Hidden commissions and kickbacks are back in the headlines. A recent article on This is Money article looked at how some freeholders and managing agents make extra money from leaseholders, just as Angela Rayner pledged at the Labour conference to cap unfair fees and introduce an independent regulator for managing agents.
For most leaseholders, the hardest part isn’t understanding the problem. It’s knowing how to tell whether it’s happening in their own building. This guide explains how these charges work, the warning signs to look for, and the practical steps you can take.
How do hidden commissions and kickbacks work?
There are three common ways money can be taken from a service charge without appearing as a separate cost:
- Contractor kickbacks. A contractor is asked to add a mark-up to their invoice. The inflated amount is paid from the service charge, and the difference is passed back to the managing agent or freeholder. Managing agents quoted in the This is Money article put these mark-ups at around 10 to 15 per cent.
- Insurance commissions. A broker shares part of its commission with whoever placed the business. Because commission is usually a percentage of the premium, a higher premium means more commission. A 2022 Financial Conduct Authority investigation found commission was shared in 68 per cent of cases, and that 58 per cent of the policies it sampled carried a commission rate of 30 per cent or more.
- Utility and supplier arrangements. Similar payments can be built into energy, water or other contracts arranged on the building’s behalf.
None of these shows up as its own line in the service charge accounts, which is exactly why they’re hard to detect.
Are commissions illegal?
Not automatically, but they must be transparent. Since 1 January 2024, any commission on buildings insurance arranged by a freeholder must be disclosed to leaseholders. Where payments are kept secret, leaseholders have successfully challenged them at tribunal, including at Canary Riverside in London, where leaseholders recovered insurance commissions charged over several years.
The rules are also changing. The Government has asked the FCA to look again at the cost of leasehold insurance, and has pledged to introduce an independent regulator for managing agents.
Warning signs to look out for
No single sign proves anything, but a combination is worth questioning:
- Vague budget headings, such as “general maintenance” or “sundries”, with large sums and little detail.
- The same contractors for everything, year after year, with no evidence of competitive quotes.
- Insurance renewed automatically, without the market being tested or the broker’s fee being explained.
- A rebuild value that keeps rising faster than inflation, which pushes up the premium (and any percentage-based commission).
- A management fee charged as a percentage of the service charge, which gives the agent a reason for costs to rise. Industry bodies including RICS consider this poor practice.
- Reluctance to share invoices or quotes when you ask for them.
How to check your service charge
If you’re a leaseholder
You have a legal right to ask for a summary of the costs that make up your service charge (under section 21 of the Landlord and Tenant Act 1985), and then to inspect the invoices and receipts behind it (under section 22).
A request can be as simple as this:
Dear [Managing agent / Landlord],
Under section 21 of the Landlord and Tenant Act 1985, I request a written summary of the costs incurred in relation to the service charges for [property address] for the period [dates].
Once received, I also request, under section 22 of the Act, the opportunity to inspect the accounts, receipts and other documents supporting the summary, or to be provided with copies.
Yours sincerely,
[Name, flat number]
Once you have the invoices, getting like-for-like quotes for a few of the larger items is the most reliable way to tell whether costs are reasonable.
If you’re an RMC or RTM director
As a director, you’re effectively the client, so you can ask your managing agent directly. Useful questions include:
- Do you, or anyone connected to you, receive any commission, rebate or other payment from our contractors, insurer, broker or suppliers?
- Is your management fee the only income you earn from our building?
- Is the fee fixed, or a percentage of costs?
- How were our main contractors chosen, and can we see the quotes?
- What is our building’s rebuild valuation, and when was it last checked?
- Can we see spending and invoices as they happen, rather than once a year?
A good managing agent will answer all of these openly and without hesitation.
What good practice looks like
The best protection isn’t relying on new regulation. It’s a way of working where there’s nothing to find:
- A fixed management fee, with any additional charges published up front
- No commissions or rebates from any supplier
- Significant contracts tested regularly, with quotes shared
- A dedicated bank account for each building, reconciled regularly
- Invoices and spending visible to directors throughout the year
- Clear, itemised service charge budgets and accounts
Frequently asked questions
Can leaseholders get money back if they’ve paid hidden commissions?
Possibly. Leaseholders have recovered undisclosed commissions through the First-tier Tribunal, and some legal firms run group claims. Each case depends on its facts, so it’s worth taking legal advice.
Who regulates managing agents?
There’s currently no single statutory regulator, although the Government has pledged to introduce one. Many managing agents belong to professional bodies such as The Property Institute (TPI) and must be members of a redress scheme such as The Property Ombudsman.
Is a high management fee a warning sign?
Not necessarily. A realistic fee can be a good sign if it means the agent doesn’t need to make money elsewhere. What matters is that the fee is clear, and that it’s the agent’s only income from your building.
What should a management fee include?
It varies, so check your management agreement. As a guide, it should cover routine management, budgeting and accounting, contractor management and regular site visits, with any extras listed clearly.
ALLRES manages residential buildings across London and does not accept commissions or kickbacks from suppliers. If you have a question about your building’s service charge, you’re welcome to get in touch at [email protected].
