How freeholders and brokers are utilizing secret commissions and kickbacks to become profitable from leaseholders

Angela Rayner pledged to end the injustice of ‘fleecehold’ at this week’s Labour party conference, taking aim at property managers and estate agents.

The housing secretary promised to cap unfair administration fees and ground rents, and to set up an independent regulator for managing agents.

Freeholders and managing agents can currently charge high fees for routine requests and permissions, such as keeping a pet or making alterations to their home.

Rayner gave the example of a leaseholder being charged £400 for permission to change their front door, and then a further £60 to add a doorbell. 

However, some fear the Government is miscalculating the scale of the problem, and say these kind of fees are simply the tip of the iceberg. 

According to industry insiders, many leaseholders could be paying hundreds or even thousands of pounds extra on their service charges each year as a result of hidden commissions and kickbacks. 

Compared to the administration fees Rayner called out in her speech, these inflated charges are much harder for leaseholders to identify, let alone challenge. 

What are kickbacks?

The bosses of two block management firms say they believe the majority of leasehold blocks are being run in such a way.

Speaking exclusively with This is Money, Alan Draper, founder of block management firm Common Ground, and Darren Bennett of block manager Fortem, say contractor kickbacks are widespread.

A kickback is when a freeholder, or the company that manages a block of flats, asks a contractor to inflate the cost of work they have done, or a service they are providing, on their invoice.

Then, this cost can be passed on to the flat owners through their service charge and the freeholder or managing agent can pocket the difference. 

Later, the contractor will send the overpaid money back – but freeholders are none the wiser and the service charge is never adjusted. 

Contractors may be incentivised to do so by the promise of regular work, as freeholders and managing agents control large numbers of properties. 

The biggest financial kickbacks are often taken from buildings insurance agreements and jobs carried out by building contractors, but they can also be made with utility companies when agreeing energy or water tariffs. 

Draper says: ‘I know several contractors across five counties who do work for managing agents and they report that they are asked to add 10-15 per cent or more to any invoice they produce – which is paid for by leaseholders. 

‘The contractors are then sent a ‘rebate’ invoice by the managing agent, payable directly 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.’

Darren Bennett says while his firm refuses kickbacks from contractors, the practice is commonplace.

‘When it comes to kickback agreements with contractors, we think we are in the minority,’ says Bennett. 

‘There are those who will take advantage. There are managing agents who have bad ethics who will try and make as much money as possible.

‘If a management company sets out to make as much money as they can from kickbacks, they’ll do it on all jobs whether it’s a £300 quote or £30,000.

‘For a leaseholder, it’s very difficult to find out what these are as they won’t appear on the service charge budget,’ adds Bennett.

How much could property managers be pocketing?  

Service charges are a particular bone of contention because leaseholders, often have no control over the budget for work done and services provided, or the firms that are used.  

Service charges have been rising at terrifying levels in recent years with 50 per cent increases over the last five years not uncommon. 

Although much of this is related to inflation in the form of rising labour and material costs, there are growing fears among leaseholders that something more sinister is at play.

If hidden commissions and kickbacks are widespread, they could be contributing to these rises.  

The average leaseholder’s service charge bill now ranges from £1,525 a year for the cheapest 10 per cent of buildings to £8,680 for the top 10 per cent, according to the latest research by the Property Institute. 

This is based on analysis of 2,137 buildings and 117,052 homes across England and Wales.

Both Bennett and Draper say contractor kickbacks are typically offered at between 10 and 15 per cent of the job’s cost. 

But in reality, there is no limit on what percentage these kickbacks could amount to and little way for leaseholders to find out.

Bennett says: ‘I don’t agree with it, but I can see how it proliferates across the industry and why it could be an appealing way to make money for some firms, particularly if they have lots of staff to pay.

‘I’ve been offered many kickbacks by contractors, which we refuse – and almost all insurance brokers we’ve dealt with ask if they need to factor in additional commission for us.’

Third of insurance bills goes on ‘commission’ 

One of the better known ways that most managing agents or freeholders bank some additional income is via buildings insurance, which leaseholders foot the bill for via their service charge. 

Property managers might take referral fees, commissions or administration fees when taking out the insurance. 

Often the insurance broker will be paid a commission by the insurer but then agree to share this with the property manager or freeholder as a reward for giving them their business. 

Once more parties are involved, commission makes up a higher proportion of the overall cost. 

Commissions regularly account for 30 per cent of the insurance bills freeholders pay, but in rare cases can make up to 60 per cent of the total insurance premium, according to Leaseholder Action, a legal initiative aimed at challenging secret insurance premiums. 

 The financial incentive exists for premiums to be higher rather than lower because commissions are typically charged as a percentage, rather than a fixed fee.

‘Commissions incentivise intermediaries to choose policies based on remuneration rather than value for leaseholders,’ says block manager Alan Draper.  

‘These commissions are embedded in the insurance premium, which leaseholders pay through service charges, making them largely invisible to those footing the bill.

‘In some cases, all the parties will take slices of commission, creating layers that inflate costs without adding real value. 

‘It also allows the freeholder or managing agent to hide the bulk of the commission structure as they only have to declare the commission paid to them directly.’

Disclosure of any commission is now mandatory and information should be given to leaseholders on insurance policies arranged by freeholders and renewed on or after 1 January 2024.

However, Liam Spender, the head of campaign group Leaseholder Action and head of real estate litigation at Velitor Law, says there is often a ‘conspiracy of silence,’ where insurance brokers and utility companies won’t say how much they are sharing with landlords and managing agents.

In 2022, a Financial Conduct Authority investigation found that the sharing of remuneration by brokers, freeholders and property managing agents was widespread, happening 68 per cent of the time. 

It found that, of the insurance policies it sampled, 58 per cent had a commission rate of 30 per cent or more.

A 2024 letter by the FCA reported that £1.6billion was paid for insurance between 2019 and 2022. Applying the FCA’s 30 per cent average rate could mean that £538million of that was commission. 

There have been rare instances of leaseholders taking landlords or block managers to trial over such matters.

In 2023, leaseholders at Canary Riverside in London recovered £1.3million in insurance commissions charged by their landlord over ten years, albeit this was reduced on appeal in 2024. 

Last month, the Government asked the FCA to look again at the cost of leasehold insurance – the results of which will published next year.

Commission payments are not the only way freeholders and managing agents can extract income from leaseholders. 

It is also possible to do so by inflating the total sum insured. For example, insuring a building with a rebuild cost of £20million at £30million instead. 

They can then increase this sum each year to take into account of rising costs – but often at a rate well ahead of inflation.

A scenario such as this was found to have taken place at Hollins Bank Court in Blackburn in 2024, in which a tribunal found premiums to have been inflated by up to 30 per cent.

How to find out if you’re being fleeced 

The only way leaseholders can work out if they are paying a commission is to make a request under section 22 of the Landlord and Tenant Act 1985 to see the invoices their freeholder or agent has paid. 

They will then need to get like-for-like comparisons from other contractors to check the costs were really inflated. 

Draper says he doubts any managing agents engaged in kickbacks will declare this to leaseholders, even if requested to do so.

‘When agents engaged in this practice respond to section 21 and 22 requests, they are actually concealing the truth,’ says Draper.

‘The mark up is not part of the costs of the services or goods for which the contractor was employed. 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.’

Spender also thinks the practice of kickbacks is ‘very prevalent’ – though says proving it is almost impossible.

‘Commissions are usually a percentage added on to the cost and concealed within the price, making them difficult to detect,’ says Spender.

‘Residents often see service charges demanded and reported under broad headings like “general maintenance” and “amenities” so it is hard to tell what costs are included and whether they are affected by secret commissions.’

Even with proof of invoices under section 22 it can be hard to prove any wrongdoing, according to Spender.

Why do property managers accept kickbacks? 

The freeholder will typically either appoint a block management firm to run the building or they will set up their own block management firm. 

A block management firm will always charge a management fee. This is included in the service charge budget and there for all leaseholders to see each year. 

Bennett says the reason he thinks many block managers turn to kickbacks and commissions is because the fixed management fees alone are not enough to run a business.

‘Leaseholders will always complain about management fees being too high, but often they are simply too low to justify taking on a building,’ says Bennett.

‘Management companies often feel it’s a choice between accepting kickbacks or having to spread themselves thinly in terms of staff numbers and the number of buildings they manage. The latter can result in poor service levels.’

Typical fees that managing agents charge range from £200+VAT per flat each year up to £600 plus VAT a year, according to Bennett.

Very few big block management firms disclose what their fees are on their websites. Instead they state their fee will depend on factors such as the location, type of building, the amenities on offer, and the scale of the development.

A minority of block managers do disclose their fees. For example, block management firm Brompton charges £450 per flat including VAT. In a building of 100 flats that would amount to £45,000.

Bennett says typically one property manager will be responsible for roughly 500 properties.

On the basis of a company charging £450 per flat, that would mean £225,000 from fixed fees alone.

There are also some leases that require the freeholder to use percentages to work out management fees and so block managers may have to follow that precedent, according to ARMA.

Both ARMA and the Royal Institution of Chartered Surveyors (Rics) believe it’s poor practice to use percentages as a basis for management fees because it establishes an immediate conflict of interest between leaseholders and those managing.

If, for example, a managing agent can charge 10 per cent of the overall service charge bill – they are financially motivated to keep costs higher not lower.

Aside from management fees, there are other additional fees that block managers charge for. 

These include fees for providing a management pack, also known as the LPE1 form, for which there is no statutory cap.

During a sale or remortgage, lenders and solicitors need it to check the financial health of the building and confirm nothing could affect the property’s value or their security.

Fees vary widely; typically £150 to £500, and occasionally as high as £600 in London. 

Freeholders can also charge a fee for registering the new mortgage against the freeholder’s records – this typically runs from £50 to £200, sometimes up to around £300 to £350, according to Nicholas Mendes of mortgage broker John Charcol.

Aside from that, most managing agents typically charge for additional company secretarial work, lease enquiries and permissions to make changes such as sub-letting the property or even renovating. 

There can also be extra charges for out-of-hours emergencies, additional site visits beyond the standard annual inspection and Building Safety Act compliance work for high-rise residential buildings.