Right to Manage

Introduction

This post is not meant to describe or give a full interpretation of the law; only the courts can do that. Nor does it cover every case. If you are in any doubt about your rights and duties then seek specific advice.

The Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to acquire the landlord’s management functions by transfer to a company set up by them – the Right To Manage (RTM) company. The right was introduced, not just as a means of wresting control from bad landlords, or managing agents, but also to empower leaseholders, who generally hold the majority of value in the property, to take responsibility for the management of their block.

The right to manage is available to leaseholders of flats, not of houses.

The process is relatively simple. The landlord’s consent is not required, nor is any order of court. There is no need for the leaseholders to prove mismanagement by the landlord. The right is available, whether the landlord’s management has been good, bad or indifferent.

The right is exercised by the service of a formal notice on the landlord. After a set period of time, the management transfers to the right to manage company (the RTM company) which has been set up by the leaseholders. Once the right to manage has been acquired, the landlord is also entitled to membership of the company.

However, there are important issues to consider and a substantial amount of work to be done before service of the notice, if the takeover of management is to be successful. This leaflet sets out the issues and the practical operation of the right, from first considerations to full management of the building.

Preparation

Perhaps the very first consideration should be what the leaseholders want to achieve by taking over the management of the building.

Clearly, it makes sense for the leaseholders to take general control of the upkeep of their most valuable assets – the flats – but to do so will bring with it duties and liabilities. In acquiring the power to make approvals and to enforce the covenants of the leases, the leaseholders become wholly responsible for all decision-making in terms of budgets and reserve funds, standards of management and provision of services, repairs and major works, and with the overall function of the building.

Whatever the motivation, there are a number of basic issues which should be considered prior to taking any action.

RTM does not necessarily mean self-management. The RTM company can decide to carry out day to day management itself, or it could delegate this function to a managing agent. The managing agents will be instructed by the RTM company, so decisions on such things as major works could still be taken by the RTM company, if they wish.

Unless the building is small (no more than, say, six flats) the day-to-day management may be best left to a professional managing agent. Management is a job which requires certain skills and experience and carries with it great responsibility. Dissatisfaction with the present managing agent may result more from the leaseholders’ feelings of impotence in the decision-making process than from any real shortcomings in the manager’s abilities. The same managing agent, working to the instructions of the RTM company, may deliver a satisfactory service without the upheaval of a change of management.

One of the major motivations may be to save money on maintenance and repair works. While this is a sensible objective, the RTM company must adopt a responsible attitude to the long-term maintenance aspects – the building remains in the landlord’s ownership and the flats remain the leaseholders’ principal financial assets. The RTM company should not save money by reducing essential services or by allowing the block to deteriorate. The covenants in the lease (which will not be changed in the exercise of the right) should specify service provision and require the property to be maintained as it becomes necessary, not when convenient.

The RTM company will be required, like any other landlord, to comply with a Government-approved code of management practice. There are two such codes at present, one produced by the Royal Institution of Chartered Surveyors (RICS), and one by the Association of Retirement Housing Managers (ARHM) which refers specifically to purpose-built retirement property. While compliance with the codes is not mandatory, failure to do so is one of the grounds for an application to the First-tier Tribunal (Property Chamber) to appoint a new manager or to end the right to manage.

Taking over the management will bring responsibilities and it is important to consider these at an early stage:

• the leaseholders will manage the building through a company and will need to learn about company procedures or to employ someone to advise them on such matters.
• people must be found to be officers of the RTM company, not just initially, but on an on-going basis, the officers will have all the normal responsibilities of company directors as well as of landlords of residential property;
• the RTM company will be as vulnerable to criticism from lessees and residents as was the landlord. Some leaseholders are irrational in their expectations;
• there will need to be regular (but not necessarily frequent) meetings;
• there will be many technical matters to be dealt with, such as budgets and accounts, specifications and legal requirements;
• there will be a need to keep the RTM company solvent, so leaseholders who routinely default on payment will prove a headache;
• there may be difficult and sensitive issues in dealing with neighbours and fellow leaseholders;
• the company and its directors will be legally required to comply with a wide range of company, housing and health and safety law.
• In considering exercising RTM one should be aware of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE is designed to protect the rights of employees when a transfer situation arises, ensuring that the terms and conditions of employees are preserved, with continuity of employment. Whether TUPE will apply depends on the particular facts of the case, and it is advisable, where a building is served by employees of the landlord or management company, to seek specialist advice as to whether it would apply in the event that RTM were exercised.

Having said all this, the right to manage is an opportunity for those owning most of the value in the building – the leaseholders – to run their own affairs and to make their own decisions about the management and upkeep of their flats.

Qualification for RTM

The building must meet certain conditions and a minimum number of leaseholders are required to take part.

• at least two-thirds of the flats must be let to ‘qualifying tenants’*;
• it can be part-commercial but the non-residential part must not exceed 25% of the total floor area, excluding common parts
• RTM does not apply where the immediate landlord of any qualifying tenant is a local housing authority.
• RTM does not apply where the premises fall within the Resident Landlord Exemption. To fulfil this exemption would require the following:
  • The premises must be other than a purpose-built block (for example a converted house); AND
  • They must comprise not more than four flats; AND
  • One of the flats must be occupied by the freeholder or an adult member of their family as their only or principal home for the last twelve months.

*A ‘qualifying tenant’ is a leaseholder whose lease was originally granted for an original term of more than 21 years. There is no requirement for any past or present residence in the flats, nor any limit on the number of flats which can be owned by one person.

The right to manage may only be exercised by a right to manage company and the members of the RTM company must comprise a sufficient number of qualifying tenants. The required minimum number of qualifying tenants must be equal to at least half the total number of flats in the building, for example, if there are 10 flats in the building, at least five of the flats of qualifying tenants must participate in the action. It should be noted that where there are only two flats in the building, both flats of qualifying tenants must participate.

The right relates to a building, so, in an estate of separate blocks, each block would need to qualify separately and an individual RTM notice served. In the case of an estate of flats under the same management, it would be sensible to take over the management of the whole estate, but this would have to be accomplished by application in respect of each separate block.

The RTM Company

The right to manage is exercised by the company, not by the individual leaseholders, and so cannot be put into practice without the formation of the company. It is the company which obtains the right to manage and which then takes responsibility for the management; the individual leaseholders may change over time, but the company remains in place.

The RTM company must have an Articles of Association which govern the purpose and running of the company. The Articles are prescribed by law and a company will not be a valid RTM company for the purposes of the Act if it does not match these provisions.

At registration a Memorandum of Association is required which is a short statement from the subscribers setting out their intention to incorporate the company together with a list of their names.

The prescribed Arts are set out in Statutory Instrument 2009 No 2767.

Forming the RTM company is a relatively simple operation and can be done by a solicitor, by a company agent or by the qualifying leaseholders themselves.

• Companies House produces several free explanatory leaflets:
  1. Directors and Secretaries Guide (GBA1)
  2. Annual Returns (GBA2)
  3. Resolution (GBA7)
  4. Accounts and Accounting Reference Dates (GBA3)

Contact: The Registrar of Companies, Companies House, Crown Way, Cardiff CF14 3UZ. Tel: 0303 1234 500 –  https://www.gov.uk/government/organisations/companies-house

Any number of qualifying leaseholders may set up the RTM company; it does not require the full number of participants at this initial stage, simply enough participants to provide a chairman, some directors and a secretary. Obviously the very first step is to identify those leaseholders of the building who will be prepared to take on this responsibility – the exercise of the right to manage is not possible without the input of a dedicated group prepared to run the company.

Once the RTM company has been registered, with its original members, it must then formally invite the rest of the qualifying leaseholders to join.

The Notice Inviting Participation

All qualifying leaseholders are entitled to become members of the RTM company; no-one may be excluded for any reason. This is not a matter of choice – the legislation opens the membership to all qualifying leaseholders.

It is also important to remember that, once the right to manage has been acquired, the landlord is also entitled to membership of the company.

The Notice Inviting Participation must be in writing and in the prescribed form and must be served on all qualifying leaseholders who are not, at the time of service, members of the RTM company or who have not already agreed to be members. It must:

• state that the RTM company intends to acquire the right to manage;
• state the names of the members of the RTM company;
• invite the recipient to become a member of the RTM company;
• provide other information required by regulations:
  • the RTM company’s registered number and the address of its registered office;
  • the names of its directors and, if applicable, the secretary;
  • the name of the landlord, plus the name of any other person who is party to the lease other than the leaseholders.

The notice must also state:

• that the RTM company will take over the landlord’s management functions under the lease, including the enforcement of tenants’ covenants and the granting of approvals. In the case of buildings containing flats under the control of the landlord, or commercial units, the notice must make it clear that the management powers obtained through RTM will not extend to those flats or units.
• that each member of the RTM company may be liable for the landlord’s reasonable costs arising from service of the notice to exercise the right to manage. (This is to ensure that everyone is aware of the potential financial implications of involvement in a RTM application.)
• whether or not the RTM company intends to employ a managing agent to manage the building (and, if a prospective agent has been identified already, his name and address); or, alternatively, whether the company intends to appoint the current managing agent. If the RTM company does not intend to appoint an agent but to manage the building itself, the notice must give details of the management experience, if any, of the existing members of the company.
• The notice must be accompanied by a copy of the Articles of Association of the RTM company or state where the Articles may be inspected and copies taken; the notice is considered not to have been served if it does not include the Articles of Association or state where it can be found. The legislation says that the notice ‘is not invalidated by any inaccuracy in the particulars’, but this should not be taken as a licence for carelessness. This is a formal notice and care should be taken that it fully complies and is properly served. It may be advisable to employ a solicitor who specialises in this area to draft and serve the notice.

The prescribed form is set out in a Statutory Instrument (2010 No 825).

The notice may be served by post, or by simply delivering it to all the flats; the legislation provides that it may be addressed to the leaseholder at the flat in the building (his qualifying address) unless the leaseholder has previously notified the company of a different address in England and Wales at which he wishes to receive notices. If the leaseholder is living permanently abroad, the secretary of the RTM company should make reasonable attempts to send the notice but is not obliged to serve it outside England and Wales.

The procedure of service of the Notice Inviting Participation is important. Firstly, the legislation requires that all of the leaseholders should have the opportunity to take part in the exercise of RTM. However, the adequacy or otherwise of the procedure may provide an opportunity to the landlord to challenge the eventual action of obtaining RTM on the basis that the RTM company is not properly constituted, in that it failed to comply with the service of the notices. Therefore, the RTM company, or the Company`s solicitor, should ensure that evidence of the satisfactory delivery of, or posting of, the notices is retained, in case of any subsequent challenge from a qualifying lease-holder or the landlord.

All of those qualifying leaseholders who respond to the notice and who ask for membership must be enrolled as members of the RTM company and the membership noted in the company records. Indeed it would be prudent although not compulsory to include an application form for membership with each Notice Inviting Participation. The wording of the application form can be found in Article 26(1) of Statutory Instrument No.2009 No.2767 being the prescribed form of Articles of Association.

Obtaining information

Although the RTM company is now legally equipped to proceed, it would be unwise to do so without some detailed investigation into the present management arrangements and the implications for the company of taking on the management. The legislation provides rights both to information from the landlord and access for inspection of the premises, but it is of the greatest importance that the RTM company takes stock to ascertain what information it requires, i.e. to know what it needs to know.

The management of any but the smallest building can be complicated and for large buildings, or estates, can be comparable to the management of a sizeable business. The RTM company should not be tempted to start the process of taking over the management without a clear idea of what is involved.

• The joint LEASE/ARMA leaflet Appointing a Managing Agent sets out the basic duties of management and the general responsibilities of a manager (or a managing agent).

Information requirements will vary for each building. In the case of larger buildings, it may be prudent to obtain professional advice from a managing agent or surveyor on what is required. The following is suggested:

• the proper name of the leaseholders’ immediate landlord and its address for service of notices. This should appear on all rent and service charge demands;
• the name and address of any other landlords with interests over the immediate landlord. For example, the landlords may comprise the freeholder plus the head lessee, or the freehold may be split in its ownership;
• the full names and addresses of all the leaseholders in the building;
• details of any non-residential or commercial use in the building;
• the current arrears position;
• the insurance arrangements for the building;
• how the building is presently managed and, where the building is managed by an agent, the name and address of the managing agent;
• details of all contracts presently in force for the maintenance of the building or fittings and for the provision of services (contracts are covered more fully below);
• the overall state of repair of the building and any identified requirements for major works, repairs or improvements, including copies of any recent survey reports.

Some of this information will already be known; the remainder can be obtained by a number of means: through rights to information under Landlord and Tenant legislation; from the records of the Land Registry; or by the service of a notice under the RTM legislation:

• Landlord and Tenant legislation – you are entitled to obtain details of the name and address of your landlord under rights provided by the Landlord and Tenant Act 1985. The information, if requested, must be provided within 21 days and failure to so provide is an offence.
  The same Act provides a right to an annual statement of the service charge account for the building and for investigation of the documents, receipts and other information on which the charges are based.
• Land Registry – as long as the property is registered (most are), you are entitled to inspect the register and to obtain copies of the Land Registry certificate to the freehold. The entry will provide the name and address of the registered owner(s) and details of any other interests in the freehold, including other freeholders, leases registered against the freehold title and mortgagees. There is a small fee for copies of the certificate.
  There are a number of District Land Registries around the country, not all of them serving the area in which they are located; you should contact the nearest office to find the Registry serving the area in which your property is located.
• Information notice – Section 82 of the 2002 Act provides a right for the RTM company to serve a notice on the landlord (s) requiring any information ‘which the company reasonably requires for ascertaining the particulars to be included in a claim notice for claiming the right to acquire the right to manage’. The wording is quite precise – the power is to require information sufficient to serve the claim notice; it is not a general power to obtain information other than for this purpose. Where the required information is contained in ‘documents’, for example, accounts or bank statements, contracts or specifications, the notice can require the landlord to allow access for inspection and copying of documents or to supply a copy of the document.
  A landlord served with a notice under Section 82 must comply within 28 days. There is no prescribed form, so the notice could be in the form of a letter requesting the information.
  Section 83 provides a right of access, after service of the Notice of Claim.

Plans and budgets

The legislation does not require the RTM company to produce, or submit to the landlord, any form of business plan or budget, nor to provide any information as to how the company proposes to manage the building. The Notice Inviting Participation requires a statement of whether the company proposes to self-manage or to appoint professional management, but there is no statutory requirement for employment of a manager, or for any prior management experience by the company – there are, after all, no such requirements for landlords.

Nevertheless, a prudent group will want to look ahead and to examine how the building should be managed, what advantages might be achieved (or achievable) and what cost savings or other benefits might be gained. At this stage, before commitment to the action, it is worth the group clarifying the motives for obtaining management. It could be to save money, to improve standards, to take control of the decision-making process or simply to oust a bad landlord. It is around the motivation that the management strategy should be based.

There is no requirement to prepare a draft budget, but it would be useful to produce one. It is most likely that recipients of the Notice Inviting Participation will want to know how the action will affect their costs and what the embryo RTM company expects to deliver in terms of management standards.

It is sensible to consider the employment of a managing agent and to look at the costs of this and the service delivery objectives that could be achieved. It may be, for example, that the present managing agent is labouring under inadequate or defective instruction, but that a service in accordance with the wishes of the leaseholders could be delivered if the agent were instructed by them. The members of the RTM company should, if possible, interview a number of agents.

It should be remembered that, although the management passes to the leaseholders’ company, no ownership passes and all leases remain unaltered. Thus the fabric of the building remains in the ownership of the landlord. The RTM company will have a duty to the landlord not to allow a depreciation in the value of the landlord’s interest through neglect, mismanagement or deliberate under spending on the building.

One of the first steps, for larger buildings, should be the drafting of a planned maintenance programme and this will require professional help. The programme should, ideally, be for at least a 25-year period, so it covers all the building elements that need periodical renewal. It should include budget costs (including fees and VAT), so that both routine and irregular costs can be properly programmed to spread expenditure. This will form the basis for the establishment of a reserve fund.

One of the continuing problems of leasehold system is the difference in expectations and objectives between the landlord and the leaseholders. For the landlord, the building is usually a long-term investment. On the other hand, many leaseholders view their ownership of the flats as short term – they may have no long-term view and wish to limit their short-term costs.

It must be a prerequisite of the acquisition of the right to manage that the RTM company will manage the building sensibly, in accordance with the terms of the lease.

Exercise of the Right

The Notice of Claim

The claim may only be exercised where:

• the building complies;
• the RTM company meets the statutory requirements; and
• 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 the service of the Notice Inviting Participation.

The right is exercised by service on the landlord of a Notice of Claim; there is no requirement to prove default or bad management by the landlord, and there is no requirement for approval by a court. The Notice of Claim must be served on:

• the landlord of the whole or any part of the premises;
• any intermediate landlords;
• any parties to the lease other than the leaseholders (e.g. a management company named in the lease) and any manager who has been appointed by a court or tribunal under the provisions of Part 2 of the Landlord and Tenant Act 1987. A copy of the Notice of Claim must also be sent to the relevant court or tribunal where a manager has been so appointed.

A copy of the Notice of Claim must also be sent to each qualifying tenant in the building. The form for the Notice of Claim is prescribed: it must be in writing and must:

• specify the premises and include a statement of the grounds on which the premises comply with the qualification for RTM;
• state the full names and address of each person who is both a qualifying tenant of the building and a member of the RTM company;
• in respect of those persons, provide sufficient details of his or her lease to identify the flat and to show:
  • the date on which the lease was entered into;
  • the term for which it was granted;
  • the date of commencement of the term;
• state the name and registered office of the RTM company;
• specify a date, not earlier than one month after date of service of the Notice of Claim, by which each person who was given the notice may respond by giving a counter-notice (qualifying tenants who are sent a copy of the notice do not have the right to serve a counter-notice);
• specify a date, at least three months after the date for the counter-notice, on which the RTM company intends to acquire the right to manage the premises.

The regulations require the inclusion of three further points:

• a statement informing the landlord that he may alert the RTM company to any inaccuracies in the notice. (As with the Notice Inviting Participation, the legislation provides that ‘a claim notice is not invalidated by any inaccuracy in the particulars’, but this is not an invitation for fraudulent statements);
• a reminder in the notice for a landlord who has no objection to the claim to serve the ‘contract’ and ‘contractor’ notices (see page 15);
• a statement to remind the landlord of his statutory right to membership of the RTM company (see page 13).

The prescribed form for the Notice of Claim is set out in the Statutory Instrument (2010 No 825).

It is this Notice of Claim which brings the exercise of the right to manage into being and sets the date for the RTM company to take over the management. In being able to set their own date, the members of the RTM company are in a position to plan ahead and to prepare for the transfer. While the legislation provides a minimum period of three months (four months in total from the service of the claim, in order to allow for the opportunity to serve a counter-notice), this need not necessarily be taken as a maximum; it may be prudent in some circumstances to provide a longer period in order to engage a new managing agent and to put other arrangements in place to ensure that the transfer of the management function is as seamless as possible.

Absent landlords

If the landlord, or any of the other parties to the lease on whom the 

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