THE RIGHT TO MANAGE

HOW DO I DO IT?

THE RIGHT TO MANAGE UNDER THE COMMONHOLD AND LEASEHOLD REFORM ACT 2002

Who can exercise the Right to Manage?

It is available to those Leaseholders (known as “Qualifying Tenants”) who hold a Lease of their Flat which was granted for an original Term of more than 21 years and at least two thirds of the Flats within the relevant Building must be let to Qualifying Tenants

the Right to manage can only be exercised by a Right to Manage Company (“RTM Co”), which has to be set up by the Qualifying Tenants, and the members of such RTM, being Qualifying Tenants, must not be less than at least half of the total number of Flats in the relevant Building

in order to exercise the Right to Manage the Leaseholders do not have to prove any ‘failure’ by the Landlord in the management of their Flats

Does my Building qualify for the Right to Manage?

Whilst most Buildings containing residential Flats are likely to qualify, there are the following restrictions

your Building can contain commercial premises, that must not exceed 25% of the total floor area of the relevant Building (excluding the common parts) – the residential part of the Building must therefore comprise at least 75%

if the immediate Landlord of a Qualifying Tenant is a local housing authority then the Right to Mange cannot be exercised

the Right to Manage cannot be exercised if the Building benefits from the Resident Landlord exemption - basically, to gain such exemption, the Building must not be a purpose-built block; it must comprise not more than 4 Flats and one of the Flats must have been occupied by the Freeholder or an adult member of their family as their only or principal home for the last 12 months

Our development comprises more than one Building containing Flats, but they are all managed by the same Landlord/Management Company

The Right to manage only applies to individual buildings, so if there is more than one block of Flats on a development then a separate Right to Manage process will need to be undertaken in relation to each Block of Flats

What benefits will we get from exercising the Right to Manage?

Some of the benefits include:-

the RTM Co will then have control over the management of the Building
the potential to control the level of the Service Charge and reduce the cost of maintenance and repair works etc. (but the RTM Co must, nevertheless, ensure that the Building is adequately maintained)

Responsibilities transferred to the RTM Co will include:-

repair redecoration and maintenance of the structure and common parts of the Building
providing the services to the Building (heating the common parts, lighting, cleaning etc.)
arranging for Buildings insurance
demanding and collecting the Service Charge
dealing with the preparation of the Year End Accounts
complying with all statutory requirements relating to the management and fabric of the Building
the day-to-day management of the Building
dealing with Leaseholder’s requests approvals under their Leases (e.g. for alterations, subletting, pets etc.) – this will be limited to things which are permitted by the Lease ‘with the consent of the Landlord’ and although it will now be for the RTM Co to deal with the issue of such consents, they are required to inform the Landlord of their intention to issue any such consent and give the Landlord a set period of time (depending upon the nature of the request), to respond before issuing such consent. However, if the Lease contains an absolute restriction against the Leaseholder doing some act (for example to make structural alterations), the RTM Co would not be in a position to grant consent for that and would need to refer the request to the Landlord for them to issue any relevant consent
enforcing the Leaseholder’s covenants – the RTM Co will be under a statutory duty to ensure that the Leaseholders comply with their obligations under the respective Leases and to take enforcement action upon any breach – if such breach is not remedied then the RTM Co must inform the Landlord, whose ultimate remedy would be to forfeit the relevant Lease

It should be noted that:-

the RTM Co will not get the right to demand and collect the Ground Rent (which will remain with the Landlord)

the management of any non-residential premises within the Building (e.g. retail units) will not be transferred and will remain with the Landlord

the right to forfeit the Lease and obtain possession of the relevant Flat is excluded, with such right remaining with the Landlord

Where do I start?

As you can imagine, the management of a block of Flats is not a simple operation and needs to be done efficiently and effectively in order to ensure that the Building is maintained in good condition and appropriate ‘reserve’ funds built up to provide the monies to pay for major works from time to time. Those duties will fall upon the RTM Co, who will then be responsible for making the majority of the decisions in connection with the management of the Building

Even if the Right to Manage is exercised, in most cases the Leaseholders will still need to employ the services of a managing agent to assist them in such management

It will also then be the case that it will be the RTM Co which will then be responsible for collecting the Service Charge and other monies due under the Leases, so that could put the Directors of the RTM Co in conflict with some Leaseholders who do not pay or dispute sums demanded or are in breach of their covenants as a Leaseholder. The RTM Co will be dependent upon receipt of the Service Charge monies to be able to effectively manage the Building

Those Directors will also have to consider and make decisions in relation to applications for consent received from Leaseholders (as mentioned above)

The benefits of exercising the Right to Manage need to be weighed against the obligations and duties which will then be imposed upon the RTM Co

You will all therefore need to give very careful consideration to exercising the Right to Manage and seek suitable professional advice. Quite a bit of preliminary work will also need to be done before the procedure can be started

Consideration also needs to be given (and suitable advice obtained) at an early stage as to the likely costs to be incurred in pursuing the Right To Manage process – in addition to the RTM Co’s own costs, they will also be responsible for any reasonable costs incurred by the Landlord, such as legal fees in connection with considering and responding to the Notice of Claim; accountants fees in connection with the provision of accounts and transfer of funds; subsequent legal and managing agents fees in relation to the handing over of the management information and management functions (if the level of such fees are disputed then an application can be made to the First Tier Tribunal (Property Chamber) (“FTT”) by either party for a determination as to their reasonableness

It should be noted that:-

the liability to pay the Landlord’s costs applies to all of the members of the RTM Co (and cannot be avoided by winding up the RTM Co)

if the RTM Co has to apply to the FTT for a determination as to their entitlement to exercise the claim to the Right to Manage, the RTM Co is not responsible for paying the Landlord’s costs in relation to that, unless the Tribunal determines that the RTM Co is not able to exercise the Right to Manage

Outline of the Procedure

Assuming that you qualify to exercise the Right to Manage, there are a sufficient number of Qualifying Tenants who want to participate and you have decided to go down this route, there now follows a general outline of the procedure which needs to be undertaken to exercise the Right to Manage – suitable professional advice will need to be obtained before such procedure is undertaken

Participation Agreement

as the Right to Manage procedure is dependent upon a minimum number of Qualifying Tenants exercising the right and it will involve fees and expenses being incurred (such as legal and accountant’s fees), Qualifying Tenants should consider entering into what is called a ‘Participation Agreement’ whereby they agree with each other to participate (and continue participating) in the process and to bear their part of any costs and expenses incurred as and when needed – formal legal advice will be needed to put such a Participation Agreement in place

Formation of the RTM Company

the RTM Co has to be formed – it needs to be a Company limited by guarantee (i.e. the Qualifying Tenants will be members of such Company, as opposed to shareholders in it) and it must have a Memorandum & Articles of Association (i.e. the rules which govern the running of such Company) which are in a form laid down by statute. Also, the name of such Company must end with “RTM Company Limited

Invitation to Participate

if the RTM Co has been set up by only some of the Qualifying Tenants then, once it has been incorporated, it will need to invite the remainder of the Qualifying Tenants to join and become members of the RTM Co – it should be noted that (1) all Qualifying Tenants are entitled to become members of the RTM Co and none of them must be excluded, so the invitation must be extended to all, and (2) that if and when the Right to Manage has been acquired, the Landlord is entitled to become a member of the RTM Co.

the Invitation to Participate is done by way of a written Notice and the form of such Notice must be in the form laid out by statute.

It needs to:-

state that the RTM Co intends to acquire the right to manage the relevant Building
state the names of the members of the RTM Co
invite the recipient of the Notice to become a member of the RTM Co
provide certain other information required by regulations:-

the registered number of the RTM Co and the address of its registered office
the names of the directors of the RTM Co and also the Company Secretary
the name of the Landlord of the Building as well as the name of any additional party to the Lease other than the Leaseholders (such as a Management Company)

Such Notice must be served upon all Qualifying Tenants within the Building who are not at that point already members of the RTM Co (or have already agreed to become members)

The Notice also needs to state the following:-

that the RTM Co will take over the Landlord’s management functions under the Lease, including the enforcement of the Leaseholder’s covenants, and the granting of approvals. If the Building contains Flats which are under the control of the Landlord, or contains commercial units, then the Notice must make it clear that the management powers taken over by the RTM Co upon completion of the RTM process will not extend to such Flats or commercial premises
that each member of the RTM Co may be liable to pay the Landlord’s reasonable costs arising from the service of the Notice to exercise the Right to Manage
whether or not the RTM Co intends to employ a managing agent to manage the Building (if the RTM Co has already identified such a managing agent then their name and address must also be given) or intends to retain the existing managing agent. In the event that the RTM Co intend to manage the Building themselves, as opposed to appoint a managing agent, then the Notice must give details of the management experience which any of the members of the RTM Co may have

In addition, the Notice must be accompanied by a copy of the Articles of Association of the RTM Company (or state where they can be inspected and a copy taken). N.B. if this is not done then the Notice will be considered to be defective

Service of the Invitation to Participate

Service of the Notice upon each Qualifying Tenant can be done by post or by hand delivery to the relevant Flat. If a Leaseholder has previously notified the RTM Co of a different address in England and Wales for service of notices, then that address must be used – it could well be that a Qualifying Tenant is living abroad permanently, in which case the Secretary of the RTM Co is required to make reasonable attempts to serve the Notice upon them, but is not obliged to send it outside of England and Wales

PLEASE NOTE: The Invitation to Participate is an extremely important part of the process and, if not done properly, could lead to the failure of the whole process (which ultimately could enable the Landlord to resist the claim to the Right to Manage) – the Officers of the RTM Co need to ensure that the Invitation to Participate is served upon all of the Qualifying Tenants within the Building and that suitable evidence of the service of such Notice upon each Qualifying Tenant is retained in order to overcome any subsequent claim from either a Qualifying Leaseholder or the Landlord that this process was not correctly carried out – very often the RTM Co will employ the services of a Solicitor to deal with the service of the Notice

Enrolment as members of the RTM Co

Once the Notice has been served upon the Qualifying Leaseholders, it is open to each one of them to respond and ask to become a member of the RTM Co – all who do so must be enrolled as a member of the RTM Co and their membership noted in the records of the RTM Co

Whilst it is not strictly necessary, it is a good idea (and could save some time) for the RTM Co, when serving the Notice upon the Qualifying Leaseholders, to also include an application for membership of the RTM Co – the form of such application for membership which must be used is set out by statute

What information the RTM Co needs to know before exercising the Right to Manage

Having followed the above part of the procedure the RTM Co is now in a position to progress to exercise the Right to Manage.

However, at this stage it will only have limited information in relation to the management functions it is proposing to take over, so the next stage is to establish what information/documentation it needs to have in order to properly assess what needs to be done to manage the Building effectively and then seek to obtain such information/documentation – the members of the RTM Co are (with some exceptions) unlikely to be experts in this field, so the RTM Co ought to seek formal advice from a managing agent or surveyor who specialises in the management of similar buildings

Information which will be particularly relevant includes:-

the name of the Leaseholder’s immediate Landlord and their address for service of notices – this information should appear upon all rent and service charge demands received by the Leaseholders (if the Landlord is a company then a quick check at Companies House should also be able to confirm their registered office).
the name and address of any other Landlords whose interest in the Building is superior to that of the immediate Landlord
the full names and addresses of all of the Leaseholders in the Building
details of any non-residential or commercial use within the Building
what the current position is in relation to arrears in payment of the Service Charge
full details of the Buildings insurance effected in respect of the Building
how the Building is currently managed and details of the managing agents
details of all contracts currently in force in relation to the maintenance of the Buildings and the provision of services to the Building
the current state of repair of the Building and whether any major works, repairs or improvements have been identified as being needed (including copies of any survey reports which have been obtained)

The RTM Co has various means to source the information it requires, such as:-

the information/documentation its already holds (such as copy Leases, service charge demands and accounts etc.)
obtaining information from the Land Registry (provided that the title to the Building is registered)
exercising the rights available to Leaseholders under Landlord and Tenant legislation – for example, under the Landlord and Tenant Act 1985, a Leaseholder is (1) entitled to request details of the name and address of their Landlord and which must be provided within 21 days (2) the right to an annual statement of the service charge account for the Building and (3) the ability to inspect the documents, receipts etc. upon which the Service Charge is based
exercising the rights available to RTM Companies under the Commonhold and Leasehold Reform Act 2002 – for example (section 82) the service upon the Landlord of a notice requiring any information which the RTM Co reasonable requires for ascertaining the particulars to be included in a claim notice for claiming the right to manage (i.e. the information needed to be able to serve the claim notice) – the Landlord has 28 days to respond to such a notice

Armed with such information, the RTM Co should then take the time to consider what needs to be done to manage the Building; how it proposes to manage the Building; investigate what potential costs savings might be achievable; establish whether any urgent repairs or other works are required (and what funds, such as reserve funds, might be available to fund these); prepare a suitable draft budget and also develop a long-term program of planned maintenance in relation to the ongoing maintenance and upkeep of the Building

The members of the RTM Co will, of course, be wanting to see that there is a properly thought out plan in place before the Right to Manage is exercised (as it will have cost implications for them all) and that it will lead to the resolution of the issues which caused them to consider the Right to Manage in the first place (such as poor performance by the Landlord, high/unreasonable service charge costs; the ability to take control of decisions made in relation to the Building etc.) – will taking over the management of the Building achieve this?

Formally exercising the Right to Manage

It is done by the service upon the Landlord of a Formal Notice of Claim (which has to be in a prescribed form)and cannot be served until 14 days after the RTM Co has served upon the Qualifying Leaseholders the Notice of Invitation to Participate

The Notice of Claim needs to be served upon:-

the Landlord of the whole or any part of the relevant premises
any intermediate Landlord
any other parties to the Lease (besides the Leaseholders), such as any Management Company named in the Lease. If a Court or Tribunal has subsequently appointed a manager in place of such Management Company then the Notice of Claim needs to be served upon such manager, with a copy also being sent to the court or tribunal who appointed such manager

and one of the requirements for such Notice of Claim form is that it has to set out the date upon which the RTM Co intends to acquire the Right to Manage the Building (that date must not be less than four months from the date of service of the Notice of Claim, allowing the Recipient one month in which to serve a Counter-Notice).

If no Counter-Notice is served by the Landlord or other recipient then the RTM Co will take over the management of the Building as from the date set out in the Notice of Claim

However, the Landlord or other recipient of the Notice of Claim is able to serve a Counter-Notice (in a prescribed form) upon the RTM Co within the time specified within such Notice for this (which must be not be less than one month). If such a Counter-Notice is served it will either agree to the claim being made by the RTM Co, or dispute such claim for the reasons set out in the Counter-Notice – the claim can only be disputed upon the following grounds:-

the Building does not qualify for the Right to Manage to be exercised
the RTM Co does not comply with the statutory requirements
the members of the RTM Co do not represent half of the Flats in the Building

The consequences of the service of such a Counter-Notice are:-

if the Landlord agrees to the RTM Co’s claim then the RTM Co will take over the management of the Building as from the date set out in the Notice of Claim
if the claim is disputed then the RTM Co must make an application to the FTT within 2 months of the date of such Counter-Notice – it should be noted that if no such claim is made then the RTM Co will be deemed to have withdrawn its claim for the Right to Manage (and will be responsible for the Landlord’s costs)
if the application is made to the FTT than the Tribunal will determine whether or not the RTM Co can exercise the Right to Manage (with a further right of appeal to the Lands Tribunal being possible)

A copy of the Notice of Claim needs to be sent to each Qualifying Tenant within the Building

It is possible that service of the Notice of Claim upon the Landlord or other party to the Lease is not possible as they cannot be found. However, this will not prevent the Right to Manage being exercised – provided that it has used all reasonable steps to locate such missing party, the RTM Co is able to apply to the FTT for an order entitling it to acquire the Right to Manage – however, before making any such application the RTM Co must advise all of the Qualifying Leaseholders within the Building (not just those who are a member of the RTM Co) that such party cannot be found and that the RTM Co is proposing to make the application to the FTT for the relevant order

After the Notice of Claim has been served the RTM Co then has the statutory right to require access to any part of the premises if that is reasonable, in connection with such claim (i.e. to inspect the areas and facilities not generally accessible to the Leaseholders. This right can be exercised by giving to the Landlord not less than 10 days’ written notice to that effect (there is no special wording which has to be used)

It is very much in the interest of the RTM Co to exercise this right and appoint a suitably qualified surveyor to carry out an inspection of the Building and its plant and machinery – there could be hidden issues which will become the problem of the RTM Co once it takes over the management

When does the RTM Co take over management of the Building?

If the Landlord accepts the claim made by the RTM Co, or fails to respond to the Notice of Claim, then the RTM Co will take over the management as from the date set out in the Notice of Claim

If the Landlord disputes the claim but subsequently agrees in writing with the RTM Co that it accepts such claim then the RTM Co will take over the management on the date which is 3 months after the date of that written agreement

If the Landlord disputes the claim and the RTM Co subsequently obtains a determination from the FTTthen the RTM Co will take over the management on the date which is 3 months after such determination becomes final

What happens to existing contracts to provide services to the Building?

Following the successful exercise of the Right to Manage and the RTM Co taking over the management, the RTM Co will need to obtain from the Landlord details of all such contracts. Such contracts could be:-

With a managing agent for the management of the building
Maintenance contracts for items such as lifts, boilers, central heating, door entry systems, access gates, cleaning and gardening
Contracts to provide other services or supplies to the Building

These contracts will need to be considered carefully and steps taken by the RTM Co to either terminate (and source alternative contracts to replace them) or to renew them. Clearly it is important that all relevant contracts are in place at the point the RTM Co take over the management of the Building

As soon as possible after a Landlord receives the Notice of Claim from the RTM Company, they are required to serve the following notices:-

A Contractor’s Notice upon all of the contractors appointed by the Landlord in relation to the Building giving such contractors details of the relevant contract; advising them that the right to manage is being acquired by the RTM Co; details of the name and address of the RTM Co; the date the RTM is to take over the management and advising such contractor who wants to continue to provide services to the Building to contact the RTM Co

A Contract Notice upon the RTM Co giving details of the existing contracts in relation to the Building; the name and address of the contractor and advising the RTM Co to contact such of those contractors whose services it wishes to continue

Although this procedure is in place in relation to such contracts, the RTM Co should try to obtain as much information in relation to such contracts at the earliest opportunity. They should also investigate alternative contractors to guard against the fact that some of the existing contractors may not wish to continue providing such services to the Building

What obligations are imposed upon the Landlord?

These are:-

a statutory duty to provide such information as is requested by the RTM Co as being reasonably required in connection with the exercise of the Right to Manage (i.e. the information required for the proper management and running of the Building) – the Landlord is not obliged to ‘volunteer’ information, merely to reply to questions asked by the RTM Co, so it is very important that the RTM Co obtains proper advice from a managing agent, surveyor or the like who has experience of managing properties such as the Building, so that all of the relevant questions are asked – if the RTM Co has already lined up a managing agent to assist with the management of the Building then they should be able to assist the RTM Co with this task – the list of questions, requests for information or requirements to see documentation will be quite extensive

The Notice requesting the information etc. can be served by the RTM Co upon the Landlord at any time and it has 28 days in which to respond. However, the Landlord is not obliged to respond before the date the RTM Co takes over the management – in order to obtain the information as quickly as possible after taking over the management the RTM Co needs to serve such notice upon the Landlord at least 28 days before the date they are due to take over the management in order to avoid any delays, in which case they would be managing the building ‘blind’

a statutory duty to make payment to the RTM Co on the date the RTM Co takes over the management of the Building or as soon after that date as is reasonably practicable of the monies held by the Landlord in relation to the Building and which have not already been committed as expenditure. The amount to be paid will be:-

The total of:-

the service charge monies received from the Leaseholders plus
any service charge monies which have been invested by the Landlord (plus any interest which has accrued)

Less

The outgoings incurred by the Landlord up to the date the RTM Co take over the management of the Building

Clearly, it is important for the RTM Co to receive those funds as quickly as possible to enable it to properly manage the Building, but that is not always the case, so the RTM Co may need to consider putting in place some contingency measures to fund operations pending receipt of such monies

In the event of a failure to agree the sum to be transferred to the RTM Co, the ultimate route would be a determination by the FTT, but that could take some time, so other avenues may need to be pursued first