Law Commission Report: Exercising the Right to Manage

Last year the Law Commission began its consultation on proposed changes to the right to manage (the “RTM”).

The final report has now been published which can be found here; we examine the key recommendations below.

Premises in which the RTM is available

Key recommendations:

1. RTM should be exercisable in respect of leasehold houses as well as flats.
2. Premises can qualify for the RTM if they are a (part of a) building reasonably capable of being managed independently, even if they do not satisfy the requirements for self-containment.
3. The limit on non-residential floorspace be increased from 25% to 50%.
4. The RTM be exercisable in respect of premises which comprise or contain at least one residential unit held by a qualifying tenant, rather than two as in the current law.

Comments:

The proposals would remove common stumbling blocks to a successful RTM application. It would also remove the arbitrary distinction between flats and houses. This should lead to more RTM applications and reduce the need for expensive expert advice.

Leases capable of supporting an RTM Claim

Key recommendations:

1. Shared ownership leases granted for more than 21 years should be a long lease for the purpose of the RTM legislation, regardless of whether the particular leaseholder has staircased to 100%.
2. Where a lease does not permit residential use, the leaseholder should not be a qualifying tenant for the purposes of the RTM.
3. Where a lease permits only residential use, the leaseholder should be a qualifying tenant for the purposes of the RTM.
4. Where a lease permits both residential and non-residential use, the leaseholder should be a qualifying tenant for the purposes of the RTM unless the premises are occupied solely for business purposes.

Comments:

Many leaseholders are excluded from the RTM process by virtue of the cost of staircasing their lease to 100%, even if they share the same rights and responsibilities as other leaseholders. Clarifying that a shared ownership lease is a long lease addresses this.

The definitions for mixed-use properties would preclude simple workarounds from the RTM process and are flexible enough to include mixed-use properties with a genuine residential purpose (such as live/work units) in the RTM regime.

Nature or the landlord

Key recommendations:

1. Shared ownership leases granted for more than 21 years should be a long lease for the purpose of the RTM legislation, regardless of whether the particular leaseholder has staircased to 100%.
2. Where a lease does not permit residential use, the leaseholder should not be a qualifying tenant for the purposes of the RTM.
3. Where a lease permits only residential use, the leaseholder should be a qualifying tenant for the purposes of the RTM.
4. Where a lease permits both residential and non-residential use, the leaseholder should be a qualifying tenant for the purposes of the RTM unless the premises are occupied solely for business purposes.

Comments:

This would expand the availability of the RTM and remove restrictions which are not justified as a matter of policy or principle.

Multi-building RTM

Key recommendations:

1. Enable multi-building RTM applications.
2. Require that each individual building which is to be included in the multi-building RTM claim meets the qualifying and participation criteria.
3. Leaseholders in a building not originally included in a multibuilding RTM claim, should be able to join in the existing RTM arrangements at a later date.
4. It should be possible for leaseholders to “break away” from an established multi-building RTM and claim the RTM in respect of their own building or a smaller number of buildings, subject to the expiry of a minimum period of time following the acquisition date of the original multi-building RTM.

Comments:

The proposals would address the situation where even if buildings are on the same estate and share appurtenant property such as gardens or car parks, they cannot take over management through a single RTM company in a single claim.

The RTM Company

Key recommendations:

1. Abolish the rule that once an RTM company has been established for a set of premises, there can be no other RTM company for that premises.
2. Require that RTM company directors must hold an AGM.
3. Minor clarifications to the current voting rights as set out in the model articles and the method for allocating votes.

Comments:

The proposals would prevent the use of sham RTM companies being used to prevent RTM claims, and also tweak the internal workings of RTM Companies to make them more accountable.

Assistance and Support for RTM Companies

Key recommendations:

1. The government should make training for leaseholders acting as company directors available free of charge.
2. At least one director of an RTM company should be strongly encouraged to complete training.

Comments:

Leaseholders often have insufficient knowledge about the rights and responsibilities that are acquired by an RTM claim. The educational resources that currently exist are often cost-prohibitive or inadequately detailed. The above would remove one of the cost barriers to this and ensure that at least one director is well informed.

The Acquisition Process

Key recommendations:

1. The requirement to serve notices inviting participation to the RTM claim should be abolished.
2. All notices under the RTM legislation should be capable of being given by email, subject to some restrictions.
3. There should be a requirement that claim notices are signed by or on behalf of an RTM company (the signature(s) may be affixed electronically).
4. RTM companies should only be required to serve freeholders of the premises. The onus will be on freeholders to pass this notice on to any intermediate landlords.
5. Service at certain categories of address will be deemed to have been effective.
6. Landlords (and other relevant parties) should be required to state and explain all objections in the counter-notice and should not generally be permitted to raise new arguments at a later stage.
7. In cases where no counter-notice is received, the RTM company will have the option of confirming the validity of its acquisition of the RTM in the Tribunal.
8. The validity of RTM notices may only be challenged if they fall short of prescribed requirements relevant to the underlying purposes of those notices.
9. How the acquisition date is determined should be clarified.
   

Comments:

The proposals would stop minor technical errors from stopping an otherwise valid RTM claim. They would also reduce the cost of the RTM process which is often a major factor in considering whether to make an RTM claim.

Information Rights and Management Contracts

Key recommendations:

1. In addition to information reasonably required to complete the claim form, RTM companies should be entitled to inspect or obtain a copy of any information that they reasonably require to decide whether to claim the RTM.
2. RTM companies should have a right to obtain any information they reasonably require to decide whether to apply to the Tribunal for a determination that they are entitled to the RTM.
3. The Government should provide model forms which RTM companies can choose to use when exercising the right to obtain information.
4. The landlord should have a duty to notify RTM companies of material changes to information they have provided.
5. The RTM company should bear the landlord’s costs of complying with requests for information if the request is made before the claim notice is served, after this each party should bear their own costs.
6. For management contracts entered into prior to the determination date, the landlord must notify the contractor of the RTM claim and the RTM company of the new management contract as soon as possible after the claim is determined, and no later than 14 days afterwards.
7. For management contracts entered into after the determination date, we recommend that the landlord must provide the relevant notifications on the date the contract is entered into, or as soon as possible afterwards if not reasonably practicable on the date. In any event, the notification must occur before the acquisition date.

Comments:

The proposals would allow the leaseholders to obtain a fuller picture of the current situation to enable them to make an informed decision on whether to acquire the RTM.

The acquisition of the RTM will generally cause existing management contracts to be frustrated. These proposals address the possible exceptions to this where contracts are entered into where the landlord is aware of an RTM claim.

Management Functions

Key recommendations:

1. RTM companies should not take over regulated health and social care.
2. Landlords and RTM companies should seek to work together to procure suitable insurance cover in joint names. In the absence of agreement being reached, the Tribunal should have jurisdiction to make a determination.
3. The landlord should have rights to request a written summary of insurance cover placed in relation to the premises and to inspect or be sent a copy of the policy and associated documents.
4. RTM companies should not automatically acquire management functions over appurtenant property shared with other buildings which are not part of the RTM claim. They should only acquire management functions if the certain criteria are met.
5. The Tribunal should have the power to order a variation to a lease if the acquisition of the RTM makes management of premises in accordance with the leases unworkable.
6. Landlords should be required to transfer any uncommitted service charges to the RTM company on the acquisition date.
7. The landlord should transfer sums that should be in the service charge pot on the assumption that the landlord has collected sufficient sums from each leaseholder to cover their share of the actual service charge expenditure incurred.
8. RTM companies should be permitted to recover certain prescribed costs of management as an additional service charge in circumstances where the lease does not make provision for this.

Comments:

In relation to retirement or other specialist accommodation, it is possible that an RTM company may become responsible for providing “regulated activities” to leaseholders, such as health and social care. These services are governed by the Care Quality Commission, with which the services provider (in this case, the RTM company) must be registered. Failure to register is a criminal offence. For this reason, it is proposed that regulated activities should not be acquired by the RTM company.

RTM companies sometimes struggle to obtain insurance due to not having sufficient and timely information about the premises’ insurance history. There is also uncertainty as to an RTM company’s ability to claim on the insurance in the event of the building’s complete destruction because responsibility for reinstatement is not one of the management functions transferred to the RTM company. The above would address these issues, as the alternative of having the RTM company acquire the obligation to reinstate would create significant financial risks.

By not automatically acquiring management functions over shared appurtenant property the risk of managing shared appurtenant property and not being able to recover the cost of this from non-RTM leaseholders can be avoided.

What the RTM company can do is both enabled and limited by the leases. The RTM company may have difficulty exercising its management functions because of the terms of the leases. This proposal provides an option to resolve this where varying the leases is not feasible.

There is currently no deadline for transferring service charge funds and the landlord has no obligation to recover service charge for the benefit of the RTM Company. This leaves the RTM company in a financially difficult position. The proposals would address this.

It is a well-known issue that RTM companies have no legal means of recovering their management costs from leaseholders. This puts them in a worse position than landlords, who are often entitled to recover such costs through the service charge. It also leaves them at risk of challenge if, as most RTM companies do currently, they recover these costs through the service charge without being entitled to do so. The proposal to permit the recovery of prescribed costs of management would finally deal with this.

Post-Acquisition Rights and Obligations

Key recommendations:

1. RTM companies should be under a duty to either notify the landlord of specified applications or refuse the application within a reasonable time and in any event within 30 days after receipt of the application. Landlords may object to such approvals being granted by the RTM company by applying to the Tribunal for a determination within 30 days of receiving notification of the request for approval from the RTM company.
2. It should be clarified that landlords cannot charge administration fees for lease consents after the RTM has been acquired.
3. It should be clarified that RTM companies are not entitled to give retrospective consents or consents in respect of absolute covenants, as these are not consents given “under” the lease.
4. RTM companies should not be required to include the landlord’s name and address in any demand for sums payable under the lease.

Comments:

The proposals would address the practical problems where The RTM company and the landlord both retain rights and obligations relating to actions which require consent.

Costs and Dispute Resolution

Key recommendations:

1. RTM companies should no longer be required to pay landlords’ non-litigation costs.
2. Each party should bear their own costs in any Tribunal proceeding relating to the acquisition or exercise of the RTM, subject to the Tribunal’s existing powers.
3. Any term of a lease which purports to enable a landlord or manager party to the lease to recover costs incurred in litigation or otherwise as a result of the acquisition of the RTM should be unenforceable.
4. The Tribunal should continue to have jurisdiction over disputes arising in the course of an RTM claim.
5. The Tribunal should be given exclusive jurisdiction to determine whether a requirement of the RTM provisions has been satisfied, whether in the course of a claim, or the exercise of management functions after a successful claim:

Comments:

As mentioned before, costs are a key concern in an RTM claim. These proposals would reduce the cost uncertainty for leaseholders by clarifying what is recoverable, and the jurisdiction in which a dispute will be dealt with. This would enable more leaseholders to proceed with RTM applications as they would have a better idea of the costs involved.

Termination of the RTM

Key recommendations:

1. The RTM company should be able to apply to the Tribunal if it wishes to give up the RTM.
2. Management functions should generally revert to whoever is responsible for exercising those functions under any leases of the premises when the RTM terminates. If that party no longer exists, management functions should transfer to the landlord.
3. The person taking over management functions should have 90 days from the RTM ending to apply for the appointment of a manager.
4. Landlords should have a defence to an RTM claim where the premises have been the subject of a previous RTM which terminated in the preceding two years. If the defence is raised, the RTM company could apply to the Tribunal for an order that the RTM claim should proceed in any event.

Comments:

There is no general right for RTM companies to apply to the Tribunal to give up management. However, over time it may become either impossible or undesirable for the RTM company to continue to manage. These proposals would deal with a gap in the RTM legislation, enable the orderly surrender of management rights.

More informationPinney Talfourd are experts in RTM claims. We keep up to date on changes to the law so we can ensure you are given up to date advice.

Please do not hesitate to contact either Stephen Eccles by email or on 01708 463202 or Oliver-James Topping by email or on 01708 463227 should you wish to discuss anything further.

This article was written by Oliver-James Topping, Solicitor in the Residential Property Litigation at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of November 2020.