From the date it acquires management, a RTM Company has the right to step into the existing landlord’s shoes under the terms of the leases in order to collect service charges from the leaseholders. However, in some circumstances a RTM Company might find it is unable to recover historic service charge arrears and other costs leading to a serious hole in its budget.
When a RTM Company acquires the Right to Manage, it is entitled to all of the service charges held by the landlord in the service charge account on the acquisition date. However, following the Upper Tribunal Lands Chamber’s decision in OM Ltd v New River Head RTM Co Ltd [2010] the landlord does not have to account for service charge arrears when it hands service charge money over.
If a leaseholder is in arrears prior to the RTM acquisition, the landlord will often use the service charge reserve fund to cover its expenditure and hand over the balance to the RTM Company. As a result the RTM Company inherits a shortfall in the service charge fund which it cannot recover.
As the service charges have been demanded prior to the acquisition of the Right to Manage, the right to recover the arrears remains with the landlord. However, provided it has been able to settle its expenditure, the landlord will have little incentive to take action. To force the landlord’s hand, leaseholders who have paid their reserve fund contributions and in effect funded their debtor neighbours would have to challenge the landlord under s.27A of the Landlord and Tenant Act 1985 on the grounds that they have been asked to contribute more than their fair share towards expenditure. This can be a lengthy process, and there is little the RTM Company can do itself to ensure that it inherits the ‘clean slate’ it is hoping for in the service charge accounts.
It is possible for the landlord to assign its right to recover historic arrears to the RTM Company but the RTM Company may be unable to recover the legal costs it incurs in doing so. Following an assignment, the RTM Company is entitled to bring a claim in the county court but is unlikely to be awarded costs where the claim is allocated to the Small Claims Track. The RTM Company might therefore consider whether the lease gives it grounds to recover its costs.
Many leases, however, only allow costs recovery where the cost is incurred in contemplation of forfeiture. Since the RTM Company does not acquire the right to forfeit, it may be unable to rely on such a clause, leaving it unable to recover its costs from the defaulting leaseholder.
For many leaseholders, RTM means the power for residents to decide the level at which service charges are set. However, it would certainly be wise for any leaseholders considering a Right to Manage claim to consider the service charges arrears situation at their building before exercising their rights.
Simon Masters is a Solicitor and Nick Scurfield is a Trainee Solicitor at CG Naylor LLP
