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Right to Manage – Is It Right For You?
Whilst Right to Enfranchise may often be seen to be the ultimate answer for leaseholders – it is costly, as you’re buying an expensive investment. A large number of leaseholders cannot afford to go down the enfranchisement route, so they look for the next best thing. Right to Manage [RTM] is the alternative route that most opt for. It’s good but has some limitations.
Right to Manage came into existence with the enactment of The Commonhold and Leasehold Reform Act 2002. It allows leaseholders (in certain circumstances, outlined below) to take over the management of their building – to take control of the management clauses of their leases – via a specially formed company. The process does not involve buying the freehold title, and thus it is a far cheaper process than Right to Enfranchise [RTE]. Consequently, it is the most popular route for leaseholders with a ‘troublesome’ freeholder and/or freeholder’s managing agent.
The starting point with RTM is very similar to that of RTE;
Does The Building Qualify?
This article is purely a guide, so we won’t go into the very fine detail of the law here. That would be too lengthy and too boring a read. But in short the building qualification hurdles are:
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At least 2/3rds of the flats must be let to ‘qualifying tenants’.
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Commercial floor area (if any) must be below 25% of the total internal floor area.
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The immediate landlord must not be a local housing authority.
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The “Resident Landlord Exemption” must not apply.
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A minimum of 50% of qualifying tenants must participate.
Note: There are some other exemptions, so seek specialist advice from a leasehold specialist lawyer.
It is useful for leaseholders to elect a ‘project management team’ to co-ordinate actions and to communicate with the lawyer. This reduces confusion and (importantly) lawyer fees. A group of two or three normally does the job – alongside regular meetings with all participants.
Get A Fighting Fund
Although RTM is far cheaper than RTE, there will be costs and those need to be paid promptly. Principally those costs will be lawyer’s fees and the cost of incorporating the Right To Manage Company [RTMCo].
The other problem which a fighting fund solves, is people saying ‘yes’ but actually doing ‘no’. If people are really committed to the project, they will put their hand in their pocket and they will contribute to the fighting fund. If they don’t pay – they’re not committed and won’t participate. Knowing who is committed and who is not, is vital for getting past the “minimum of 50%” qualification hurdle mentioned above.
Gather Information
The next thing to do is to gather all the information that the lawyer (and you) will need. This includes:
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The lease for each flat > NOT a standard generic lease.
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Lease plans for each flat.
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Photographs of the building – all exterior elevations.
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The full names of all leaseholders, as confirmed by the documents.
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Contact details; address, email, phone, etc.
You’ll also need contact information for all occupiers; e.g. tenants of leaseholders … as the process usually involves gaining access to all flats at some point.
The Right to Manage Company [RTMCo]
RTM is exercised by your specially formed company, not by the leaseholders directly. Therefore, shortly after the lawyer has been instructed, a new RTMCo needs to be incorporated.
The Articles of Association for an RTMCo are prescribed in the Commonhold and Leasehold Reform Act 2002 (as amended) and therefore you cannot use a ‘company off the shelf’. Statutory Instrument 2009 No.2767 refers.
Not all qualifying members are needed to form the company, so the ‘project management team’ can usually fulfil the role of initial directors.
Notice Inviting Participation
The RTM process is fairly simple BUT VERY PRECISE. You and your lawyer need to ensure that process is followed absolutely correctly – otherwise you’re annoying freeholder will have legal grounds for dismissing your claim. That’s one of the reasons for using a qualified leasehold specialist lawyer, not any old local solicitor.
In brief, there are several criteria which affect the validity of the Notice Inviting Participation;
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ALL qualifying leaseholders are entitled to become members of the RTMCo.
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The notice must be in writing (hard copy, not email).
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The notice must be in the prescribed form.
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The notice must be served on ALL qualifying leaseholders who are not already members of the RTMCo.
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The notice must state the RTMCo intends to acquire the right to manage (the specific building).
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The notice must state the names of the (current) members of the RTMCo.
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The notice must invite the recipient to become a member of the RTMCo.
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The notice must provide other information required by the regulations; e.g. company number, registered office, director names, freeholder/landlord name.
Plans and Budgets
The legislation does not require the RTMCo to produce a business plan or budget, nor to provide information about how it intends to manage the property. However, it is prudent for the ‘project management team’ to do so – as this is usually important information which leaseholders ask for before agreeing to become a member of the RTMCo.
A prudent group will therefore instruct a managing agent to assess the building’s needs, analyse the historic service charge financials, and then prepare a fully costed service charge budget. That is a fair amount of work and the managing agent will probably need to make a charge for the time involved, and their expert advice.
The notice inviting participation needs to state if there will be a managing agent employed, or if the RTMCo will ‘self-manage’. It is therefore important to make decisions early on in the process and to instruct a managing agent early on also.
A prudent group of leaseholders will have a detailed service charge budget AND the cash to fund the RTMCo’s expenses for the claim process … AND enough cash to fund the service charge expenditure over two or three months (in case funds are not transferred quickly by the outgoing managing agent).
Notice of Claim
The right to manage claim may only be exercised where:
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The building complies.
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The RTMCo meets the statutory requirements.
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Membership of the company comprises the qualifying leaseholders of at least half of the flats in the building.
The claim may not be served until 14 days after service of the Notice Inviting Participation.
The notice must be served on:
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The landlord of the whole or any part of the building.
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Any intermediate landlords.
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Each qualifying leaseholder in the building.
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Any parties to the lease other than leaseholders; e.g. a named Management Company … or First-tier Tribunal appointed Manager.
The form of the Notice of Claim is prescribed; i.e. the legislation requires specific information to be included, otherwise the notice will be invalid. The Notice must:
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Specify the premises.
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Include a statement of grounds on which the premises qualify for RTM.
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State the names and addresses of qualifying tenants and RTMCo members.
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Profive sufficient details to identify each qualifying tenant’s flat, and provide lease terms.
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State the name and address of the RTMCo’s registered office.
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Specify a date (more than a month after the claim) for any counter-notice.
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Specify a date (more than three months after counter-notice) on which the RTMCo intends to take over management.
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Other requirements apply > Statutory Instrument 2010 No.825.
Absent Landlords
There are some cases where a landlord is ‘absent’ and their whereabouts are unknown. In these cases, an application can be submitted to the First-tier Tribunal (Property Chamber) if the property is in England … or the Leasehold Valuation Tribunal in Wales, if the property is in Wales.
Right of Access for Inspection
Although the leaseholders may know their building from an occupation viewpoint, they may not have access to nor have an understanding of all parts of the building – particularly with larger more complex buildings, which may include an element of commercial or retail units. In some cases therefore, there is a need to inspect areas of the property which are not normally accessible to residents and leaseholders.
Section 83 of the Commonhold and Leasehold Reform Act 2002 provides for “any person authorised to act for the RTMCo” to inspect any flat and/or part of the building. At least 10 days advance notice must be provided to the occupiers of that part of the building; e.g. tenants of leaseholders.
This right of access is only available after service of the Notice of Claim.
Landlord’s Counter-Notice
It should be remembered that the vast majority of freeholders/landlords do not want to have the management of their building taken away from them. They might be upset by the RTM claim and thus might fight by every legal means to ensure the claim fails.
The first chance the landlord has to dispute the RTM claim is via the landlord’s counter-notice. There are only two possible responses to the claim by the landlord, either:
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Agree with the RTM claim.
Or
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Allege reasons why the RTMCo is not entitled to proceed.
If the landlord admits the right, then management passes to the RTMCo on the date specified in the Notice of Claim. The participant leaseholders breathe a big sigh of relief if the landlord reacts in this way.
If the landlord disputes the right (which is far more commonly the case), this can only be on the grounds that:
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The building does not qualify.
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The RTMCo does not meet the requirements.
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The members of the RTMCo do not represent half of the flats in the building.
Or
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The required process has not be followed correctly.
Application to the First-tier Tribunal
If a dispute arises between the landlord and the RTMCo about the validity of the claim, the RTMCo may submit an application to the First-tier Tribunal (or in Wales, the Leasehold Valuation Tribunal). That application must be submitted within two months of the counter-notice.
If the application is not submitted to the Tribunal within the two month deadline, the claim will be deemed withdrawn.
The Tribunal will then determine the issue and will provide directions for the parties.
If the parties dispute the Tribunal’s findings, there is a right of appeal to the Upper Tribunal (formerly the Lands Tribunal) … by leave of the First-tier Tribunal or Upper Tribunal.
Landlord’s Costs
The legislation requires the RTMCo to reimburse the landlord’s costs incurred in dealing with the claim. This applies even if the claim fails and/or does not proceed.
Landlord’s Membership of the RTMCo
If the RTMCo succeeds in its claim and takes over management of the building, the landlord is then entitled to become a member of the RTMCo. The landlord has full voting rights, determined by the number of units/flats held in the building. If no units/flats are held, then the landlord has one vote.
This right extends to intermediate landlords too.
Management and Supplier Contracts
When the RTMCo succeeds in its claim, the landlord is no longer in a position to fulfil existing contracts for the management of the building. Those contracts become ‘frustrated’ in legal terms and must end.
The landlord is required to serve notice on contractors and suppliers:
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To identify the relevant contract.
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Must include a statement that the RTM is to be acquired by the RTMCo on [date].
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Must include the name and address of the RTMCo.
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Must include a statement advising the contractor or supplier who wishes to continue, to contact the RTMCo.
These notices must be served “as soon as practicable” … but because there is a three month gap between the determination date and the acquisition date, there is plenty of time for the notices to be prepared and served before the transfer of management.
Landlord’s Duty to Transfer Funds
It is the landlord’s duty to transfer service charge funds to the RTMCo (usually care of their managing agents) “as soon as practicable after the acquisition date”. An upset or difficult landlord may not rush to complete that task – which is why the RTMCo needs to ensure it has sufficient funds collected in order to deal with management for initial months of the new setup. The project management team must therefore PLAN AHEAD!
Registration of the Right To Manage
The RTM is not registrable at HM Land Registry. But there is a need/desire to potential flat purchasers of the situation. Consequently the affected freehold title (and/or intermediate leasehold title) can have an entry added by the Registrar. Rule 79A of the Land Registration Rules 2003 refers.
Management Functions and Responsibilities
RTM does not permit the leaseholders to take over all functions previously performed by the freeholder/landlord. It only allows for the RTMCo to take over the ‘management’ clauses of the leases. That sometimes causes confusion and subsequent disputes.
In outline the RTM includes:
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Repairs, redecorations, maintenance of the building structure and common parts, including cyclical maintenance and maintenance of plant.
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Improvements to the building (only where allowed by the leases).
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Provision of services – lighting, cleaning, gardening, caretaking, etc.
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Arranging buildings insurance.
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Levying and collecting service charges, accounting, etc.
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Compliance with statutory requirements relating to management; e.g. Health & Safety.
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Day-to-day management of the building.
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NOT management of non-residential parts of the building.
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NOT functions relating to forfeiture and possession.
In Summary …
Right to Manage claims are complicated, because the minutia of the law is very detailed and must be followed precisely.
Most landlords will challenge the process and/or compliance with the process.
Specialist lawyer assistance is strongly recommended.
Once Right to Manage is acquired, STAY WITHIN THE BOUNDARIES and don’t try to take over non-management functions performed by the landlord. Costs expended on such items will not be recoverable and could lead to a ‘black hole’ in the finances.
But having said all that – Right to Manage is a useful and relatively cheap process for dealing with poor management and/or a poor freeholder. Yes, it needs careful consideration and planning – which is why the assistance of a professional managing agent is recommended.
At Casserly Property Management we don't project manage RTM claims. However, we can provide an analysis of the historical finances and the current management requirements of the building – and we will provide a detailed service charge budget for a RTMCo. We charge a fee for these services, agreed in advance, and payable upon delivery of the documents (not upon successfully acquiring RTM), so do contact us if you need those services.
Alternatively, if you'd like to schedule a free consultation to discuss the specifics of your situation, please use the button, below.
Finally, the need for a Specialist Leasehold Lawyer is mentioned several times in this article, if you'd like an introduction to one or two who we would recommend, just click the button, below, and complete the pop-up request form.
Best wishes,
Paul
Paul Casserly
Casserly Property Management
P.S. If you've found this article interesting, informative or useful in any way, please share it using the following links. And I'd love to hear your thoughts, as well. Just leave your comments below. Thank you.
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