The lessee of two evils

It's a common enough situation. a registered social landlord owns a scheme, but cannot, or does not want to, manage it itself. Maybe it's rationalising its stock, maybe it wants to help out a smaller RSL, or maybe specialist skills are needed because the scheme involves a particular client group. Whatever. There are two ways to deal with the relationship between owner and manager: a lease or a management agreement. Both have advantages and disadvantages, so think hard before signing that contract.

Please lease me
Granting a lease can have considerable benefits for tenants because under this system, the managing organisation will be their landlord, able to grant tenancies or give licences in its own name. The organisation will, as far as the tenants are concerned, have all the landlord's responsibilities. This is less confusing than being told, for example, that organisation A will collect your rent and deal with arrears but organisation B will handle repairs unless they are very minor, in which case organisation A will do them, and so on. For you, the advantage of a lease is that services are treated as exempt supplies for VAT, so they can be 17.5% cheaper than services under a management agreement.

Complete agreement
But you may not want the managing organisation to have all the landlord functions, for instance if it is new and untried, in which case a management agreement is best for you. It is also best if you intend to hand over a very small number of tasks, or if your lenders are unhappy about a lease, or you may have no choice: if the scheme was funded by a Housing Corporation grant and the managing organisation is not an RSL, then leasing is out (a lease would be a disposal and you would then have to repay grant).

As for VAT – the position for management agreements is not as bad as it may seem at first. It is possible to write the agreement so that only the management fee has VAT added on to it, rather than all the money spent on repairs. If the fee is standard-rated, then some VAT on supplies made to the managing organisation may be recoverable.

Deciding between a lease and a management agreement is just the start

Your time starts now...
Deciding between a lease and a management agreement is only the beginning. Whichever you choose, there is a whole series of further decisions to be made:

• Who's going to do what? Every task needs to be looked at. It needs to be clear who is responsible for each, not just to the staff working in the scheme now, but for people new to the scheme in the future.
  
• What about the money? Is the managing organisation collecting the rent, spending what needs to be spent and passing on the balance? Is that a fixed amount, or is all the rent going to the owner and money being paid to the managing organisation according to a budget? What's going to happen about cost increases in future years, rent increases for example? How will arrears be handled and who takes the risk on voids? What happens about one-off costs like major nuisance cases or environmental health problems?
  
• Who's going to choose the tenants? Is there a nomination agreement with another organisation responsible for screening them?
  
• How long will the arrangement last? Can it be ended earlier on notice? If it is a fixed term, will it come to an abrupt end or keep going until ended on notice? What about breaches? What kind of dispute resolution process is there? If the arrangement is ended, what will happen to staff? Will they transfer to the owner or the new manager/leaseholder and if not, who will pay redundancy costs?

There are no right or wrong answers to most of these questions, but there must be answers. Both sides must look at the risks and benefits. Taking the voids risk is not very sensible if you are not dealing with the nomination arrangements. Taking the arrears risk is inadvisable if you need the owner's permission to bring court proceedings. Agreeing to do all the repairs for a fixed fee would be unwise unless you have surveyed the building. Letting the managing organisation or leaseholder take as much of the rent as they say they need is not a very good idea if you have interest payments to meet on a loan.