Right to Manage – Will you benefit from the potential reforms?

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 it 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 that 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. if regards 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 has consulted. It is currently finalising its recommendations for reform. They had planned to publish their recommendations in Spring 2020 but there is to be a short delay in view of the Covid-19 pandemic.

Ideas consulted on and the recommendations that may follow

Flat owners and landlords alike may wonder what proposals the Law Commission consulted around as regards the recommendations that may be made to Government to understand how it may affect them in their particular situation. These are set out below:

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, 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.

Proposals for reform in this regard around which there has been consultation as above are:

• Extending the RTM to leasehold houses.

• 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.

• Reducing the number of qualifying tenants required from two thirds to one half to bring more buildings within the scope of RTM. As a minimum qualifying tenants equating to half of the flats in the block would need to be members of the RTM company.

• To abolish the requirement that there be two residential units held via qualifying tenants so that a single flat owner above a shop or in a building with another flat not held by a qualifying tenant or a house leaseholder could qualify.

• Remove the 25% threshold for non-residential element of the building and replace it 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 proposed 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.

• National Trust property – currently this is not exempted from the RTM. It is concerned that if the rules are relaxed to allow house leaseholders to exercise the RTM then they could lose control of external property losing connection with it such as listed parks and conservation areas. So there is proposed to be an exemption from the RTM for National Trust properties.

• Live/work units – these do not qualify for the RTM under the existing legislation but it is poorly drafted such that it only constituted 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 proposed to be replaced with one that operates where the lease prohibits residential use so that only they are excluded.

Estate situation

Multiple buildings are 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 and so it is proposed 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 couldn’t be forced on them. Blocks who participated originally would be able to break away from the estate wise management after a minimum period.

Voting rights are not proposed to be changed despite the risk of larger blocks dictating management of the smaller ones on the estate where a single RTM claim in respect of all of them is made. The right to breakaway would be the solution for an unhappy smaller block of course.

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 and so 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.

To meet this issue it is proposed that external land exclusive to a given building or buildings within an RTM claim should always be transferred on acquisition of the RTM. Where it is shared then it is proposed the automatic transmission of management function no longer apply and that instead it remains with the landlord unless the parties agree an alternative arrangement or the tribunal determines that.

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.

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 Government is undertaking work to set professional standards for managing agents and so the RTM consultation questions whether it should be mandatory for RTM companies to use a managing agent which meets the regulatory standards that may be set in this regard. Potential triggers for a requirement along these lines might be the proportion of non-residential premises, their size and any special characteristics i.e. if it is a listed building.

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 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 proposed that the invitation to participate be removed as a requirement. Qualifying tenants are entitled to become members at any time so 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 and as to any special arrangements for management of non-exclusive external property.

Notices – to avoid satellite litigation around notices it is proposed the tribunal be able to waive any requirement or allow an error to be fixed and that grounds for challenge of notices be reduced and to allow a single officer of the RTM company to sign notices on its behalf, permitting prescribed notices to be given by email to certain categories of email addresses and improving the deemed service provisions around this. The circumstances in which a claim notice can be deemed withdrawn are also to be reduced the landlord instead having ability to apply for strikeout.

Missing landlords – where the landlord’s identity is known but the address is not then potential proposals include the RTM company having to undertake some pre-service checks and to place an advertisement in the London Gazette before being able to apply to the tribunal for a determination for acquisition of the RTM.

Date of vesting of management – while the RTM company might specify a date in their claim notice that they prefer to take over management on, this can be put back by the landlord giving a counter notice that is negative. Proposals may include giving the RTM company the right to apply to vary the date and to provide a mechanism for it to be determined if it is not set out in the claim notice as it should be.

Management information and contracts

A prescribed form of information notice is proposed with it either being given alongside the claim notice with an obligation for the landlord to provide the information alongside its counter notice or to allow the RTM company to serve this in advance of making a claim i.e. where it is needed as regards external property to decide whether to make the claim with a 28 day period for response with the possibility for extension in exceptional circumstances. 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.

The landlord would be under an obligation to notify the RTM company of any immaterial changes to the information provided or perhaps on the date management vests to confirm there are no material changes which haven’t been notified.

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.

So it is proposed that details of the contracts be provided as part of the information notice procedure plus copies of the contracts themselves and that at that time the landlord give notice to the relevant contractors of the RTM claim but without the statement the contract will automatically terminate, for the RTM company to then start negotiations with them or new contractors to then tell the landlord which if any are to be continued for it in turn to notify the contractors of the position.

Problems around the Transfer of Undertakings (Protection of Employment) Regulations 2006  (TUPE) were noted and further feedback sought as regards the management function including caretakers or other employees of the landlord having a right to occupy a flat in the building.

Management functions

It noted that the RTM company only acquires the functions imposed on the landlord by the lease as opposed to enhancing them by for example granting the RTM company the ability to carry out improvement works were the lease doesn’t provide for that. So there may be reform in this area.

Regulated activities

They asked whether regulated activities i.e. personal care or transport services that are governed by the Care Quality Commission should be excluded (as opposed to that the right to manage being excluded with regard to the building concerned).

Insurance

Various technical proposals are to be considered including 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, entitling the landlord to demand a copy of the new policy within 21 days, to clarify that the management functions include reinstatement so that insurance can be taken out for this and enabling the landlord to ensure the property is not underinsured.

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 50% of the estimated accrued uncommitted service charge funds on that date with the remainder payable within six months. Landlords will be required to use reasonable endeavours to pursue service charge arrears accrued prior to that date and pay over funds received to the RTM company.

Lease consents

Flat owner’s applications for consent to carry out alterations, keep a pet or sublet where that is required under the lease terms invokes a procedure currently whereby the application 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 within 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.

Potential amendments to the procedure involve the RTM company and landlord jointly instructing advisors to reduce the costs or changing the procedure to require the initial application to be made to both the RTM company and landlord.

Dispute Resolution and costs

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 feared 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 provisional proposals include giving the tribunal exclusive jurisdiction over disputes and enforcement relating to RTM, considering whether mediation or arbitration might be helpful at any stage and looking at whether the RTM company should continue to make any contribution at all to the landlord’s costs and if so how that can be limited i.e. to a fixed amount. As regards litigation, they propose each party bare their own costs save in the case of unreasonable behaviour. There should be a presumption in favour of preventing the landlord recovering litigation costs of either service charge.

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 proposals are made that:

1. 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,
2. In the case of termination there should be expressed provision as to who becomes responsible for management then with the default position being that it returns to the party the lease provides for or failing that the landlord,
3. 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.
4. Where an application to restore the RTM company is made within 30 days of strikeoff then once restored it should be able to apply to the tribunal for their management functions to be restored to it.
5. 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.
6. The RTM company should have the right to apply to the tribunal to give up the RTM and for management to transfer back to the default party under the lease or a manger to be appointed then.
7. 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.
8. Where the RTM ceases the landlord should be able within the following 30 days to have a manger appointed as opposed to management reverting to the default party under the lease.

Conclusion

• In conclusion if recommendations are made and implemented along the lines of the proposals consulted upon then:
• The right will be extended to leaseholders of houses and a single qualifying tenant in a building.
• Reducing the number of qualifying tenants required from two thirds to one half and removing the 75% minimum residential element will bring more buildings within the scope of RTM.
• The ability to make a multi-building RTM claim may be worth waiting for if there are significant potential complexities around management of external parts for example.
• The process changes to limit the ability for landlords to challenge claims is useful but shouldn’t be a reason to delay making a claim.
• The proposed improvement in the provision of management information will be helpful particularly for larger blocks but probably shouldn’t put off flat owners applying at this stage as often they can obtain that information voluntarily between new and existing managing agents.
• Costs changes may tilt the piece in favour of leaseholders but leaving aside of the possibility of a very draconian fixed fee regime or the exclusion of the ability to recoup costs at all for landlords this isn’t a good reason to delay for flat owners as the current level of costs once socialised between the applicants can be small in any event.
• Shared ownership leaseholders will welcome the clarification that they can participate whatever share they currently hold.
• Leaseholders of Live-work units should not be affected
• 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 then is currently possible may be of use to some leaseholders struggling to obtain participation from the larger building and will give them peace of mind that they are not at risk of costs in a fight to assert their right as they may do currently.
• The changes around the RTM company itself will stop claims being frustrated 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.