The whole idea of freehold/leasehold has gained a bit of a 'reputation'.
The reputation, to use a common expression for the "legal executive lawyers" reading, is that it would appear at first glance to all be a bit of "a rip-off".
The reason some people think it is a rip-off, whether it actually is or not, is because they - the people paying the charges - don't understand what they get in return for paying their money (e.g. annual ground rent, or £50 for kitty, or £258 for the chance to pay £1 annually).
Sure we can see why the housebuilder, the freeholder/freehold management company similar to Pier Management and the investor are so happy. But what about the guy/gal paying the money that feeds the whole system in the first place? There's nothing wrong or illegal about any of the money involved, and you did voluntarily (presumably) sign the leasehold, but what do you get in return?
Some might suggest that the freehold sale by the house builder enables the house/flat to be sold for less by the housebuilder, so the leaseholder (house purchaser) benefits because they pay less for the property in question.
Well, the 'discount' - if there is one - is only because a freeholder/freehold management company similar to Pier Management paid the housebuilder for the rights to the freehold (the right to collect money from the house purchaser - or in the case of a block of apartments, from each and every apartment owner - for many, many years to come).
That freeholder/freehold management company similiar to Pier Management didn't buy it for fun - it bought it because, typically, it has promised investors a return on their money, which was used in turn to buy the freehold. They are paying for the right to collect money in the future.
So, any 'discount' created from such a transaction is clearly going to be made up over the longer term, either with the original property purchaser or from subsequent owners. It's quite logical - otherwise, why would they 'risk' the money to buy the freehold in the first place? Exactly.
Essentially, the claim behind the reputation seems to be that first time buyers, excited about buying their first house/flat, do not really think about the business model described above, which may or may not in the broadest of senses describe a lot of what Pier Management does.
They don't really think about what these charges add up to over, say, 50 years.
Is the sales agent on the site really incentivised to point out the finer details (drawbacks? costs?) of the leasehold to the buyer? Is the solicitor (often recommended or introduced by the same sales agent or housebuilder) incentivised to point the details out? Many would say no, and in fact go further and say there is a conflict of interest. They might say the sales agent just wants the sale. That the solicitor just wants the fee.
The excited buyer signs the document, little realising what they are getting themselves into in terms of future obligations. What they are locked into, for an awfully long time (unless they sell the property, or buy out the freehold).
Buyers often don't appear to really understand the 'small print' of what they are signing up for, especially terms that allow the charge which the freeholder can charge the leaseholder to increase over time.
It's not my guess that people don't understand what they are signing up for, by the way.
It's exactly what investigations into this business model of housebuilders, freeholders and management companies who acquire freeholds suggested : "Nine out of 10 homeowners stung by the leasehold scandal weren't given clear legal advice when they bought, claims 'disturbing' new report"
But what about the house/flat owner? You know, the guy/gal paying the actual charges each and every year?
What do they get out of all this?
Great question.
The whole idea of freehold/leasehold has gained a bit of a 'reputation'.
The reputation, to use a common expression for the "legal executive lawyers" reading, is that it would appear at first glance to all be a bit of "a rip-off".
The reason some people think it is a rip-off, whether it actually is or not, is because they - the people paying the charges - don't understand what they get in return for paying their money (e.g. annual ground rent, or £50 for kitty, or £258 for the chance to pay £1 annually).
Sure we can see why the housebuilder, the freeholder/freehold management company similar to Pier Management and the investor are so happy. But what about the guy/gal paying the money that feeds the whole system in the first place? There's nothing wrong or illegal about any of the money involved, and you did voluntarily (presumably) sign the leasehold, but what do you get in return?
Some might suggest that the freehold sale by the house builder enables the house/flat to be sold for less by the housebuilder, so the leaseholder (house purchaser) benefits because they pay less for the property in question.
Well, the 'discount' - if there is one - is only because a freeholder/freehold management company similar to Pier Management paid the housebuilder for the rights to the freehold (the right to collect money from the house purchaser - or in the case of a block of apartments, from each and every apartment owner - for many, many years to come).
That freeholder/freehold management company similiar to Pier Management didn't buy it for fun - it bought it because, typically, it has promised investors a return on their money, which was used in turn to buy the freehold. They are paying for the right to collect money in the future.
So, any 'discount' created from such a transaction is clearly going to be made up over the longer term, either with the original property purchaser or from subsequent owners. It's quite logical - otherwise, why would they 'risk' the money to buy the freehold in the first place? Exactly.
Essentially, the claim behind the reputation seems to be that first time buyers, excited about buying their first house/flat, do not really think about the business model described above, which may or may not in the broadest of senses describe a lot of what Pier Management does.
They don't really think about what these charges add up to over, say, 50 years.
Is the sales agent on the site really incentivised to point out the finer details (drawbacks? costs?) of the leasehold to the buyer? Is the solicitor (often recommended or introduced by the same sales agent or housebuilder) incentivised to point the details out? Many would say no, and in fact go further and say there is a conflict of interest. They might say the sales agent just wants the sale. That the solicitor just wants the fee.
The excited buyer signs the document, little realising what they are getting themselves into in terms of future obligations. What they are locked into, for an awfully long time (unless they sell the property, or buy out the freehold).
Buyers often don't appear to really understand the 'small print' of what they are signing up for, especially terms that allow the charge which the freeholder can charge the leaseholder to increase over time.
It's not my guess that people don't understand what they are signing up for, by the way.
It's exactly what investigations into this business model of housebuilders, freeholders and management companies who acquire freeholds suggested : "Nine out of 10 homeowners stung by the leasehold scandal weren't given clear legal advice when they bought, claims 'disturbing' new report"
But I Like a Clean Hallway
At this stage it's worth pointing out that the charges for the business model are not the same as the general management company charges you pay to say, keep the communal hallways clean, or keep the estate gardens/shared areas looking good.
Those tend to be charges that people understand and see the justification for - pay X, get Y. Pay £500 a year, get clean hallways and nice looking shared gardens, or a clean bin store, for example.
What people don't tend to understand as implicitly, is what paying £xxx ground rent to companies similar to Pier Management (who are acting on behalf of freeholders) actually gets them.
No, it's usually not insurance - that tends to be covered by the general management company fee.
No, it's usually not maintenance, or cleaning.. the general management company fee tends to take care of that too.
No, it's usually not the 'reserve' fund to paint the hallways or replace the roof - again, regardless of who authorises and arranges that work - which tends to be infrequent - the money paid into the reserve fund is usually collected by the management company.
Sometimes the line between the management company, the freehold management company and the freeholder can also be a bit blurred. But ultimately, more than a few people wonder what the payment for ground rent actually gets them in return.
Those tend to be charges that people understand and see the justification for - pay X, get Y. Pay £500 a year, get clean hallways and nice looking shared gardens, or a clean bin store, for example.
What people don't tend to understand as implicitly, is what paying £xxx ground rent to companies similar to Pier Management (who are acting on behalf of freeholders) actually gets them.
No, it's usually not insurance - that tends to be covered by the general management company fee.
No, it's usually not maintenance, or cleaning.. the general management company fee tends to take care of that too.
No, it's usually not the 'reserve' fund to paint the hallways or replace the roof - again, regardless of who authorises and arranges that work - which tends to be infrequent - the money paid into the reserve fund is usually collected by the management company.
Sometimes the line between the management company, the freehold management company and the freeholder can also be a bit blurred. But ultimately, more than a few people wonder what the payment for ground rent actually gets them in return.
The Charges You Have to Pay, Can Increase. A lot.
And often such increases can seem absurd - remember in school, when we learned about compounding? If I start with £2, but allow it to double every year, well within 50 years I have 2^50 = £1,125,899,906,842,624 or.. more than one thousand TRILLION pounds. More than all the money in existence, from a starting point of 2 quid.
So the "legal executive lawyers" at this point might shout "that's an absurd example". Well, it's just math.
If you'd like to learn more about real life lease charges that could reach £10,000 a year, every year (meaning, £10,000 a year in additional cost to your regular mortgage payments, utilities, council tax and other payments to a management company to clean the halls) within 40 years - and still keep increasing - Moneywise has that covered too.
Now, this reputation has become such a 'scandal' that the government has started a consultation on whether this whole system should be reformed (or even banned outright).
It is my opinion that what tipped the government over the edge, to the point of intervening, was that housebuilders drunk on the profit from selling freeholds to freeholders and free hold management companies started adding them to HOUSES rather than the commonly accepted practice of adding them to communal apartment/flat blocks.
That's just my opinion, for the "legal executive lawyers" reading. But my opinion is that the government was happy enough to let this rather strange game continue, for decades prior to the recent press.. until there started appearing negative headlines in the mainstream press about what buyers were actually signing up for. And those headlines seemed to be driven in no small part by houseowners, who suddenly realised what the terms of their respective leases actually meant.
All facilitated by the merry-go-round of incentives between housebuilders, freeholders (and freehold management companies) and investors (and at the lower levels the incentives for sales agents and solicitors, and even surveyors).
Housebuilders like Taylor Wimpey, have started up fancy sounding schemes like the 'Ground Rent Review Assistance Scheme' and set aside not insignificant sums (£130,000,000 from TW alone!!!) to try to help out the houseowners who feel trapped by onerous lease terms.
Unfortunately, despite the government intervention, there are an estimated 4.2 million leaseholders in the UK who are beholden to the terms of the lease they signed when purchasing their house/flat. These leases can run for, typically, up to 999 years. It's not a problem that is going to go away by itself. There is a way, sometimes, to buy out a lease. But.. oddly enough.. it's not usually a cheap endeavour.
Around 100,000 leaseholders are thought to have leases described officially as 'onerous'.
So what does this pre-amble have to do with Pier Management?
Well, it's all about the hard money.
So the "legal executive lawyers" at this point might shout "that's an absurd example". Well, it's just math.
If you'd like to learn more about real life lease charges that could reach £10,000 a year, every year (meaning, £10,000 a year in additional cost to your regular mortgage payments, utilities, council tax and other payments to a management company to clean the halls) within 40 years - and still keep increasing - Moneywise has that covered too.
Now, this reputation has become such a 'scandal' that the government has started a consultation on whether this whole system should be reformed (or even banned outright).
It is my opinion that what tipped the government over the edge, to the point of intervening, was that housebuilders drunk on the profit from selling freeholds to freeholders and free hold management companies started adding them to HOUSES rather than the commonly accepted practice of adding them to communal apartment/flat blocks.
That's just my opinion, for the "legal executive lawyers" reading. But my opinion is that the government was happy enough to let this rather strange game continue, for decades prior to the recent press.. until there started appearing negative headlines in the mainstream press about what buyers were actually signing up for. And those headlines seemed to be driven in no small part by houseowners, who suddenly realised what the terms of their respective leases actually meant.
All facilitated by the merry-go-round of incentives between housebuilders, freeholders (and freehold management companies) and investors (and at the lower levels the incentives for sales agents and solicitors, and even surveyors).
Housebuilders like Taylor Wimpey, have started up fancy sounding schemes like the 'Ground Rent Review Assistance Scheme' and set aside not insignificant sums (£130,000,000 from TW alone!!!) to try to help out the houseowners who feel trapped by onerous lease terms.
Unfortunately, despite the government intervention, there are an estimated 4.2 million leaseholders in the UK who are beholden to the terms of the lease they signed when purchasing their house/flat. These leases can run for, typically, up to 999 years. It's not a problem that is going to go away by itself. There is a way, sometimes, to buy out a lease. But.. oddly enough.. it's not usually a cheap endeavour.
Around 100,000 leaseholders are thought to have leases described officially as 'onerous'.
So what does this pre-amble have to do with Pier Management?
Well, it's all about the hard money.
Sub-letting (Having a Tenant) Fees
Let's focus on one common hard money type: subletting fees.
The general idea (I'm speaking generally, not specifically about Pier Management.. don't worry we'll get onto them specifically in a moment) is that, if you own an apartment with a lease, and then you find a tenant to rent the apartment off of you, you have to tell the freeholder.
The reason for having to tell the freeholder is not entirely clear (you can ask companies like Pier Management why you have to tell them, or what they do to justify the charge for notifying them.. usually at least £50 but sometimes more than £100 - please do share any helpful responses you get and I'll publish them here).
I have yet to hear a convincing reason for making this charge, or justifying the size of it, but your opinion might differ.
One claim (generally speaking, not for Pier Management, although you can find out more about an explicit answer Pier did give, confusing as it was, here) is that they need to 'register' the tenancy, whatever that means in reality.
Another is they need to issue a permission certificate, for, <reasons>, that aren't entirely clear either. Another is that the have to verify the tenancy agreement language is appropriate, despite the majority of tenancies following the very prescriptive language of the AST.
But regardless of the why or the what, you do have to pay the necessary fee. If the lease says you have to, then you have to.
Often people assume you are telling the freeholder for insurance purposes. But, typically, the general management company (the co. that cleans the hallways or looks after the plants) is the entity responsible for insurance, including for the building that contains the individual apartments/flats.
The issue is, and why this becomes hard money, is if you the leaseholder don't tell the freeholder about your tenant.. nothing tends to happen. And I do mean nothing. Absolutely nothing.
Without you telling a company like Pier Management, they can't know for sure that you have a tenant, and therefore can't collect the extra charges.
Hence hard money. Really hard, actually.
And that is where the fun for Mr Bland the "legal executive lawyer" begins.
Accusations & Allegations
Recall that you, the leaseholder, are (usually, and amongst other things) obligated (note: not obliged) to tell the freeholder or freehold management company similar to Pier Management if you have a tenant sub-letting your property.
But that is it.
You don't, for example, need to send them a copy of the tenancy agreement (unless it says you have to in your lease - it doesn't in mine nor in any lease I have read).
You don't, for example, need to tell them if the tenant is employed/DSS or any other information about the tenant like date of birth (unless it says you have to in your lease - it doesn't in mine nor in any lease I have read).
You don't, for example, need to notify them after the first year of periodic tenancy (what a fixed tenancy becomes if you don't renew the AST) expires (unless it says you have to in your lease - it doesn't in mine nor in any lease I have read).
The obligation you have, is plain and clear in the terms of the lease you signed when purchasing the property in question. Go read it now, and use a highlighter to make the obligation(s) you have stand out.
And that is it.
And this is the big one. You don't, and this is absolutely critical, have to respond to the freeholder, or a freehold management company similar to Pier Management, if they write to or otherwise contact you, alleging that you have a tenant. Without definitive proof, such allegations are just assumptions. And English law doesn't have a lot of time for assumptions.
Even... if that allegation/assumption is true.
Let me say that again, because it's really important.
1. You do have obligations spelled out in the lease you signed, and you must perform them
2. You do not have to respond to an accusation/allegation by the freeholder or a freehold management company like Pier Management. Even if their accusation is true.
Listen again, because this is really, really important.
And a large part of the hard-money business model is at stake.
WE'LL PUT IT IN A GRAPHIC BECAUSE IT REALLY IS THAT IMPORTANT:
But that is it.
You don't, for example, need to send them a copy of the tenancy agreement (unless it says you have to in your lease - it doesn't in mine nor in any lease I have read).
You don't, for example, need to tell them if the tenant is employed/DSS or any other information about the tenant like date of birth (unless it says you have to in your lease - it doesn't in mine nor in any lease I have read).
You don't, for example, need to notify them after the first year of periodic tenancy (what a fixed tenancy becomes if you don't renew the AST) expires (unless it says you have to in your lease - it doesn't in mine nor in any lease I have read).
The obligation you have, is plain and clear in the terms of the lease you signed when purchasing the property in question. Go read it now, and use a highlighter to make the obligation(s) you have stand out.
And that is it.
And this is the big one. You don't, and this is absolutely critical, have to respond to the freeholder, or a freehold management company similar to Pier Management, if they write to or otherwise contact you, alleging that you have a tenant. Without definitive proof, such allegations are just assumptions. And English law doesn't have a lot of time for assumptions.
Even... if that allegation/assumption is true.
Let me say that again, because it's really important.
1. You do have obligations spelled out in the lease you signed, and you must perform them
2. You do not have to respond to an accusation/allegation by the freeholder or a freehold management company like Pier Management. Even if their accusation is true.
Listen again, because this is really, really important.
And a large part of the hard-money business model is at stake.
WE'LL PUT IT IN A GRAPHIC BECAUSE IT REALLY IS THAT IMPORTANT:
They are REALLY, REALLY, REALLY Going to Try to Make You Respond to Them
It should be clear from the business model section, how difficult (and yet super important, well, for the investors at least) collecting the hard money is.
It is extra difficult when the hard money in question, such as a fee for sub-letting i.e. having a tenant in your property simultaneously:
1. doesn't appear to get any benefit for the person paying it (you)
2. doesn't appear to create any obvious, tangible downside if not paid (again, by you)
I suppose, sweet irony, you could say there isn't the.. incentive for you to pay it.
Now we must be clear. You must pay it (or offer to pay it), if your lease says you must. But that obligation is specific. It obligates YOU to contact the freeholder to tell them about your tenant. It likely does NOT extend to you having to respond to letters from the freeholder/freehold management company stating you have to pay it. You can check, go read it now. What does it say?
It's a really subtle difference, yet arguably an entire part of the hard-money business model relies on assuming that when a freeholder fires off a letter to a leaseholder accusing them of having a tenant (or some other chargeable event) that the leaseholder will reply to that letter.
Freeholders and freehold management companies are going to try REALLY hard to get you to respond to them.
They literally are depending on you responding to them, is it clear?
Hard money can be worth more than easy money, annually. But the problem is, it's hard to collect it.
They (speaking generally) are going to hammer you with letters, with ever escalating language/charges, in an effort to get you to respond. To, if you like, implicate yourself. The language and "charges" will ratchet up, often quickly and often to hundreds of pounds, because this is a tactic proven time and time again (not just with leasehold charges, but with e.g. parking tickets) to get you to respond. They want to provoke a reaction.
The game stops if you just ignore them (but continue to pay any correct invoice you are sent e.g. for ground rent and otherwise satisfy the very specific obligations your lease requires you to).
A few ways freeholders/freehold management companies like to guess/accuse you of owing, for example, a subletting fee to them, without actually knowing for sure (an assumption, in other words.. and therefore relying on you responding in order to confirm it):
It is extra difficult when the hard money in question, such as a fee for sub-letting i.e. having a tenant in your property simultaneously:
1. doesn't appear to get any benefit for the person paying it (you)
2. doesn't appear to create any obvious, tangible downside if not paid (again, by you)
I suppose, sweet irony, you could say there isn't the.. incentive for you to pay it.
Now we must be clear. You must pay it (or offer to pay it), if your lease says you must. But that obligation is specific. It obligates YOU to contact the freeholder to tell them about your tenant. It likely does NOT extend to you having to respond to letters from the freeholder/freehold management company stating you have to pay it. You can check, go read it now. What does it say?
It's a really subtle difference, yet arguably an entire part of the hard-money business model relies on assuming that when a freeholder fires off a letter to a leaseholder accusing them of having a tenant (or some other chargeable event) that the leaseholder will reply to that letter.
Freeholders and freehold management companies are going to try REALLY hard to get you to respond to them.
They literally are depending on you responding to them, is it clear?
Hard money can be worth more than easy money, annually. But the problem is, it's hard to collect it.
They (speaking generally) are going to hammer you with letters, with ever escalating language/charges, in an effort to get you to respond. To, if you like, implicate yourself. The language and "charges" will ratchet up, often quickly and often to hundreds of pounds, because this is a tactic proven time and time again (not just with leasehold charges, but with e.g. parking tickets) to get you to respond. They want to provoke a reaction.
The game stops if you just ignore them (but continue to pay any correct invoice you are sent e.g. for ground rent and otherwise satisfy the very specific obligations your lease requires you to).
A few ways freeholders/freehold management companies like to guess/accuse you of owing, for example, a subletting fee to them, without actually knowing for sure (an assumption, in other words.. and therefore relying on you responding in order to confirm it):
So you can immediately see why the hard money, is hard. Really hard!
To collect the hard money, the freehold management company needs to rely on you:
1. being open & honest
2. remembering
3. understanding the terms of the lease you signed
4. responding if they accuse you of/allege something
You can see the issue, right?
1. is debatable (and complex, because it becomes a function of whether the leaseholder thinks the charge itself is open/honest)
2. is really debatable
3. is extremely debatable (refer to the hundreds of thousands of people above who didn't understand what they were signing)
4. is just blind luck, where you can try to influence the odds with 'tactics'
And really? 1, 2 and 3 are immutable. They can't and don't tend to change, nor can they be changed.
The only thing open for the freeholder/freehold management company/"legal executive lawyer" (realistically, not literally) to try and influence... is 4. WILL YOU RESPOND OR NOT.
THEY NEED YOU TO RESPOND.
What can a freehold management company do when faced with these unenviable odds of collecting this hard money (which is so critical to improving the return on investment for the investors)?
They can guess, and they can accuse. They can try to frighten you with lots of big words and even legal firms/executive lawyers.
Oh, and they can lie.
The Oxford English Dictionary defines a lie as:
"to say or write something that you know is not true".
Let's take a look at the postcard Pier Management sent to a property I own, shall we?
