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Factors in the balance

15 Dec 14

Is the cost to the taxpayer and the factoring industry of resolving disputes via the home owner housing panel justified by the number and value of disputes heard?

by Wendy Quinn

The Property Factors (Scotland) Act 2011 (PFSA) was a highly anticipated and publicised piece of legislation, which promised to deliver fundamental changes to what was an unregulated industry perceived to be facing significant problems and mass dissatisfaction from homeowners.

Factors have been operating for many years within the towns and cities of Scotland, helping to maintain the fabric of some of our most iconic and historic buildings, as well as our everyday dwellings and amenity land. It would be unrealistic to suggest that these factors do not face challenges, whether that is with individual homeowners, lack of funds or bureaucracy tying their hands. Whilst a great deal of the legislation undeniably represents welcome progress in our sector, I am not convinced that we can consider it to be proportionate to the scale of the perceived problem.

The position of consumers of services provided by factors and landowning maintenance companies (LMCs) has greatly improved in recent years. There have been a number of significant developments in this market which have been, for the most part, wide reaching and demonstrate very positive progress.

Why legislate?

Take for instance the market study carried out in 2009 by the Office of Fair Trading, which looked in great depth at property managers in Scotland (both traditional factors and LMCs), which can be found at this link.

The OFT report concluded that there was a lack of effective competition in this market, difficulties with switching and that the complexity of the legal situation meant there was a need for an effective independent complaints and redress mechanism easily accessible to the owners of shared property. It also recommended that the Scottish Government should reconsider the provisions of the Title Conditions (Scotland) Act 2003 (TC(S)A 2003).

In March 2011 the Scottish Government undertook the consultation, on the maintenance of land on private housing estates, which suggested possible changes to the TC(S)A 2003 in relation to “switching” (i.e. dismissal and replacement) of bodies carrying out land maintenance on private housing estates (LMCs). The consultation produced 62 responses, of which 57 agreed to their responses being made public. The responses were not published until May 2013, and no longer appear to be on the Scottish Government website; however the consultation and the Government's summary and analysis of the consultation responses, with a full list of the non-confidential respondents, can still be read.

Another fundamental change to safeguard homeowners was the introduction of the 2010 Consumer Code for Home Builders in relation to new homes, which has successfully been in place since 1 April 2010 – some two years prior to the PFSA. It is widely known that this legislation alone has serious implications for any home builder found to have failed to comply. If a home builder fails to meet the requirements of the code, the home buyer can make a complaint to the code’s independent dispute resolution scheme. Information on the code is at www.consumercodeforhomebuilders.com

The PFSA came fully into force on 1 October 2012. It aims to protect homeowners by providing minimum standards for property factors. It applies to all residential property and land managers, whether they are private sector businesses, local authorities or housing associations.

Finally, in 2013 the Justice Committee of the Scottish Parliament undertook an inquiry into the effectiveness of the provisions of the TC(S)A 2003 after 10 years of operation, in particular in relation to LMCs – the barriers to “switching” to an alternative service provider.

The Scottish Government decided against bringing forward legislation at this time to amend the TC(S)A 2003. Its view is that PFSA is a real asset to the industry and has had a significant impact on factors and LMCs, and that further legislation at this stage could bring further costs which might have to be met by the customers of the factors.

The call for evidence, official reports of evidence, Justice Committee report and the Scottish Government’s response to the report are at the Justice Committee's web page.

Effect of the 2011 Act

Turning now in more detail to the PFSA, this has three main requirements/principal objects:

Registration – All property factors in Scotland were required to submit an application for registration by 1 October 2012.

A code of conduct – for property factors – setting out minimum standards:

  • detailed provisions including the written statement of services, with information on financial and other charging arrangements (for transparency on cost of services);
  • communication and consultation;
  • financial obligations;
  • debt recovery;
  • insurance;
  • carrying out repairs and maintenance;
  • complaints resolution.

A dispute resolution mechanism – the home owner housing panel (HOHP) – for home owners dissatisfied with the service from a property factor. The HOHP provides greater rights to homeowners. Under s 17 of the PFSA, complaints can be taken to the HOHP when a factor (including a LMC) has failed to carry out the property factor’s duties and has failed to ensure compliance with the code of conduct for registered property factors.

Having worked in the industry for some time, I can say that it has been my experience that many of the industry changes have actually come from within, whether from management firms, house builders or solicitors, and there has long since been an acknowledgment of certain shortfalls, whilst not to the level suggested by Scottish Government. It has to be recognised that much of what the TC(S)A 2003 and the PFSA legislated for was already available to homeowners, whether that be the ability or right to “switch”, or to complain and seek resolution for a dispute.

With regard to switching factors, I agree that homeowners are more informed now than in the past; however homeowners always had the legal right to dismiss and replace a factor, whether by exerting those rights under the title deeds to their properties or under the TC(S)A 2003.

As for market competition, there are currently 365 firms registered as Scottish property factors under the PFSA, offering a range of management services. This would certainly suggest that consumers have an abundance of choice of factors to choose from – all on their doorsteps.

Some figures about disputes

Let us consider the depth of the perceived problem, by referring to those figures taken directly from a HOHP presentation, which cover the period up until 31 July 2014.

 There are 357 registered property factors, comprising 20 local authorities, 120 housing associations (registered social landlords), and 217 commercial property factors (including 137 land management companies (LMCs) registered as factors).

 A total of 460 HOHP applications have been received, comprising 18 in 2012, 333 in 2013 (including 146 applications from one development, and 15 applications from one homeowner over two developments), and 109 in 2014.

 These have resulted in 110 rejected applications; 44 withdrawn applications; and 57 published decisions, of which:

  • 35 resulted in at least one ground of complaint being upheld;
  • three involved local authorities;
  • eight involved housing associations;
  • 46 involved 21 individual property factoring firms.

 There were 75 hearings, and three mediations.

 Twenty nine property factor enforcement orders were made.

 Of the applications determined, 375 were either rejected or withdrawn.

 There were 221 written decisions issued by home owner housing committees.

Currently there are around 365 registered Scottish property factors offering a range of property or land management services to just over 600,000 properties registered on the Scottish Property Factor Register. In almost two years, of the 600,000 homeowners currently receiving management services, only 460 (0.0766666%) chose to raise a complaint through the HOHP, of which 146 came from a single development. Of those 460 applications received, only 29 resulted in property factor enforcement orders being issued. This represents 0.0048333% of the 600,000 properties registered.

There is a cost to everyone involved, not purely on a monetary level, but from a resource, business and personal cost perspective. When we look at the figures published by the HOHP we must surely ask if this is a justifiable strain on the public purse for such a small number of cases. Title deeds over the last 100 years or so have made provision for mediation, whether through the dispute resolution service offered by the RICS or by referral through the local sheriff court. The ability of home owners to have their grievances aired and resolved has always been there, at very little overall cost. In comparison, whilst there has not been a direct study into the true financial and resource burden to any registered Scottish property factor who has to defend a HOHP case, financial information has now been released with regard to the overall running cost of considering and dealing with these cases.

The President of the HOHP held a HOHP user group event in August 2014. The following figures were released:

  • 2012 (1 October 2012 to 31 March 2013): £195,000 including transitional and initial setup costs which are not recurring costs;
  • 2013 (1 April 2013 to 31 March 2014): £260,700;
  • 2014 (1 April to 30 June 2014 – one quarter): £63,625.

See the detail here.

An analysis of process to date

The Act seems to be delivering on a number of levels, but as with any new system there are always going to be teething problems. It just seems that these teething problems are not being ironed out – in fact they are becoming bumpier as time goes on. With a lack of public forum open to factors themselves, how does the Scottish Government or the HOHP hope to share experiences and opinions as to how the processes can be improved? Surely this is something home owners, factors and HOHP itself would all benefit from.

The overriding objective set out in reg 3 of the Homeowner Housing Panel (Applications and Decisions) (Scotland) Regulations 2012 is to deal with proceedings justly. The most fundamental right for all parties involved in any case, whether that be civil or criminal, is to be treated fairly and equally, and this principle can be the only basis of any just outcome. Disappointingly, though, this has not been our experience with regard to the operation of the HOHP in the cases we have been involved with. Its funding, its ability to deal with proceedings justly ensuring, so far as practicable, that the parties are on an equal footing procedurally and are able to participate fully in the proceedings, and the administration burdens that have been put on to factors are imbalanced.

I know there are other firms who have experienced the same problems, but I suppose it all comes down to this: why, some three years after the PFSA was passed in 2011, do we still have so many unanswered questions and no forum within which to raise them? Consider for example the following questions/suggestions for improvement:
 Why does only a home owner, and not a factor, have the right to take a case to the HOHP?
 Why is there no automatic right to intimation of an application by HOHP to a factor?
 Detailed practice rules should be set down to define the time parameters within which an application must be heard and determined. Some cases have been running for almost two years involving thousands of pages of submissions, with no hearing dates yet determined. As such, factors cannot pursue these residents for outstanding payments as there would be an ongoing dispute. This impacts on the collection of funds from the remainder of the development, leaving the factor in an untenable position. It is unsatisfactory to have put in place an open ended dispute resolution procedure.
 The complaints resolution section of the code would be improved by including a definition of “complaint”. The majority of customers contact with queries seeking information – some may lead to a complaint, but not all queries are treated as complaints. One committee has accepted that a home owner has not followed the factor's in-house procedure, yet that committee was satisfied that the application to the HOHP was not submitted prematurely.
 Detailed practice rules should be set down to establish how “serial complainants” are dealt with.
 Detailed practice rules should be set down to establish how a committee can satisfy itself regarding an applicant’s competency to attend, give evidence and understand the proceedings. This arises from an instance whereby a home owner admitted having “diminished comprehension during the hearing” – a concern which the factors raised in advance with the committee.
 The legislation does not give powers to a committee or the President to charge fees for an application or to award expenses following a determination. The decision rests with the Scottish ministers, who have decided that fees should not be charged. All costs associated with the process have to be borne by the factor even if the case is dismissed. Can the Scottish ministers reconsider this so that, at the very least, a committee should be able to order payment of costs by one party to the other, for example if a party has behaved unreasonably in the way they have conducted their case?
 Can the Scottish ministers consider introducing a modest charge for the HOHP handling complaints – which could be refunded where a complaint is determined in favour of a home owner? This mechanism is already utilised successfully to deter spurious and vexatious claims in the employment tribunal process. This could be linked to a “de minimis” rule. An open right to object without sanction of costs is a right to object without responsibility – encouraging frivolous complaints.

A better way?

Taking everything into account, both from the legislative side and from personal experience, I see no credible evidence of anything even vaguely approaching mass dissatisfaction with this industry, by home owners.

The 2011 Act has been introduced at a considerable cost to the property management industry, costs which ultimately will require to be borne by home owners. Any further changes will only increase these costs and would be wholly disproportionate given the scale of the issue.

It would be useful to establish the total cost of the financial awards made against factors by HOHP in comparison to the true financial cost to the taxpayer of bringing these cases in the first place. In any event, regrettably, what we do not have is a reflection of the true cost to factors of compliance, not only in time, but in money and reputation. Can the HOHP really justify hearing a case where the total cost of the works being complained about is less than £10, compared to the cost of bringing the case which will clearly come closer to thousands of pounds? I do not accept this could ever be considered a positive use of Government time.

The new requirements involve all factors in a learning process, and it appears that many factors have done their best to comply. However, communication is key to success, and whilst many factors have voiced their desire to sit down and talk with HOHP, the industry still awaits its response.

Meantime the reality, when you look at the overall picture, has regrettably fallen far short of what I consider our business sector needs, and most certainly what our business sector can sustain.

I believe important lessons can be learnt here by both the Scottish Parliament and the Scottish Government.

The present complaints resolution process of the Home Owner Housing Committee represents complete overkill, and demonstrates a failure to take on board the open and accurate communication of factors’ knowledge in this market presented to parties including the Scottish Government, MSPs, the Justice Committee of the Scottish Parliament and senior Government officials. As policy decision makers, the Scottish Government has a duty to ensure that new legislation is based on accurate and credible information, and to consider to whether there is a genuine public need to legislate or just a desire to placate a vocal minority.

It is for this primary reason that I consider a more effective solution is for home owners to be guided towards an independent dispute resolution service – mediation. In this regard I welcome the announcement of the HOHP’s pilot mediation scheme, which has been introduced to assist resolution of property management disputes at an early stage and without the need for a hearing before a Home Owner Housing Committee. This will apply for certain types of cases where both home owner and property factor agree to this process. The project and the effectiveness of mediation for factoring disputes will be evaluated after a period of time or a specific number of referrals and mediation outcomes, depending on the takeup figures for mediation. I look forward to seeing the outcome of this pilot scheme.

The public interest in treating the private sector purchaser fairly will need to be balanced against the public interest in avoiding ill considered, unnecessary and undesirable legislation at a considerable cost to the taxpayer, which is out of proportion to the scale of the perceived problem.

Wendy Quinn, solicitor, Legal and Compliance Manager, Greenbelt Group Ltd; tutor in property law and conveyancing, Diploma in Legal Practice, University of Glasgow
Wendy Quinn also participated on 5 March 2013 in the Justice Committee of the Scottish Parliament's inquiry into the effectiveness of the provisions of the Title Conditions (Scotland) Act 2003

Notes for information

The HOHP website is at: hohp.scotland.gov.uk/prhp/2156.html

The code of conduct sets out minimum standards. The code is underpinned by the principle of transparency so that home owners are clear about what they are paying for, the way in which charges are arrived and the routes available to them if they wish to make a complaint.

Section 27 of the 2011 Act provides that an annual report will be issued for the HOHP. The preparation and timing of the issue of the report is a matter for the HOHP President. Initially this report was not publicly available on the HOHP website – instead it was available on the linked www.prhpscotland.gov.uk/prhp/1.html Private Rented Housing Panel website. In other words one had to know where to look in order to find it. It now appears on the HOHP website page “How can we help”. Future annual reports will be published.

Two full years after the implementation of the 2011 Act on 1 October 2012, only one annual report has been published – being the Annual Report for 2012. Therefore the only information available from this first report is an operational update for the first quarter from commencement of the 2011 Act to the end of December 2012, by which time a total of 24 applications had been received comprising one LMC complaint and 23 factor complaints. No hearings took place during the period of this annual report.

The HOHP website contains a statement regarding the Freedom of Information (Scotland) Act 2002 which “introduces important new rights to access information held by public authorities and requires more proactive publication of information”. HOHP website then directs the reader to Scottish Government’s website. However, despite this, HOHP have informed us that as HOHP is a Scottish tribunal (falling within the definition of “court”), it has absolute exemption from disclosure of information created by a court or a member of its administrative staff for the purposes of or in the course of such proceedings.

PUMAS (Property Managers Association Scotland) have submitted questions to HOHP. These questions are at hohp.scotland.gov.uk/prhp/files/Questions%20PMAS%20Final%20pdf.pdf

One of their questions was to promote the benefit of a working party (with representation from all parties) to assist in streamlining and improving the process for all concerned. However HOHP has responded in terms that it is a judicial body and it is not appropriate for the Panel to engage in working parties as described. There is presently no route for the user group to be heard.

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