This article was first published on the Winckworth Sherwood website.
The Right to Manage (RTM) was introduced in 2002 giving flat owners the ability to collectively take over the management functions in respect of their building without having to prove fault on the part of those responsible for management under their lease (usually their landlord) or paying a premium. So in this way leaseholders, acting via an RTM company, take control of services, repairs, maintenance, improvements, and insurance in respect of their building.
It has provided a very useful alternative to collectively claiming the freehold at cost for those flat owners who do not have lease appointed management companies or other aims such as the need to extend short leases or make other amendments to them. It is also much quicker at four months plus some preparation than pursuing the freehold.
With any of these rights certain of the landlord’s reasonable costs need to be reimbursed and a statutory procedure applies.
However, there have been some problems and so the Government tasked the Law Commission to undertake a review of the existing RTM legislation with a view to improving it by making the procedure simpler, quicker and more flexible from flat owners’ point of view.
So what are the problems to be addressed and are there potential benefits worth holding off making a claim for?
Problems
The Law Commission found various problems with the existing system such as:
- Leaseholders of houses and buildings that comprise less than 75% residential do not enjoy the right.
- A lack of flexibility with regard to multiple blocks on an estate (separate claims required in respect of each block).
- Management information being provided too late in the process to assist flat owners in the exercise of the RTM effectively.
- Uncertainty as to the extent of the obligations the RTM company takes on i.e. gardens and car parks that are shared with other buildings.
- Concerns about the adequacy and validity of insurance taken out by RTM companies.
Consultation and recommendation status
The Law Commission consulted and has now published its recommendations for reform. So what recommendations have been made to Government by the Law Commission?
Qualification
Currently the RTM can only be claimed in respect of a self-contained building (or part) which contains at lease two flats held by qualifying tenants (broadly speaking flat owners with leases originally granted for more than 21 years) where such tenants hold at least two thirds of the total number of flats in the building (or part). It excludes leasehold houses and mixed use buildings such as a shop with residential uppers.
It can be difficult to determine whether a relevant part qualifies and so costly satellite litigation has sprung up around this effectively depressing the availability and attractiveness of the right to flat owners. The qualification criteria were copied over from the collective freehold enfranchisement legislation despite different policy considerations applying and so it may not be necessary to retain such potential hurdles to qualification as the relevant part be self-contained in the way it needs to be for a freehold claim.
Blocks are excluded where less than two thirds of flats are held by qualifying tenants and so developments can be structured to exclude the application of the right and this may feel inequitable to flat owners where there is a majority of flats in the building held by qualifying tenants.
Premises with non-residential parts around 25% may experience satellite litigation around the precise floor measurements, adding to the nuisance value available to a landlord and arbitrarily excluding certain buildings where the threshold is exceeded. Recommendations for reform in this regard are:
- Extending the RTM to leasehold houses by abolishing the requirement that there be two residential units held by qualifying tenants. So that a single flat owner above a shop or in a building with another flat not held by a qualifying tenant could qualify too.
- Enabling part of a building to exercise the right to manage where it would otherwise fall foul of the self-containment rules drawn from the collective enfranchisement right. So that for example, there didn’t need to be a clear vertical division between one part and another such as where a car park lies beneath several blocks so requiring, although sited on top of it, to be treated as a single building for the purpose of the RTM.
- Increase the 25% threshold for non-residential element of the building to 50%; they had consulted around replacing the threshold entirely with a requirement that RTM companies instruct professional managing agents in that situation to protect the landlord where it loses control under a new regime where it wouldn’t before.
- Shared ownership leaseholders who have not staircased to 100% are proposed to count as qualifying tenants as they are responsible for 100% of the service charge.
- Resident landlord exclusion – this is to be removed.
- Split freehold – currently separate RTM applications are required where part of a larger building is held by a separate freeholder. That requirement is proposed to be removed so that the larger building could be managed as one with consequential changes being made to the tribunal’s powers to enable them to make any conflicting lease provisions work in this situation.
- Live/work units – these do not qualify for the RTM under the existing legislation but it is poorly drafted such that it only constitutes an excluded business tenancy where the tenant is carrying on a business and so leaseholders wishing to participate can circumvent the exclusion by subletting the property on a short lease to a third party to carry on that business use instead. So the exclusion is recommended to be replaced with one that only operates where either the lease prohibits residential use or, where a lease permits both residential and non-residential use, the they are occupied solely for business purposes.
They have decided not to reduce the number of qualifying tenants required from two thirds to one half to bring more buildings within the scope of RTM where they had consulted around this.
Estate situation
Multiple buildings are currently prevented from being subject to a single RTM claim and management by one RTM company as a result.
There are down sides to amending qualification to enable estate wide RTM claims to the exclusion of individual claims in respect of buildings within the estate. As a result it is recommended that both methods of proceeding be permitted with an estate wide RTM right being available where the buildings in question contribute to a common service charge and/or share the use of the same external property such as gardens or car parks.
A multi-building RTM wouldn’t necessarily need to cover the entirety of the estate.
It could include leasehold houses.
The qualification criteria would need to be met in respect of each constituent building to avoid flat owners of other blocks on the estate taking control of management in another block where they were content with their landlord’s conduct of management.
Late joiners in an estate situation would be allowed, with the RTM company’s consent, but it couldn’t be forced on them. Blocks who participated originally would be able to break away from the estate wide management after a minimum period.
Responsibility for management of land outside the building that directly contains the flats
Currently the default position is that the RTM company takes over management of certain property the flat owners are entitled to use externally even if that is shared with other buildings. As a result multiple parties can end up being responsible for management of the same area, causing conflicts or leaving gaps depending on who picks up the management baton in respect of the given area. It may be the RTM company is not aware of an area of land they are responsible for as the transfer of management responsibility is automatic.
The recommendation is that RTM companies do not automatically acquire management functions over such ‘appurtenant’ property. It will only do so if it specifies such property in its claim notice and either the landlord does not object via its counter-notice or the Tribunal determines that it is appropriate for the RTM company to acquire management functions in respect of it, in which case it has the power to direct how that property should be managed.
RTM companies’ operation
To prevent abuse potentially of the rule that once an RTM company has been established for a given set of premises there can be no other RTM company created in respect of it. That rule will be replaced with one prohibiting a claim notice being given for a set of premises while a live claim is in hand.
To ensure RTM company members can participate in decision making by the RTM, a rule requiring AGMs is to be introduced save where there is only one member.
To improve management, prospective directors of the RTM are to be encouraged to undertake free training on the RTM regime and their obligations.
To avoid freeloading and other risks, RTM companies are to be able to recover their reasonable management costs from leaseholders as part of the service charge.
Management quality
The strong encouragement for at least one RTM officer to obtain training is to be kept under review in respect of what action Government takes in response to the Regulation of Property Agents: Working Group Report.1 which recommends minimum entry requirements and continuing professional development for property agents and might be extended to include RTM companies.
Simplifying the procedure
Currently the RTM claim notice can only be given once a notice inviting participation has been given to all qualifying tenants who are not already members of the RTM company. To avoid challenges to claims on the basis that such an invitation has not validly been given it is recommended that the invitation to participate be removed as a requirement. Qualifying tenants are entitled to become members at any time before or after the claim is made so they are not prejudiced by this.
Counter notice – once the RTM company gives its claim notice, the landlord has an opportunity to serve a negative counter notice. If it fails to do so there is deemed to be no dispute about entitlement, however, in that situation there is no obvious way in which to determine whether the claim was in fact valid and so protected from challenges in future. So it is proposed the RTM company can apply to the tribunal to determine that the RTM was available and validly exercised. Also, landlords will only get one bite at the cherry as to the objections they wish to rely on such that if it isn’t stated in the counter-notice they won’t generally be permitted to raise new arguments at a later stage.
Notices – to avoid satellite litigation around notices it is recommended that the validity of RTM notices can only be challenged if they fall short of certain prescribed requirements. A single officer of the RTM company is to be able to sign notices on its behalf. Notices will be capable of being given by email to certain categories of email addresses and the deemed service provisions are to be improved around this. Parties are to have the power to waive defects in notices, amend them by agreement and for the Tribunal to rule to that effect. RTM companies only have to serve freeholders; the onus is then on freeholders to pass this notice on to any intermediate landlords.
Date of vesting of management – with the landlord’s agreement the 3-month minimum period (from the counter notice due date) for management to vest is to be capable of being shortened. The maximum is 12 months.
While the RTM company might specify a date in their claim notice that they prefer to take over management, this can be put back by the landlord giving a counter notice that is negative. In that case the date will be 3 months form withdrawal of the negative notice or a determination upholding the claim.
Management information
Leaseholders’ rights to obtain information are to be beefed up: they are to have the right to obtain information both after initiating the claim and in advance i.e. where it is needed as regards external property to decide whether to make the claim. This is to meet the current problems associated with management information only being forthcoming on the day that management vests, so far too late for it to be useful to the RTM company.
RTM companies’ right would be to obtain any information they reasonably require to decide whether to apply to the Tribunal for a determination that they are entitled to the RTM. Besides being entitled to information reasonably required to complete the claim form, RTM companies would be able to inspect or obtain copies of any information reasonably required to decide whether to claim the RTM.
Prescribed forms of information notice are proposed. The landlord would be under an obligation to notify the RTM company of any material changes to the information provided. Pre claim information requests are at the RTM companies cost and then it switches away from it.
Management contracts
Currently, while the RTM company is not liable under or bound by any contract made by the landlord prior to the acquisition of the RTM, it isn’t clear always whether the contract has been terminated automatically or not and if so what compensation may be payable to the contractor. In addition often the landlord may provide details of management contracts very late in the process.
It is proposed that details of the contracts be provided sooner; for management contracts entered into before the determination date the landlord must notify the contractor of the RTM claim and the RTM company of the new management contract as soon as possible after the claim is determined up to 14 days afterwards; for management contracts entered into later landlords must provide these notifications when entering into the contract is entered into unless it is not reasonably practicable in which they must do so ASAP after that. Either way the notifications must be given before management vests.
Contracts will be considered frustrated by the acquisition of the RTM unless the landlord was aware of the possibility of an imminent RTM claim before entering into the contract or it explicitly contemplates an RTM claim as a future possibility.
Management functions
The RTM company acquires the functions imposed on the landlord by the lease. Regulated activities i.e. health and social care that are governed by the Care Quality Commission are to be excluded (as opposed to that the right to manage being excluded with regard to the building concerned).
Insurance
Where the commission had consulted around proposals that the RTM company should be given the current insurance policy along with claims history and last reinstatement valuation prior to acquisition of the RTM, the recommendations are that the RTM use the early information right, the parties work together to place a policy on risk in joint names with fall back to the Tribunal if agreement can’t be reached with the existing policy continuing in the interim.
The landlord is to have the right to request a written summary of insurance cover and to inspect or be sent a copy of the policy and associated documents.
Lease variations
Problems can arise from the terms of the flat leases as the management functions acquired by the RTM company derive from them. For example, the service charge provisions may be framed to reflect the building forming part of a larger estate so causing problems around the liability for and apportionment of service charges.
To cater for this it is recommended that the Tribunal have the power to vary a lease where acquisition of the RTM makes management of premises in accordance with the leases unworkable. This would apply to flats within and outside the building subject to an RTM claim and last for the duration of the RTM being available to any party with an interest in them.
Uncommitted service charge
To meet concerns around delays and shortfalls in accounting for such funds to the RTM company on the date management vests, it is proposed that the landlord must account to the RTM company for the uncommitted service charge funds on that date subject only to the landlord being able to retain monies required to discharge any service costs incurred up to that date which have not yet been paid where they evidence this.
As regards service charge arrears, the landlord would have to undertake a reconciliation.
Lease consents
Flat owners’ applications for consent to carry out alterations, keep a pet, or sublet where that is required under the lease terms, currently invokes a procedure whereby the application is made initially to the RTM company which in turn has to notify the landlord and allow a certain amount of time for it to object before granting consent potentially.
Problems can arise around the tenant applying to the wrong party for consent initially or receiving it from the wrong party i.e. without the landlord being aware of the application and double costs being payable.
It is recommended that landlords only be consulted with regard to applications for approval around assignment, underletting, charging, parting with possession, structural alterations/improvements or use changes.
RTM companies would only have to consult if it wanted to grant approval and then within a reasonable time limit of 30 days. Landlords wanting to object to approvals being granted would have to apply to the Tribunal within 30 days.
Landlords would be precluded from charging administration fees for such lease consents. RTM companies would not be entitled to consents retrospectively or consents to a matter that is absolutely barred by the lease.
Inclusion of landlord’s details in demands for payment
It is recommend that RTM companies should not be required to include the landlord’s name and address in any demand for sums payable under the lease as regards the duty under section 47 of the Landlord and Tenant Act 1987 to provide their name and an address for service in England and Wales in any written demand for sums payable under a lease including rent, a service charge or administration charge.
Dispute Resolution and cost shifting
Problems identified include the complexity around whether a dispute has to go to the tribunal courts for determination, the landlord’s right to recover all reasonable costs arising out of a RTM claim notice is to encourage them to be more thorough then they might be in their analysis of the validity of the claim and their ability to recover costs as soon as one sided where they challenge the ability of a claim as if they aren’t successful in challenging this the RTM company has to cover their reasonable costs and if they lose they are still covered but they don’t have to cover the RTM company’s costs of the challenge. The onus is on the leaseholders to apply for an order stopping the landlord from recovering their litigation costs through the service charge.
To meet these concerns, it is recommended that landlords should no longer be entitled to recoup their non-litigation costs, i.e. those incurred by the landlord in evaluating and responding to the RTM claim, save where an RTM claim fails and the RTM company has acted unreasonably in proceeding with the claim.
As regards litigation costs each party is to bear their own costs absent the Tribunal awarding costs over conduct or wasted costs:
- The Tribunal is to have the power to restrain multiple unmeritorious RTM claims
- Costs recovery provisions in the lease are trumped by these provisions.
Termination of the RTM
Landlords have complained that there is no provision for the RTM to terminate where membership falls below 50% of qualifying tenants and that there is not enough ability for the landlord to step in to remove the RTM company where it is failing. RTM companies don’t have the right to give back management responsibility to the landlord. It isn’t clear whether the RTM is recommenced where the RTM company is restored to the Companies House register. It is unclear to whom management reverts when the RTM automatically ceases under the current provisions. It is questioned whether the RTM should be prevented for a period of four years after it is ceased to be exercisable by the RTM company.
Consequently recommendations are made that:
- The RTM company can apply to the Tribunal to give up the RTM
- Management functions are to revert to the landlord or whoever is responsible for exercising those functions under any leases of the premises when the RTM falls away if they are still in existence
- That person can apply for the appointment of a manager instead within 90 days from the RTM ending
- Landlords can oppose an RTM claim where the premises have been the subject of a previous RTM which terminated in the preceding two years. In which case the RTM company would have apply to the Tribunal for permission to proceed.
They have not made recommendations in the following terms that they had consulted around:
- If a leaseholder or landlord applies to appoint a manager due to poor management by the RTM company then the tribunal should take into account the level of participation in it.
- Where the RTM company and landlord agree that RTM should be terminated but it doesn’t have the support of all the qualifying tenants then they should be approved by the tribunal to protect the minority.
- Where an application to restore the RTM company is made within 30 days of strike off then once restored it should be able to apply to the tribunal for their management functions to be restored to it.
- The regime enabling the appointment of a manager is proposed to be extended to leasehold houses and buildings containing just one flat to match the premises that qualify for RTM.
- The landlord should have the right to apply for the management functions to be transferred back to the default party under the lease or for a manager to be appointed while the RTM and its company are in existence.
Conclusion
In conclusion, if the government implements reforms in line with the recommendations then:
- Leaseholders of houses and flats above shops, for example, will welcome the extension of the right to them. If house leaseholders do not want to wait, then their alternative is to enfranchise the freehold.
- Leaseholders will welcome the ability to make a multi-building RTM claim and the flexibility around this however it may not be worth waiting for unless, for example, there are significant potential complexities around management of external parts.
- The process changes to limit the ability for landlords to challenge claims is useful for leaseholders but shouldn’t be a reason to delay making a claim, particularly in a straight forward matter.
- The proposed improvement in the provision of management information will help leaseholders, particularly for larger blocks, but probably shouldn’t put off flat owners applying at this stage as they can often obtain that information voluntarily between new and existing managing agents.
- Costs changes are a boon for leaseholders, but the exclusion of the obligation to reimburse the landlord’s non litigation costs may not be worth waiting for when compared to hoped for service charge and management cost savings.
- Shared ownership leaseholders will welcome the clarification that they can participate whatever equity share they currently hold.
- Leaseholders of Live-work units will welcome the clarity around their rights.
- Resident landlords may be upset to have management control rested from them where they currently aren’t exposed to that risk.
- The ability to claim control of management in respect of smaller elements of a building than is currently possible may be of use to some leaseholders struggling to obtain participation from the larger building.
- The changes around the RTM company itself should enable more claims to get off the ground where freeloading is a problem.
- The removal of the need to give notice of invitation to participate will make the process more efficient, less costly and reduce the risk of costly litigation.
- The improvement and provision of the management information will be welcomed by leaseholders but may leave some with wasted costs where they then don’t proceed.
- Creating clarity around management contracts will be welcomed by all.
- The provisions for potential change around buildings insurance will be welcomed by landlords alike as this is often an issue.
- Extending the right to buildings with only 50% residential element is a boon for those leaseholders. Arguments around the comparative floor areas will remain.
- Improving management quality should increase leaseholders confidence and so boost participation and take up of the right.
- Landlords will not welcome the increase in their irrecoverable costs i.e. being unable to recover their non litigation costs and the onus being put on them now to notify other parties of the claim.
- Cash flow can be a big issue for leaseholders and so knowing the uncommitted service charge fund will be credited on time is very helpful for them.
- Leaseholders needing consent to sell or alter will welcome the streamlining of this process.
- Being able to validate a claim and to terminate one is helpful for leaseholders in particular.
Mark Vinall, Partner at Winckworth Sherwood
