Since its introduction under the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”), many leaseholders have acquired the right to manage their building.
In very general terms, so long as the building qualifies and the paperwork is correct (and served correctly), leaseholders are entitled to acquire the right to manage and take over the management functions. There is no need, therefore, to show any fault on the part of the current landlord and/or the manager.
However, for a non-fault based right, the acquisition of the right to manage can often seem (and feel) rather litigious; it’s even been described by the upper tribunal – most unceremoniously – as being “trench warfare”.
One of the issues that can cause a certain amount of friction post-acquisition relates to the payment of service charges where at least one flat is not subject to a lease held by a qualifying tenant.
For reference, these are referred to as “excluded units”.
What is an excluded unit?
To qualify for the right to manage, the building must, amongst other things, contain two or more flats held by qualifying tenants. It follows, therefore, that there may be flats or units within the block which are not held by qualifying tenants.
These are what we are referring to as excluded units.
One practical problem faced by a right to manage (RTM) company post-acquisition, where there are excluded units, is how to recover service charge contributions from those excluded units. An inability to recover 100 per cent of the costs the RTM incurs in providing services (ie in performing management functions) is very bad news indeed for the RTM company.
Landlord contributions to service charges
Section 103 of the 2002 Act comes to the assistance of the RTM company in these circumstances. Where:
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the premises contain one or more flats or other units not subject to a lease held by a qualifying tenant (i.e. excluded units);
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service charges are payable under the leases of the other flats in the premises; and
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the total recoverable from those flats (held by qualifying tenants) is less than 100 per cent of the service charge expenditure.
It is section 103 that obliges the holder of the excluded unit (which is most likely to be the landlord) to contribute towards the shortfall.
The 2002 Act sets out the method of calculating the shortfall in the event that there are two or more excluded units.
What does this mean in practice?
For any RTM company to succeed and successfully manage the premises, they need to be able to recover 100 per cent of the costs they incur (or propose to incur) in the provision of services.
From time to time the right on the part of the RTM company to collect service charges from the landlord of excluded units is often over looked. This is never good news and it could place the RTM company in serious financial difficulties, and lead to under recovery. Needless to say, the consequences of this are obvious.
It is very important that RTM companies should be aware of this important statutory right, which enables them to recover costs associated with excluded units.
It should not be forgotten, though, that the landlord is entitled to challenge the service charges in the Tribunal, in the same way any leaseholder can. A landlord could, therefore, challenge their liability to pay certain costs, or challenge the reasonableness of those costs under section 27A of the Landlord and Tenant Act 1985
Cassandra Zanelli is a partner at PM Legal Services
