Quick Answers
When is competitive tendering required?
Section 20 consultation requires competitive tendering for qualifying works (where a leaseholder's share exceeds £250) and qualifying long-term agreements (over twelve months). Outside these thresholds there is no statutory requirement, but the reasonableness test for service charges means routine work should still be competitively tendered where practicable.
Can a managing agent use preferred contractors?
Yes, provided the contractors charge reasonable market rates and there are no undisclosed financial benefits to the agent from the arrangement. The 2024 Act requires disclosure of financial benefits received from contractors and service providers. An undisclosed referral fee or kickback arrangement gives leaseholders grounds to challenge contractor costs as unreasonably incurred.
Can leaseholders challenge contractor costs?
Yes. The First-tier Tribunal can determine whether service charge costs — including specific contractor invoices — are reasonably incurred. The burden of showing reasonableness rests on the landlord. Request the underlying invoices under section 22, compare against market rates, and apply to the Tribunal if the costs are clearly above market without explanation.
The core problem: a managing agent who uses the same small group of contractors at all their managed buildings can negotiate arrangements where the contractor gives the agent a preferential referral in exchange for exclusivity. The agent benefits (directly through referral fees, or indirectly through convenience), the contractor benefits (through guaranteed work), and the leaseholders pay — often above market rates, often without transparency. This arrangement is not unusual and can persist for years without anyone challenging it.
Why RTM directors often miss it: the individual invoice amounts may look plausible. The problem is systematic — the same contractor for every job, every year, at rates that have never been competitively tested, with no disclosure that any financial benefit flows between agent and contractor. Identifying this requires comparing costs against market benchmarks, asking direct questions about the agent's contractor relationships, and using the Leasehold and Freehold Reform Act 2024's disclosure rights to require answers.
Key Takeaways
The reasonableness standard applies to all service charges, not just Section 20 works
Section 19 of the Landlord and Tenant Act 1985 requires that service charges are reasonably incurred and that, where they relate to works or services, those works or services are of a reasonable standard. This reasonableness standard applies to every item in the service charge — not just the major works that trigger Section 20 consultation. An overpriced routine maintenance invoice from a preferred contractor is challengeable at the Tribunal as an unreasonably incurred service charge, even where Section 20 was not triggered.
Referral fees and kickbacks from contractors must now be disclosed
The Leasehold and Freehold Reform Act 2024 built on the insurance commission disclosure requirements that existed before it by extending the financial benefit disclosure obligation to other contractor and service provider relationships. A managing agent who receives a payment, commission, or other financial benefit from a contractor used at a building managed on behalf of leaseholders must disclose that benefit. An undisclosed benefit is grounds for challenging the contractor costs as tainted by an undisclosed conflict of interest.
Section 20 competitive tendering has specific procedural requirements
Where Section 20 consultation is triggered, the landlord must seek at least two estimates for the works (or justify why this was not possible) and provide those estimates to leaseholders during the consultation process. The estimates must be from genuinely independent contractors — not from two companies owned by the same director, not from two companies with the same office address. Leaseholders who receive Section 20 notices should verify that the estimates were obtained independently and that the contractors quoted are genuine market alternatives.
Mark-ups on contractor invoices are a common hidden cost
Some managing agents apply a percentage mark-up to contractor invoices before passing them through the service charge. This mark-up may be disclosed in the management agreement as an "administrative fee" or "project management fee" — or it may not be disclosed at all. Where a managing agent charges a management fee as a percentage of the building's service charge expenditure, they have a direct financial incentive to spend more on contractors: higher expenditure generates a higher management fee. RTM directors should understand the fee structure of their management agreement fully before comparing invoice costs.
Long-term maintenance agreements require Section 20 consultation
A maintenance contract lasting more than twelve months is a "qualifying long-term agreement" under Section 20, requiring the full consultation process before it is entered into. Managing agents who roll over annual maintenance contracts with the same contractor without competitive tendering or Section 20 consultation may be creating agreements that are qualifying long-term agreements and where the leaseholder contribution is therefore limited to £100 per leaseholder for the whole agreement period. This is a significant compliance risk for any block with a multi-year lift maintenance, cleaning, or grounds maintenance agreement that was not competitively tendered.
RTM directors have a duty to oversee procurement — it is not delegated away to the agent
When an RTM company appoints a managing agent, it delegates the day-to-day management of the building. It does not delegate its duty as the company responsible for the service charge to ensure that money is spent wisely and on reasonable terms. RTM directors who simply assume that the agent is procuring competitively and honestly are not meeting that duty. Active oversight — asking questions, reviewing expenditure against benchmarks, requiring evidence of competitive quotes — is part of the director's obligation, not an unreasonable imposition on the agent.
The Preferred Contractor Problem
Managing agents typically manage multiple buildings simultaneously. Over time, they develop working relationships with contractors who service those buildings reliably and responsively. This is a legitimate and practical feature of block management. The problem arises when the relationship crosses from convenient to financially entangled.
The patterns that create service charge integrity problems are:
- Referral fees — the contractor pays the managing agent a percentage of each job they are awarded at the agent's buildings. The agent's incentive is to maximise work instructed to that contractor, not to find the cheapest option for leaseholders.
- Invoice mark-ups — the agent receives the contractor's invoice and charges the service charge a higher figure, retaining the difference. This may be disclosed as a project management fee or may not be disclosed at all.
- Ownership arrangements — the managing agent and the contractor are connected through ownership (the same director, a related company, a family member's business). The contractor is awarded all work at the building without competition.
- Convenience exclusivity — no formal financial arrangement, but the same contractor is used for everything because they are familiar, responsive, and require no tendering effort. The convenience accrues to the agent; the cost of uncompetitive pricing accrues to leaseholders.
The cumulative effect of any of these arrangements is that leaseholders pay more than the market rate for their building's maintenance, over years, without knowing it.
Red Flags: How to Spot a Conflict of Interest
A building that uses the same plumber, electrician, decorator, and grounds maintenance contractor across ten years without any competitive tendering has not been procured transparently. Different work types require different trade skills — a genuinely independent procurement process would rarely produce the same contractor for all work categories across all years. Identical contractor usage across multiple years is the simplest indicator that competitive tendering is not happening.
If an RTM director asks to see the quotes obtained before a contractor was instructed, and the agent is reluctant to provide them, or claims there was only one quote obtained, or that the work was too urgent to seek multiple quotes — each of these responses is a red flag. A genuinely transparent agent welcomes the question and provides the documentation promptly. Resistance to this basic oversight request is itself evidence of a problem.
When individual invoices are examined against market benchmarks — what a search of comparable contractors in the area would produce as a quote for the same work — the managed building's invoices are materially higher across multiple work types. A 20% premium on one invoice might reflect the complexity of the specific job. A consistent 30-40% premium across all work types over multiple years suggests the competition that would constrain pricing is not present.
The 2024 Act requires disclosure of financial benefits received from contractors. An agent who cannot give a clear written answer to the question "do you receive any commission, referral fee, mark-up, or other financial benefit from any contractor used at this building?" is either in breach of the disclosure requirement or is operating in a way that requires immediate scrutiny. A clear "no" is the expected answer for a transparently operating agent. Anything less should prompt a formal written request citing the statutory disclosure obligation.
Where Section 20 consultation proceeds with multiple quotes, verify that the quoting contractors are genuinely independent of each other. Two companies sharing a director, a registered address, or an ownership structure are not independent quotes. The Section 20 process requires genuine competition; quotes from connected entities do not provide it and leaseholders can challenge the Section 20 compliance and the resulting costs if the connection is later discovered.
Section 20 and Competitive Tendering: What Is Actually Required
Section 20 of the Landlord and Tenant Act 1985 imposes a consultation requirement on landlords before carrying out qualifying works or entering into qualifying long-term agreements. The consultation has a competitive tendering element that goes beyond simply informing leaseholders what is planned.
| Transaction type | What Section 20 Requires |
|---|---|
| Qualifying works (leaseholder share over £250) | The landlord must serve a Notice of Intention on all leaseholders describing the works. Leaseholders can nominate contractors they wish to receive an estimate. The landlord must obtain at least two estimates from genuinely independent contractors (or justify why not). All estimates must be made available to leaseholders. A Statement of Estimates is served with the estimates and leaseholders have 30 days to respond. The landlord can then proceed with the chosen contractor. If the most expensive estimate is chosen over cheaper alternatives, reasons must be given. |
| Qualifying long-term agreements (over 12 months, leaseholder contribution over £100 per year) | A more extensive four-stage consultation process. The landlord serves a Notice of Intention, invites leaseholder nominations for candidates, obtains proposals (quotes or tenders) from candidates, serves a Statement of Proposals with the proposals and invites observations. This process is more demanding than the qualifying works consultation and is frequently not followed correctly for long-term maintenance contracts. A maintenance agreement entered into without following this process caps the leaseholder contribution at £100 per year per leaseholder for the agreement period. |
| Genuinely urgent works | Where works are genuinely urgent and cannot wait for the Section 20 consultation process without risk to health, safety, or the building fabric, the landlord can carry out the works and apply to the Tribunal for dispensation from the consultation requirements retrospectively. The Tribunal will only grant dispensation where the urgency was genuine and where leaseholders have not suffered material prejudice. Dispensation applications are not a back-door for avoiding consultation on works that were foreseeable. |
The 2024 Act Disclosure Requirements
The Leasehold and Freehold Reform Act 2024 extended the financial benefit disclosure requirements that already applied to insurance commissions to cover a wider range of financial benefits received by managing agents from contractors and service providers.
The practical implications for RTM directors:
- Ask directly, in writing, for a disclosure of all financial benefits. Request that the managing agent confirm in writing whether they receive any commission, referral fee, mark-up, volume rebate, or other financial benefit from any contractor or service provider used at the building — and if so, the amount and from whom. This should be a standard annual question addressed in the AGM documentation or in a separate written request.
- Review the service charge accounts for insurance commission disclosure. The 2024 Act specifically requires insurance commission to be disclosed. If the accounts show only a gross premium without any commission disclosure, ask why. The absence of a disclosure does not necessarily mean no commission is being paid — it may mean the disclosure obligation is not being met.
- Where a disclosure confirms a financial benefit, assess whether the arrangement is appropriate. Some commission arrangements are legitimate and disclosed — an agent who earns a modest administrative fee for processing insurance and discloses this is operating transparently. An agent who earns a significant commission from a single contractor across an entire managed portfolio without competitive procurement is operating in a way that requires challenge.
Good Procurement Practice: What RTM Directors Should Require
Require quotes for all material expenditure
Establish a threshold above which the managing agent must obtain at least two independent quotes before instructing a contractor — below the Section 20 threshold, a reasonable figure might be £500 or £1,000. For works above the Section 20 threshold, the consultation process requires competitive tendering. Document the threshold and the requirement in the management agreement or in a side letter with the agent.
Review contractor costs against market benchmarks annually
At least once a year, pick a selection of routine maintenance invoices from the accounts and compare them against what comparable contractors in the area would charge for the same work. This does not need to be a formal market survey — calling two or three alternative contractors for a ballpark quote on the work described in the invoice is sufficient to establish whether the building is being charged at market rates. A consistent pattern of above-market pricing is a clear signal to change procurement approach.
Require a standard quote record for all instructed work
Ask the managing agent to keep and provide on request a simple record of every piece of work instructed above the threshold: date, work description, contractor instructed, quotes obtained (showing who provided each quote and the amounts), and reason the chosen contractor was selected if not the lowest quote. This is not an unusual request. Any agent managing a building properly should have this documentation. An agent who cannot or will not provide it does not have a transparent procurement process.
Introduce new contractors through a controlled process
When the building needs a specialist or type of contractor not previously used, or when the existing contractor is not performing satisfactorily, the RTM directors and managing agent should identify alternatives together. This prevents the agent from introducing new preferred contractors without oversight and gives the RTM directors visibility of who is working on the building. Leaseholders who are tradespeople in relevant fields can sometimes identify good alternative contractors for consideration.
Audit the major contracts every three years
Long-term maintenance contracts — lifts, fire safety, grounds, cleaning — should be re-tendered at a minimum every three to five years, with Section 20 consultation for qualifying agreements. A contract that was competitively priced in 2020 may no longer represent value in 2026. Price inflation, contractor market changes, and the building's evolving needs all affect whether the current arrangement remains appropriate. An agent who resists re-tendering a major contract is usually one who benefits from the current arrangement continuing.
Include procurement transparency as a management agreement term
Where a management agreement is being reviewed or a new agent is being appointed, include specific terms requiring: disclosure of all financial benefits from contractors; provision of quote documentation on request; competitive tendering above a specified threshold; and annual confirmation that no undisclosed financial benefits are being received. An agent who refuses to sign an agreement containing these terms is telling you something important about how they intend to manage the building.
Challenging Contractor Costs at the First-Tier Tribunal
Where leaseholders have identified contractor costs that appear to be above market rate, or where there is evidence of an undisclosed conflict of interest in procurement, the First-tier Tribunal is the correct forum for a challenge.
The approach:
- Obtain the underlying invoices. Make a written inspection request under section 22 of the Landlord and Tenant Act 1985 for all accounts, receipts, and documents supporting the service charge items being challenged. The landlord must provide access within 21 days. If they do not, this non-compliance is itself relevant evidence in a Tribunal application.
- Obtain independent quotes for the same work. Ask two or three independent contractors to quote for the work as described in the invoice. Keep written records of these quotes. The comparison between what was charged and what the market would charge for the same work is the primary evidence base for a reasonableness challenge.
- Request disclosure of any financial benefits. In writing, ask the managing agent to confirm whether any financial benefit was received from the contractor in connection with this work. Keep the response (or non-response).
- Apply to the First-tier Tribunal. The application asks the Tribunal to determine whether the service charges are reasonable. The burden of proving reasonableness is on the landlord. Present the market comparison evidence and any evidence of non-disclosure. The Tribunal can reduce the amount payable to what it considers reasonable.
Where the service charge demand includes contractor costs that are being questioned, it is better to challenge before payment than after. Paying a service charge demand in full, without reservation, can be interpreted as acceptance of the costs as reasonable. Where payment is required under the lease before a Tribunal determination is available, pay under protest and include a covering letter noting that the payment is made without prejudice to a Tribunal challenge to the reasonableness of specific items.
For the service charge accounting obligations that should make procurement costs visible to leaseholders, see Service Charge Accounts Under the Leasehold and Freehold Reform Act 2024. For Section 20 consultation on major works, see Structural Repairs and Section 20.
Frequently Asked Questions
Section 20 requires competitive tendering where a leaseholder's contribution to qualifying works exceeds £250, or where a qualifying long-term agreement is being entered into. Outside these thresholds there is no statutory competitive tendering requirement, but the reasonableness standard for service charges means work should still be competitively tendered where practicable. Set an internal threshold in the management agreement below which the agent must obtain multiple quotes before instructing.
Yes, provided the contractors charge reasonable market rates and there are no undisclosed financial benefits to the agent. The 2024 Act requires disclosure of financial benefits received from contractors. An undisclosed referral fee gives leaseholders grounds to challenge contractor costs as unreasonably incurred. A preferred contractor who charges market rates and is used because they do good work is acceptable. A preferred contractor who charges above market rates because they pay the agent a kickback is not.
Apply to the First-tier Tribunal for a determination that specific service charges were not reasonably incurred. Obtain the underlying invoices via a section 22 inspection request, obtain independent market quotes for the same work, request disclosure of any financial benefits received by the agent from the contractor, and present this comparison to the Tribunal. The burden of proving reasonableness lies with the landlord. Challenge before payment where possible; if paying, do so under protest and without prejudice to a Tribunal challenge.
A referral fee is a payment from a contractor to a managing agent for being awarded work at the agent's buildings. The 2024 Act requires these financial benefits to be disclosed to leaseholders. An undisclosed referral fee is a breach of the agent's duty and gives leaseholders grounds to challenge costs incurred through that contractor. RICS-regulated agents have professional obligations that prohibit undisclosed referral arrangements. Disclosed arrangements may still be challengeable if the cost to leaseholders as a result is above market rate.
Ask: who are the contractors used for routine maintenance and how are they selected? For each material expenditure item, what quotes or estimates were obtained? Does the agent receive any commission, referral fee, or other financial benefit from any contractor used at this building? How are major works tendered? An agent who answers these questions clearly and promptly is operating transparently. An agent who characterises the questions as unreasonable or who provides vague answers is demonstrating exactly the opacity that these questions are designed to address.
Managing a block where contractor procurement has never been reviewed?
Neon operates open procurement for all blocks we manage in East London and Essex — competitive quotes above a documented threshold, no referral fees or financial benefits from contractors, annual accounts with full expenditure transparency, and a procurement record available to RTM directors on request. If your current agent's procurement process is opaque, that conversation is worth having.
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