by Jen Lemen
Hot Topic Highlight - Right to Manage Consultation
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What is this week's blog about?
This week, Jane Forsyth BA (Hons) MRICS, FIRPM considers the highlights of the Law Commission’s open consultation on Right to Manage.
A Chartered Surveyor, qualified (non-practising) solicitor and a Fellow of the IRPM, Jane contributed towards the Commission’s research and is one of the stakeholders named in the consultation document.
Who is consulting and why?
The Law Commission is an independent organisation, which proposes programmes of law reform to the Lord Chancellor.
The Commission’s current 13th programme of reform includes residential leasehold law, and provisional proposals to reform the statutory Right to Manage.
The Consultation reflects raised awareness of leaseholder rights as a social, economic and political hot topic. This is particularly of interest to residential RICS APC and AssocRICS candidates for the Spring 2019 assessments.
What is Right to Manage?
The Commonhold and Leasehold Reform Act 2002 created the Right to Manage (“RTM”).
RTM grants leaseholders of flats the right to take over the management of their block. The distinctive characteristic of RTM is that leaseholders do not have to prove that the landlord was at fault.
How is RTM exercised?
RTM applies to qualifying leaseholders of qualifying blocks, provided the correct procedure is followed. Broadly, a leaseholder qualifies for RTM if their lease was granted for a term exceeding 21 years.
Qualifying blocks must:
- Be a detached building or self-contained part of a building comprising two or more flats
- Comprise no more than 25% non-residential use, based on the total floor area excluding common parts, with at least two thirds of the flats held by qualifying leaseholders
The RTM does not apply if a local housing authority is the immediate landlord of any qualifying leaseholder, or if the block is a conversion of four or fewer flats with a resident landlord.
The right must be exercised via a Right to Manage Company. This is a company limited by guarantee with prescribed Articles of Association. The Company issues a Notice of Invitation to Participate to qualifying leaseholders, followed by a Claim Notice to the Landlord.
The claim can only be validly exercised if membership of the RTM Company comprises the qualifying leaseholders of at least 50% of the flats in the block.
The Landlord may serve a Counter Notice, either admitting the claim, or stating that the RTM Company is not entitled to exercise the right to manage.
Disputes are resolved by the First-tier Tribunal (Property Chamber) and the RTM Company also has rights of access and to obtain information in relation to the claim.
If no Counter Notice is served, the RTM Company will be entitled to take over the management on the date specified in the Claim Notice, which must be at least three months after the date for service of the Counter Notice.
Once the Right to Manage has been exercised, the landlord is entitled to membership of the RTM Company, and remains entitled to the remedy of forfeiture and to receive ground rents.
What is the RTM Company responsible for?
The RTM Company takes over responsibility for enforcing leaseholder covenants and managing the block, including maintenance and repairs, insurance, collection of service charges and provision of services under the leases. Contracts in existence prior to the management takeover will lapse allowing the RTM Company to enter into new contracts.
If the leases require the landlord’s consent e.g. to alterations, assignment or subletting, the power to grant consent passes to the RTM Company.
However, the Company must notify the landlord of applications for consent. If the landlord objects to consent being granted, application may be made to the First-tier Tribunal (Property Chamber) for a determination.
What are the issues with Right to Manage?
The consultation highlights several issues:
- The procedure is too technical, so small mistakes can cause delays, and can lead to the right being challenged or even defeated
- Delays in the provision of information can mean that RTM Companies are sometimes poorly prepared at the handover date
- Delays in the transfer of service charge funds to the RTM Company, and the inability of RTM Companies to recover arrears arising before the hand-over, can cause financial difficulties
- It can be expensive as leaseholders have to pay landlord costs
- RTM Companies cannot manage multiple blocks as the right only applies to single buildings or self-contained parts of a building. This means that on multi-building estates there may be more than one RTM Company, which can make it difficult to co-ordinate estate-wide management and potentially duplicates and complicates management roles
- The extent of the obligations passing to the RTM Company can be unclear, for example if there are shared facilities such as gardens or car parks
- There are concerns about the validity of insurance policies taken out by RTM Companies, which do not own the properties they manage
- RTM is a limited right; it does not apply to houses, to blocks with more than 25% non-residential usage, or if qualifying leaseholders own less than two-thirds of flats in the block
- There have been instances of abuse of process. There can only be one RTM Company per block so if a landlord or managing agent sets up an RTM Company it will prevent leaseholders setting up their own company; their right to do so may in effect be ‘hi-jacked’
What are the proposed reforms?
The proposals under consideration are intended to make the procedure simpler, quicker and more flexible.
- Extending RTM to leasehold houses
- Abolishing the requirement that there must be at least two residential units held by qualifying leaseholders
- Reducing the proportion of flats held by qualifying leaseholders from two-thirds, to 50%
- Allowing RTM companies to manage blocks with over 25% non- residential usage
- Allowing multi-building RTM on estates
- Preventing 'bogus' RTM Companies ‘hi-jacking’ leaseholder rights to manage, by replacing the rule that there can only be one RTM for a block, with a new rule that once an RTM Company has served a Claim Notice, no other RTM Company can do so until the claim has been withdrawn, or rejected by the Tribunal, or the Right to Manage, having been acquired, has ceased
- Simplifying the process for leaseholders e.g. by reducing the number of notices required and enabling the Tribunal to waive minor procedural errors
- Speeding up the process by introducing new deadlines and formats for the provision of information to RTM Companies
- Introducing a requirement that landlords: (a) pay 50% of the estimated accrued uncommitted service charges to the RTM Company by the RTM hand-over date; (b) pay the remaining funds within six months of hand-over , and (c) use their reasonable endeavours to pursue pre-handover arrears and pay money recovered to the RTM Company
- Clarifying insurance obligations e.g. regarding building reinstatement, and allowing a landlord to apply to the Tribunal if the RTM Company has under-insured
- Reviewing responsibility for the costs of acquiring the RTM
Do the proposals cover anything else?
The Law Commission is also asking for views on whether:
- The definition of a building should be expanded
- Free training should be made available to RTM Company directors to help them understand their responsibilities
- RTM Companies should be obliged to appoint professional managing agents in some circumstances
When does the consultation close?
The consultation closes on 30th April 2019.
The full 341-page consultation document, plus summaries and a response form are available here.
What will happen next?
The Law Commission will consider responses before deciding its final recommendations and presenting them to the Government.
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Stay tuned for our next blog post to help build a better you
N.b. nothing in this article constitutes legal or financial advice. It is also not a full explanation of the law or of the consultation.