With the Law Commission’s final report on exercising the Right to Manage set to be published this spring, we could see more freeholders losing control of their property to Right to Manage companies. While it has the potential to be a positive move for leaseholders, it’s understandable that some freeholders won’t like the thought of others taking care of a building that they own. But will the Law Commission’s proposals for reform be robust enough to eradicate the current problems and encourage uptake of Right to Manage?
What is the right to manage?
The Right to Manage (RTM) enables leaseholders to take over the management of their building from either the freeholder or a management company. Dictated by Part 2 of the Commonhold and Leasehold Reform Act 2002, leaseholders are entitled to the Right to Manage regardless of whether the current management has been good or bad. However, the 2002 Act also sets out a range of qualifying criteria that must be met in order for the Right to Manage to be exercised.
Qualifying criteria for the Right to Manage
The premises must:
- Be a self-contained building or part of a building
- Contain at least two flats, held by qualifying leaseholders
- At least two-thirds of the flats must be owned by qualifying leaseholders
The leaseholder must:
- Have a long lease with an original term of at least 21 years
Process for claiming the Right to Manage
If the above qualifying criteria is satisfied, leaseholders can legally claim the Right to Manage by serving a Notice of Claim on the freeholder. However, before this can take place leaseholders must set up a Right to Manage Company that will be responsible for the management of the property. RTM companies must obtain Articles of Association, which are legal documents that specify the purpose, duties and responsibilities of the RTM company.
A Memorandum of Association must also be registered against the RTM company, which is a legal statement signed by the qualifying leaseholders agreeing to form the company. Once the RTM company has been legally formed, a Notice of Participation must be issued to qualifying leaseholders, inviting them to join the company.
On completion of the statutory procedures, the RTM company will become responsible for: repairing, maintaining and insuring the building; collecting service charges; keeping and providing accounts; adhering to a variety of complex covenants in the lease, and complying with a range of legal obligations.
Although this process all seems very straightforward, and that was most certainly the intention when it was introduced in 2002, leaseholders encounter significant issues when exercising the Right to Manage. As a result, it can be a slow, expensive and complex procedure, which is too restrictive and lacks transparency.
What are the current problems with Right to Manage?
- RTM companies can often experience delays in receiving information that is required to enable them to manage the building effectively, such as insurance history
- RTM companies have to bear the freeholders costs in the lead up to the acquisition of the management function, this can also include litigation costs
- The application process is unforgiving of even the smallest of errors, which can prevent leaseholders from obtaining the Right to Manage
- Multi-block estates, houses and premises with more than 25% non-residential space are excluded from acquiring the Right to Manage
- Many leaseholders do not understand the extent of the responsibilities that they will attain from gaining the Right to Manage
Law Commission’s proposals to reform Right to Manage
The leasehold sector is fraught with problems. It’s been criticised for unfair practices and providing a poor value-form of tenure for homeowners. As a result, the Law Commission has been tasked with implementing reform to improve consumer choice and provide greater fairness and transparency for leaseholders. Taking a comprehensive view, the Law Commission has conducted consultations on Leasehold Enfranchisement, Commonhold as an alternative to leasehold and Right to Manage, which are all interrelated.
The objective of the Law Commission’s consultation on Right to Manage, entitled, “Leasehold home ownership: exercising the Right to Manage”, was to make the system faster, simpler and more accessible for leaseholders. In order to conduct the consultation, they devised several proposals for reform to gauge their potential effectiveness and popularity.
Right to Manage qualifying criteria – problems and proposed solutions
Despite different policy considerations applying to Right to Manage, the imposed qualification criteria were apparently “copied over” from the Collective Enfranchisement legislation. Consequently, Right to Manage is unnecessarily restrictive and essentially not fit for purpose. So, to make Right to Manage more accessible, the Law Commission proposed that leasehold houses, and buildings with more than 25% of the floor area in non-residential use, should be eligible to claim the Right to Manage. However, the latter would require the RTM company to appoint a professional managing agent.
The proposal also saw the requirement for at least two-thirds of flats in the building to be held by qualifying leaseholders reduced to a more encouraging 50%. However, the number of qualifying leaseholders who will need to become members of the RTM company would remain at 50% of all the flats in the building. In a complete turnaround, abolishment was provisionally proposed for the requirement for a minimum of two residential units to be held by qualifying leaseholders.
Further, shared ownership properties would be made legally eligible for Right to Manage and in some circumstances, those properties where there is a resident landlord in occupation. These proposals would surely see more buildings eligible to claim Right to Manage and get the proverbial ball rolling to increase uptake.
The Right to Manage company – problems and proposed solutions
In an absolutely abhorrent attempt to prevent leaseholders from claiming the Right to Manage, the Law Commission has reported that some managing agents have set up bogus RTM companies. As current legislation dictates that once an RTM company has been set up there can be no other RTM company for that premises, managing agents are using this as a legal loophole. To prevent this, the Law Commission has proposed abolishment of this unfair rule.
Another distasteful restriction in current legislation prevents RTM companies from being able to recover their management costs from leaseholders as part of the service charge. While it is in the RTM company’s interest to ensure the good upkeep of the building, the Law Commission agrees that the reasonable costs for such management should be shared by all residents. This would also mitigate any risk of challenge by leaseholders at a tribunal.
Right to Manage Notices – problems and proposed solutions
There are several Notices that need to be served in the process of acquiring the Right to Manage. These include an initial Notice of Participation to invite qualifying leaseholders to become members of the RTM company, which the Law Commission propose should be abolished. However, qualifying leaseholders should still be made aware of their right to join the company with a statement to this effect in the notes accompanying the Notice of Claim. This action would make the process considerably faster from the outset.
As it stands, freeholders do not need to respond to the leaseholder’s Notice of Claim, issued to set out their acquisition of the management of the building. Although no response to the Notice allows leaseholders to take over the management without challenge and delay, it leaves the claim open to future dispute. This is because, without a counter-notice, there is no way of validating the claim. The Law Commission, therefore, propose that in instances where a counter-notice has not been served, leaseholders may apply to the First-Tier Tribunal to gain official validation. While it’s possible that this could cause a delay and extra expense in the process, it would protect RTM companies from costly litigation in the future.
One of the most significant problems with the Right to Manage process is the requirement for complete accuracy in the Notices and freeholders subsequently taking advantage of this to the detriment of the leaseholders. We understand that some freeholders may not want their leaseholders to take control of the management of their building, but this is their legal right and for good reason. So, to intentionally deny that or to cause delays by seizing on relatively insignificant errors in the notices is quite simply wrong.
To combat this issue, the Law Commission has proposed the following to simplify the Right to Manage Notice procedure:
- Giving tribunals the discretion to waive any requirement or allow a notice to be amended to fix an error
- Reducing grounds on which a Notice can be challenged
- Providing that a signature from a single office of the RTM company will be sufficient for the signature of notices
- Allowing the prescribed notices to be given by email
- Deeming a claim notice to have been validly served on the landlord if it is sent or delivered to (a) an address specifically provided for the service of RTM notices, or the landlord’s current address; or (b) the landlord’s last known address, an address given under sections 47 and 48 of the Landlord and Tenant Act 1987 or the latest email address given for serving notices generally, plus the landlord’s address for service listed at HM Land Registry
- Reducing the circumstances in which a claim notice is deemed to be withdrawn, instead empowering landlords to apply to strike out a claim notice where the RTM company has not initiated the next step in the process
Right to information – problems and proposed solutions
In another attempt to cause disruption to the process, some freeholders will withhold vital information (which leaseholders are entitled to) until the very last moment. While freeholders are not legally obliged to provide this information until the acquisition date, it severely impedes leaseholder’s ability to make an informed decision on whether to proceed with Right to Manage. Moreover, if leaseholders do obtain the Right to Manage, this lack of information can inhibit their ability to carry out the management functions effectively, which would ultimately negatively impact the freeholder’s interest.
A further problem is that many leaseholders, who typically have little to no management experience, are understandably unaware of the information that they require in order to manage the building effectively. As a result, the Law Commission has proposed that a new “Information Notice” should be introduced, which will list the specific information that the freeholder must provide to the RTM company. Although this Notice would not be mandatory, as in some cases it would unnecessarily add time and cost to the process, it is suggested that freeholders should have a time limit of 28 days for the provision of this information with an extension possible in exceptional circumstances. It is also proposed that the freeholder could receive a fine for not providing the required information as the ultimate deterrent.
Ending Right to Manage – problems and proposed solutions
Current legislation presents further issues with bringing the Right to Manage to a close, for example where a RTM company fails to effectively deliver the management functions. Freeholders do not have enough rights to step in and take control, their only option is to apply to the Tribunal for the appointment of a third-party management company. Furthermore, where a RTM company wants to relinquish their responsibilities, they have limited options should the freeholder not wish to regain the management role.
The Law Commission has therefore proposed that RTM companies should be able to apply to the First-Tier Tribunal to give up the RTM and for the management functions to be transferred back to either the freeholder or for a manager to be appointed. Similarly, the freeholder should have the right to apply to the Tribunal to regain the management function or to appoint a new manager.
The Law Commission’s (provisional) reform proposals for the Right to Manage – In summary
Make it more accessible by:
- Relaxing the qualifying criteria, so that leasehold houses and buildings with more than 25% non-residential space could qualify for the RTM
- Permitting multi-building RTM on estates
- Requiring each party to bear its own costs of any tribunal action, and exploring options for the landlord’s non-litigation costs
- Reducing the number of notices that leaseholders must serve, and;
- Giving the tribunal the power to waive minor procedural mistakes by the RTM company when claiming the RTM
- Introducing deadlines by which the landlord must provide information on certain topics, like insurance, to the RTM company and transfer service charges to the RTM company
Less uncertain by:
- Proposing education for prospective RTM company directors about their responsibilities;
- Suggesting a new “information notice” procedure which makes clear the extent of the management functions being transferred to the RTM company; and
- Giving the tribunal exclusive jurisdiction over RTM disputes
- Setting out clearer rules for the transfer of information about management functions and for the management of property which is not exclusive to the premises claiming the RTM
The Law Commission is currently reviewing the responses to their consultation paper and anticipate that their final report will be ready for publishing in the first half of 2020. Their final reform proposals will then have to be accepted by parliament before new Right to Manage legislation is introduced. We just hope that they can deliver on their very promising proposals and that it’s enough to encourage leaseholders to claim their Right to Manage.