The Law Commission has completed its consultation on proposals to make the right to manage process more accessible, simpler, quicker and less uncertain.
The right to manage created by the Commonhold and Leasehold Reform Act 2002 gives flat owners holding long leases of their flats acting collectively to take control of the management function under their leases and so appoint a managing agent to undertake those functions under their direction instead. It is a “no fault” right and so flat owners do not need to prove mis-management by their existing landlord.
The Law Commission has reviewed the existing rules and put their proposed changes out to consultation following feedback that:
- The original system was seen as too technical, slow, restrictive, uncertain and expensive. For example small errors in complying with the procedural requirements were said to delay the process significantly or even prevent leaseholders from acquiring the right to manage.
- Delays have been experienced by right to manage companies receiving information necessary for them to manage the building effectively such as the insurance history.
- It is restricted to blocks of flats so those holding their houses via a lease couldn’t enjoy this benefit.
- Those with buildings comprising more than 25% commercial or other non-residential space were disqualified.
- There is uncertainty around who has control over the management of areas used in common by a number of blocks such as gardens and car parks.
The proposals are considered below. The consultation closed on 30 April 2019. The Law Commission is now analysing the response.
The proposal is to extend the RTM to leasehold houses.
They are consulting as to how to define a “house” for this purpose with the potential that a looser definition will be used for this purpose as compared to the banning of sale of houses on a leasehold basis; the right to manage might be available where for example there is a material overlap with another building where that isn’t anticipated to cause practical problems regarding management.
This is also a lower bar than flat owners face in a collective freehold enfranchisement claim so there may be situations where a small group of flat owners can obtain the right to manage in respect of their element of a larger building but not the freehold to it.
Currently at least two-thirds of the flats in a given building need to be held by qualifying tenants.
It is proposed that this be reduced to 50% to bring more buildings within the scope of the RTM.
So investors who had purposely kept just over one-third of the flats in a given building so as to retain control of management would be defeated in their intention. This may be a problem if some of the problems from the landlord’s point of view are not remedied such as those around insurance.
Extension to buildings containing only one flat
Currently the right to manage is only available where the building contains at least two residential units held by qualifying tenants.
Removing that minimum would allow a single flat owner to exercise the right where there are other units in the building.
Bringing buildings containing 25% or more non-residential parts within the RTM
Currently the right to manage is not available where the relevant building contains 25% or more non-residential element ignoring common parts.
It is proposed to remove that exclusion and to balance that out with a requirement that the RTM engage professional managing agents in those circumstances.
Shared Ownership Qualification
It is proposed that shared ownership leaseholders should be regarded as qualifying tenants for the purpose of the RTM whether or not they have staircased to 100% yet on the basis that they pay all of the service charge in respect of the given flat.
Currently where there is a resident landlord and certain criteria are satisfied in this regard the RTM will not be available. It is proposed that this exemption be removed.
Effect of Split Reversion
Currently where parts of the building are owned by different freeholders and there is a self-contained element to the building (so there is a clear vertical division and the given part could be independently redeveloped) then separate RTM claims need to be made in respect of each part of the building.
It is proposed that this requirement be removed so that the entire larger envelope of building can be managed as one by a single RTM company with the Tribunal being given the power to reconcile lease issues in this regard.
National Trust Property
The National Trust were concerned that with the extension of the RTM to leaseholders of houses that is also proposed those leaseholders could become responsible for external property such as listed parks and conservation areas which they wouldn’t be in a position to maintain.
So it is proposed that National Trust property should be exempt from the RTM.
Business Tenancies such as live/work units
Currently live/work units can float in and out of qualification over time as this is based on whether their lease constitutes a business tenancy – so if a unit is sub-let then the tenant can bring themselves within the qualification.
To bring certainty it is proposed to define the exclusion as being tied to leases that prohibit residential use (as opposed to permitting business use).
Currently the RTM cannot be exercised in respect of a number of buildings together; it has to be exercised in respect of each building separately.
As it can be beneficial to manage an estate (or at least a number of blocks that share external common parts) as one it is proposed that the RTM be capable of being exercised in respect of a number of buildings, where they contribute to a common service charge and/or share the use of the same external property such as gardens or car parks.
It will still be possible for individual blocks to exercise the RTM. House leaseholders may participate so that you have a “pick n mix” claim. Other blocks wishing to join the RTM after the event would need consent from the original RTM.
Each building would need to meet the qualification and participation criteria so one or more buildings can’t corrupt others. A break away situation is proposed to be permitted.
No change to the voting rights is proposed where a multi-building RTM claim proceeds due to the “unjustified additional complexity in cost” envisaged.
Shared External Property
Currently an RTM claim brings with it control of external property a given block shares, the use of which can leave multiple parties with responsibility for the same land which is not satisfactory.
It is proposed that external land that is exclusive to the relevant building will fall within the RTM claim but that land which is used in common should remain the responsibility of the relevant landlord unless the parties agree an alternative arrangement or the Tribunal makes a determination to that effect.
It is proposed that the rule against an RTM company existing where one has already been set up be abolished to avoid a claim being frustrated by tactical company formations.
Instead service of a claim notice by an RTM company will be the trigger for excluding another claim.
AGMs are to be required to ensure company members can participate in decision making. Pre-training is to be encouraged to ensure knowledge of the regime and obligations.
RTM companies are to be able to recover their reasonable management costs from leaseholders as part of the service charges if the lease had allowed for it (they can’t currently).
There are a number of criticisms around the procedure and notices.
It is proposed to abolish the requirement to serve a notice of invitation to participate due to the satellite litigation that has arisen around this and the limited importance of being invited when you can join after the event.
Where no counter notice is given there is deemed to be no dispute with regard to entitlement. That removes the ability to obtain determination that a claim is valid and so protection from challenges to the RTM made in future. So it is proposed that the RTM company be able to apply to the Tribunal for a determination as to entitlement, validity of claim and any special arrangements as regards shared external parts.
To close off satellite litigation around errors in notices it is proposed that the Tribunal be given power:
- to waive any requirement or to allow a notice to be fixed subsequently;,
- to reduce the grounds on which a notice can be challenged;,
- to enable a signature of a single officer for the RTM company to suffice; and
- to enable email service for certain categories of email address with deemed service provisions and rules to deal with missing landlords.
It is proposed that the RTM company be able to set a convenient acquisition date in certain circumstances i.e. to fit in with the end of the relevant service charge year and to fix one where this was omitted in the claim notice.
The entitlement to receive management information on the date management vests is seen as unsatisfactory and so proposals around provision of it earlier are made with related rules around giving notice to contractors.
TUPE issues are to be considered and proposals may be made.
For retirement accommodation it is proposed that the management functionsthe RTM company acquires excludes regulated activity such as the provision of care.
Currently the RTM becomes obliged to insure the premises on the date management vests and the landlord retains the right to continue insuring the premises at its own expense.
RTM companies sometimes struggle to obtain insurance, there are technical concerns around their ability to insure and Landlords can struggle to obtain evidence that the RTM company is insuring and doing so on adequate terms. It is therefore proposed that:
- the RTM company be given the current insurance policy and claims history along with last valuation to aid their being able to place insurance on risk;
- the landlord be entitled to request a copy of the insurance contract within 21 days of request; and
- clarity be given around the RTM company’s insurable interests and the ability created with the landlord to have the RTM company amend the insurance.
Uncommitted Service Charges
Currently the uncommitted service charge fund must be handed over on the date management vests or as soon as possible after that.
There have been issues around the time it has taken to make those payments and shortfalls caused by leaseholders being in arrears and the landlord having no obligation to recover the arrears and pass them on to the RTM company.
So it is proposed there be an obligation on the landlord’s part to pay the RTM company 50% of the estimated accrued uncommitted service charges by the acquisition date with the balance payable within 6 months and that the landlord had to use reasonable endeavours to pursue service charge arrears and account to the RTM company for them.
The statutory process around applications for consent under a flat owner’s lease isn’t well understood; the application should be made to the RTM company. It then has to consult with the landlord allowing a prescribed period of time for landlord objections depending on the nature of the consent application.
It is proposed that perhaps the RTM company and landlord jointly instruct an advisor to reduce costs or that the flat owner application be made to both the landlord and the RTM company or that the RTM company be obliged to pass on the application to the landlord within a set time.
Dispute Resolution and Costs
It is proposed that the First-tier Tribunal be given exclusive jurisdiction over RTM disputes and enforcement.
It is asked whether the RTM company should make any contribution at all to the landlord’s costs and if so how that could be limited i.e. by setting fixed fee.
It is proposed that each party bear their own costs of litigation absent unreasonable behaviour or wasted costs on either side and that there be a presumption in favour of an order under section 20c preventing landlords recovering their litigation costs from leaseholders through the service charge.
Termination of RTM
It is proposed that if the landlord or a leaseholder applies for a manager to be appointed due to poor management by the RTM company that the Tribunal take into account the level of participation in the RTM company and that in the event the RTM is terminated there is express provision as to who becomes responsible for management after that. The suggested default position being that management reverts to the party responsible for management functions under the lease and absent their existence that they revert to the landlord.
Where the RTM company and landlord want to terminate the RTM but this doesn’t have the support of all of the qualifying tenants then it is proposed that Tribunal approval be obtained to protect the interests of the minority.
Where the RTM company is struck off the register of companies and an application for restoration made within 30 days then it is proposed the RTM company once restored should be able to apply to the Tribunal for the management functions to be restored to it, as it is not clear whether the Tribunal currently has jurisdiction to make that declaration.
The regime for the appointment of a manager currently doesn’t apply to leasehold houses or buildings containing a single flat. It is proposed that it be extended to apply to any premises the RTM is available in respect of to reflect any extension in the availability of the RTM pursuant to the other proposals.