The below information is not meant to describe or give a full interpretation of the law; only the courts can do that. If you are in any doubt about your rights and duties then seek specific advice.
This provides an overview only.
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.
RTM is available to leaseholders of flats only. The landlord’s consent is not required, nor is any order of court. The right is exercised by the service of a formal notice on the landlord.
Leaseholders should be clear on what they want to achieve by taking over the management of the building. The leaseholders become wholly responsible for all decision-making in terms of budgets and reserve funds, standards of management and provision of services.
RTM does not necessarily mean self-management. The RTM company can decide to carry out day to day management itself, or it can use a managing agent. The managing agents will be instructed by the RTM company.
The RTM company will be required to comply with a Government-approved code of management practice- the Royal Institution of Chartered Surveyors (RICS) and by the Association of Retirement Housing Managers (ARHM).
Taking over the management will bring responsibilities including managing the building through a company, holding regular meetings, the responsibility for budgets and accounts and a need to keep the RTM company solvent. The company and directors are required to comply with company, housing and health and safety law. A managing agent may be appointment by the RTM to carry out these responsibilities.
QUALIFICATION FOR RTM
The building must meet certain conditions and a minimum number of leaseholders are required to take part. These include:
- 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.
The RTM may only be exercised by a RTM company. 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.
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.
THE RTM COMPANY
The RTM 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 RTM and which then takes management responsibility.
The RTM company must have an Articles of Association and a Memorandum of Association is also required at registration, set out in Statutory Instrument 2009 No 2767.
Forming the RTM company can be done by a solicitor, by a company agent or by the qualifying leaseholders themselves. 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.
Once the RTM 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 RTM;
- 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 notice must also state:
- that the RTM company will take over the landlord’s management functions under the lease
- 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 RTM.
- whether or not the RTM company intends to employ a managing agent to manage the building
- 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 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 procedure of service of the Notice Inviting Participation is important. All the leaseholders should have the opportunity to take part in the exercise of RTM. The Company`s solicitor, should ensure that evidence of the satisfactory delivery of, or posting of, the notices is retained.
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 must be provided within 21 days.
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 RTM’. A landlord served with a notice under Section 82 must comply within 28 days. 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. However, before commitment to the action, it is worth the group clarifying the motives for obtaining management. This motivation should form the management strategy.
Consider employing of a managing agent and the service delivery objectives that could be achieved.
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 has 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.
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 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
- 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
- specify a date, at least three months after the date for the counter-notice, on which the RTM company intends to acquire the RTM 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.
- a reminder in the notice for a landlord who has no objection to the claim to serve the ‘contract’ and ‘contractor’ notices
- a statement to remind the landlord of his statutory right to membership of the RTM company
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 RTM into being and sets the date for the RTM company to take over the management. While the legislation provides a minimum period of three months this need not necessarily be taken as a maximum; it’s wise in some circumstances to provide a longer period to engage a new managing agent and to organise other arrangements.
Before making the application, the RTM company must take all reasonable steps to find the missing landlord and, if unsuccessful, must inform all the qualifying leaseholders of the building of the intention to seek the order from the Tribunal.
RIGHT OF ACCESS FOR INSPECTION
There is a statutory right (Section 83 of the 2002 Act) for the RTM company to require access to ‘any part of the premises if that is reasonable’ in connection with the claim. This is a right to inspect areas and facilities not generally accessible to the lease-holders. This provides access to ‘any person authorised to act for the RTM company’. The right may be exercised by giving not less than ten days’ notice. This right is only available after service of the Notice of Claim.
THE LANDLORD’S COUNTER-NOTICE
No later than the date specified by the RTM company in the Notice of Claim, the landlord(s) may serve a counter-notice. The counter-notice can do one of two things: either agree to the RTM or to allege reasons why the RTM company is not entitled to proceed. The counter-notice does not provide an opportunity to raise queries or to dispute the RTM on any other ground.
The counter-notice must be in the prescribed form and is limited to one of the two following statements:
- admitting that the RTM company is entitled to acquire the RTM; or
- alleging that the RTM company is not so entitled and giving reasons to support the allegation.
If the landlord admits the right, the management will pass to the RTM company on the date specified in the Notice of Claim. Where the landlord does not serve a counter-notice, then the acquisition date for the right will be the date specified in the notice.
Where the landlord disputes the claim, the grounds for dispute are limited to:
- the building does not qualify; or
- the RTM company does not comply with the legislative requirements; or
- the members of the RTM company do not represent half the flats in the building.
The counter-notice must specify the reason for the alleged non-qualification by reference to the specific requirement of the Act and must state that:
- the RTM company may apply to the First-tier Tribunal (Property Chamber) for a determination of the issue;
- the RTM company will not acquire the right unless the Tribunal determines in favour of the company or the landlord subsequently agrees.
The RTM company must make the application to the Tribunal within two months of the date of the landlord’s counter-notice. The Tribunal determines whether the RTM company is or is not entitled to the RTM.
THE LANDLORD’S COSTS
The RTM company must reimburse the landlord for any costs he has incurred in the process. The Act refers to costs ‘in respect of professional services’ for which the landlord was ‘personally liable’. Costs are still recoverable if the RTM does not proceed.
The acquisition date is the date on which the RTM company formally takes control of the management from the landlord.
LANDLORD’S MEMBERSHIP OF THE RTM COMPANY
Immediately upon the RTM company taking over on the acquisition date, the landlord becomes entitled to membership of the company, with full voting rights as a company member. The landlord’s votes are, in the first instance, determined according to the units he holds in the building, flats or non-residential parts. In cases where he holds no units he is allocated one vote.
It is important that the RTM company is aware of any contracts currently in place by the landlord and that the relevant contractors are given adequate warning of the impending transfer of management.
Steps must be taken to ensure the continuity of management services. If any services are sub-contracted, the contractor who receives the contractor notice must send a copy to the sub-contractor.
Both the contract and contractor notices should be served by the landlord as soon as possible after he receives the Notice of Claim from the RTM company. This is enforceable through the county courts.
LANDLORD’S DUTY TO PROVIDE INFORMATION
The RTM company may require the landlord to provide whatever the company ‘reasonably requires in connection with the exercise of the RTM’. This is different from the request for information.
Where the company is appointing a new managing agent, the new agent will advise on the information and records to be obtained.
The notice may be served on the landlord at any time, but he is not obliged to act on it before the acquisition date. He must comply within 28 days of service of the notice, but cannot be compelled to do so before the acquisition date.
This timing allows the landlord sufficient time to assemble the information but does not require him to release potentially sensitive or confidential material before the RTM company actually takes over the management.
LANDLORD’S DUTY TO TRANSFER FUNDS
Where the landlord has collected service charges in advance and is holding the remainder in a trust account, he is under an obligation to hand over all the unspent sums to the RTM company. These will include unspent service charges and any reserve account or sinking fund.
The RTM company is not required to have any capital, it’s important to gain control of these funds as soon as possible in order to maintain service provision to the leaseholders of the building. However, accounts are not always up to date.
The Act provides that an application may be made to the First-tier Tribunal (Property Chamber) to determine the amount to be paid. It may be sensible, in all cases, for the RTM company and the landlord to agree to an external audit of the service charge accounts. It is most unlikely that a managing agent acting for the landlord would be prepared to take responsibility for handing over sums to the RTM company without some independent verification.
In cases of dispute, the Tribunal provides a final route for determination.
REGISTRATION OF RTM
A RTM claim notice is not registerable. However, where a RTM company has acquired the RTM, it may apply to the Land registry for an entry to be made in the proprietorship register of the affected title (Rule 79A Land Registration Rules 2003).
Application must be made using form AP1.
MANAGEMENT FUNCTIONS AND RESPONSIBILITIES
On the acquisition date, the RTM company takes over all the management functions for the premises under the lease. The functions pass to the RTM company on the acquisition date.
‘Management functions’ are defined in the legislation as ‘functions with respect to services, repairs, maintenance, improvements, insurance and management’ – that is, the delivery of all the duties reserved to the landlord under the lease.
The transferred functions also include approvals and enforcement of the covenants under the lease. The right to receive the ground rents does not pass to the RTM company but remains with the landlord.
The day-to-day functions and responsibilities of the management of the building pass to the RTM company. The landlord is still responsible for the performance of the land-lord’s covenants outside the general duties of management.
Most leases contain provisions requiring the consent of the landlord to certain actions by the leaseholder; these can include sub-letting, assigning the lease and making alterations to the flat. The power to issue such approvals passes to the RTM company.Before granting any such approval, the RTM company must give notice to the landlord.
The RTM company does not require the specific consent of the landlord, and if he does nothing, the company may grant the approval. Where the landlord objects, consent may not be granted until the landlord withdraws his objection, or the matter is decided by the First-tier Tribunal (Property Chamber). Where the landlord wishes to object, he must do so by notice to the RTM company and to the leaseholder concerned.
ENFORCEMENT OF COVENANTS
The leaseholders’ covenants, or obligations, under the lease become the responsibility of the RTM company; the company must ensure that all covenants are complied with and must keep the landlord informed.
ENDING THE RTM
The RTM, once acquired, is not subject to any time limit and will continue until it is terminated; it is not subject to review by time.
There are three circumstances where the right may be terminated:
- by agreement with the landlord
- through collapse of the RTM company
- through the appointment of a manager
Where the RTM is terminated, for any reason, no further application for the right may be made for another four years, other than with the consent of a First-tier Tribunal (Property Chamber).
Do we qualify?
For more information and to find out if your development qualifies for the Right To Manage please contact our new business team.