22 minute read
Right to Manage
BLOCKtakeover
If you and your fellow f lat owners are considering taking on the responsibility for managing your block, first you will need to understand the Right to Manage process
*block and Right to Manage or RTM is a right granted to flat owners under the Commonhold and Leasehold Reform Act 2002. As long as your your fellow residents meet the criteria (see The rights and wrongs of RTM p57 for more on this) you are free to take up the right to manage at any time. As RTM is a formal process that requires specific actions to be taken at the right time, flat owners are strongly advised to use the services of a professional adviser specialising in the leasehold sector to help them negotiate RTM successfully. Both the Leasehold Advisory Service (LEASE) and the Association of Leasehold Enfranchisement Practitioners (ALEP) have lists of suitably qualified specialists on their websites (see p56).
The first step for flat owners is to set up a Right to Manage Company (see Getting the most out of RTM, p58 of this issue). Once the RTM company has been registered, it must then formally invite the rest of the qualifying leaseholders to join using a Notice Inviting Participation. This must be in writing and in the prescribed form (Statutory Instrument (2010 No 825)) which can be obtained from the Stationery Office or downloaded from the website at www.legislation.gov.uk. The form must state that the RTM company intends to acquire the right to manage, state the names of the members of the RTM company and invite the recipient to become a member of the RTM company. It must also include a range of other information required by law. The notice may be served by post, or by simply delivering it to all the flats. If a 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. 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. The way in which the Notice Inviting Participation is served is important, which is why it is vital to take specialist advice.
The RTM process is then started by serving the landlord with a document known as a ‘Notice of Claim’. In order to do this, you don’t have to prove that your landlord is at fault or that your block is being badly managed and there is no requirement for approval by
Under RTM the RMC is ultimately responsible for maintenance whether or not a managing agent is employed
WhAt diRectoRs need to knoW RTM companies are governed by company law but what does this mean for RMCs?
A Right to MAnAge Company is set up, like any other company in accordance with certain rules and regulations. Under these rules, directors have duties that they must adhere to as outlined by The Companies Act 2006. The Act lists these duties as follows: n To act within the powers of the company – a director must act in accordance with the company’s constitution (i.e. the Articles of Association) and exercise his powers for the proper purpose. n To promote the success of the company – a director must act in good faith in the way he considers promotes the success of the company for the benefit of its shareholders as a whole. If the company is not run for the benefit of its members (e.g. a charitable company) then promotion is for the benefit of the company’s purposes. n To exercise independent judgement - this judgement or discretion can be limited if this is in accordance with the company’s constitution. n To avoid conflicts of interest – a director must avoid situations in which he has a direct or indirect interest that conflicts with or may conflict with the company’s interests. However, there are limited situations where such conflicts can be exempted or authorised or where the constitution/ Ar Articlesticles of of AssociationAssociation allowallow thethe BoardBoard to to authoriseauth such situations. n Not to accept benefits from third partiesparties – a director must not accept any benefitbenefit (including(including a a bribe)bribe) fromfrom a a thirdthird partparty which is giveny which is given becausebecau he is a directordirector or or becausebecause he he doesdoes or or omitsomits to to do do anythinganything as as a a director.director. n To declare any interest in proposed tr transactionsansa or arrangements with thethe companycompany –– a a directordirector mustmust declaredeclare thethe naturenature andand extentextent of of any interestany interest (direct or(direct or indirect)indirect) in in a a proposedproposed tr transaction or arransaction or arrangementangement withwith thethe companycompany (the(the director needdirector need not be a parnot be a party ty to to thethe tr transactionansaction forfor thisthis duty to apply). n To exercise reasonable care,ca skill and diligence –– a a directordirector mustmust exerciseexercis thethe care,care, skillskill andand diligencediligence whichwhich wouldwould be be exercisedexercised by by a a reasonablyreasonably diligentdiligent personperson bothboth withwith thethe generalgeneral knowledge,knowledge, skillskill andan experience that may be be reasonablyreas expected of a personperson carrcarryingying outout thethe functionsfu undertakenundertaken by by thethe directordirector in in relationrelation to to thethe company.company. directors are required to consider.
Directors Duties
n All current directors should make it their business to ensure that they are aware of their duties under the Companies Act 2006 (see above). n On appointment, new directors should receive guidance on these duties. n A director should have a service agreement which should specifically refer to compliance with the duties. n Companies should review their internal policies in the light of the new duties e.g. HR, business sector compliance and corporate responsibility. n Decisions made at board level or at committee level should be supported by background information and thoroughly considered. n There should be written evidence of the reasons for decisions made. n Any minutes for meetings should be detailed and should clearly set out the evidence considered and produced. n For a company with a sole member who is also the sole director, written resolutions and evidence should still be produced. Any contract between the company and a sole director must be recorded in writing. n Management and project teams reporting to directors should prepare briefing notes and reports taking into consideration the duties which the directors are required to consider.
This is a summary of a longer article first published in Flat Living, issue 7 a court. The prescribed form for the Notice of Claim is set out in the Statutory Instrument (2010 No 825) and a form can be downloaded from the website at www.legislation.gov.uk.
LEASE explains that it is the 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 counternotice) 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.
The next step is for the landlord to serve a counter-notice, no later than the date specified by the RTM company in the Notice of Claim The counter-notice can do one of two things:
either agree to the RTM or allege reasons why the RTM company is not entitled to proceed.
If the landlord agrees, 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 three issues: n the building does not qualify; n the RTM company does not comply with the legislative requirements; or n 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 and must state that: n the RTM company may apply to the Leasehold Valuation Tribunal for a determination of the issue; n the RTM company will not acquire the right unless the LVT determines in favour of the company or the landlord subsequently agrees.
The RTM company must make an application to the LVT within two months of the date of the landlord’s counter-notice. If the application is not made within this time, the claim is considered withdrawn. There is no prescribed form for this but an application form, with explanatory notes, is available from the LVT. ●
For a more detailed explanation of the RTM process and a list of leasehold specialists go to the LEASE website at: www.leasehold-advice.org. For a list of ALEP-approved specialists, go to www.alep.org.uk
TheRIGHTs and WRONGs of RTM
Right to Manage is not always as straightforward as f lat owners expect. Here, neil malOney asks the first and most basic question of all – is it right for your block?
One Of the mOst significant aspects of the Commonhold and Leasehold Reform Act which came into force in 2002 is the creation of the Right to Manage (RTM). This is the right for qualifying leaseholders to establish a company to take over from the landlord the management functions of their block as set out in their leases.
This right is limited to premises which contain two or more “qualifying tenants” so excluding houses. It also presents difficulties with mixed tenure estates. Blocks of flats must either be “a self-contained building” (i.e. structurally detached) or “a self-contained part of a building”. The latter needs to show an “earth to sky” vertical division in order to qualify for RTM, which usually rules out buildings with substantial overhanging parts or underground car parks.
So assuming your block does qualify and you wish to go ahead with RTM, what rights will you acquire? This is often a source of confusion and the recent case of Gala Unity Ltd v Ariadne Road RTM Co Ltd [2011] UKUT 425 (LC) clearly demonstrates where problems can arise. The case concerned two blocks and two coach houses which made up a single estate. All four buildings shared certain communal areas (the car park). The two blocks of flats each exercised RTM via one company but the issue was whether it now had responsibility for the common areas:n solely (i.e. it owed duties to the coach-houses and the blocks of flats) or n not at all (i.e. the common parts remained with the landlord) or n shared with the landlord (i.e. the landlord remained responsible for the common parts of the coach-houses while the company acquired responsibility for the blocks of flats)?
In the event, the Upper Tribunal (UT) held that the third scenario was applicable (although this case is now going to appeal). This is not ideal and the problem was recognised when the UT expressed the hope that the parties would negotiate a sensible solution (although after a bad-tempered and contested claim are the parties likely to want to adopt such a gracious approach?). This situation could also create difficulties for both, for example where one arranges to clean on Mondays and the other on Tuesdays. The duplication of costs surely would be unreasonable and unrecoverable?
Apart from issues like these, running an RTM Company also presents its own challenges. For example, it is unlikely that the leases will allow recovery of the RTM company’s running costs (secretarial fees, directors and officers insurance, etc) via the service charge, whereas most leases allow the landlord to do this. The LVT‘s view is that these costs would not usually be recoverable. If that is right, then RTMCo members need to know that they will be personally liable for these costs and the company needs to be sure that it has adequate alternative funds to meet its needs.
It is important that this concept is understood and absolutely essential that members understand the difference between “company” and “service charge” funds. Problems arise when they see RTM as forming a “club” for the mutual benefit of the residents (and ignoring the contractual rights and responsibilities of the lease). Members often push through “improvements” such as gates, entry phones and so on, even though the lease does not provide for recovery of these costs. Initial funding is required from the RTMCo members, as are future running and maintenance costs which are not recoverable.
So what money does the landlord hand over to the new RTMCo? Leaseholders need to appreciate that exercising RTM will not necessarily give them access to monies they think the landlord should be holding. Yes, he is obliged to hand over whatever monies are currently held in the bank account once existing commitments have been met, but this is not an obligation to hand over monies which should be there. It is not uncommon to find the company has no cash in hand to take over the management of the building and unless it takes over when a new service charge payment is due, it will find itself unable to raise funds through the lease provisions.
Even with these potential difficulties, RTM remains a valuable right allowing dissatisfied leaseholders greater control over the buildings that contain their homes. But it must not be seen as a panacea to solve all
RTM usually rules out buildings with underground car parks
ills. It is one of a range of remedies. Before exercising their right to manage, leaseholders should first consider the landlord’s rights and obligations under the lease as the company will take these on. Otherwise difficulties will arise! For example the company might have to fund expenditure for a considerable time if advanced collection of service charges is not covenanted. WHaT’s THe alTeRNaTIve?
If RTM is chosen in favour of other options that could equally be used to resolve disputes or offer better service and cost effectiveness in the future, lessees might suffer accordingly. It is wise to review all the available options with appropriately qualified professionals before exercising RTM. Alternatives include: n Appointment of a manager/receiver – a “fault” based right under Section 24 of the Landlord & Tenant Act 1987; this can have very significant benefits through enfranchisement of the property after two years. n Seek an “Order of Specific Performance” for breach of contract (after all, that’s what a lease is) when the landlord’s obligations are not being performed. This is an equitable remedy that grants the lessee what he actually bargained for, rather than awarding damages for not receiving the service. n “Variation” of leases (by negotiation) to provide a Resident’s Management Company “head-lease” – this puts the residents in a management role. n Challenge the reasonableness of the service charge - most appropriate when this is the only issue of concern – under Section 19 and 27a of the Landlord & Tenant Act 1985. n Ensure that full consultation is undertaken for works exceeding statutory financial limits and for long term contracts – see Section 20 of the Landlord & Tenant Act 1985 – respond positively to the Landlord’s notices and use professional assistance to do so, where necessary.
If you need help or advice on any of these issues, take professional advice from a chartered surveyor or solicitor specialising in the leasehold sector. ●
neil l maloney FRICS FIRPM MEWI is a director of My Home Surveyor tel 020 7183 9020 email neil@myhomesurveyor.co.uk
whAt Are your rights And responsibilities? If you are thinking about taking on responsibility for managing your block, first you need to know what’s involved. nicholAs kissen explains
if you hAve recently established a Right to Manage (RTM) company, the chances are that you have taken over the running of your landlord’s building from a manager who fell short of the ideal. However, replacing the former manager may not mean the end of your problems. Unless you proceed with caution – and understand the rights and responsibilities that you have taken on - it could be the start of a whole set of new challenges. Taking over the management of a building, whether it is a purpose-built block or a converted house carries with it a number of responsibilities.
Right to manage is exactly that – you have the right to manage the block you live in – but whether or not you decide to exercise that right is entirely up to you. Some RTM companies choose to self-manage and others appoint an external manager. However, even if day-to-day responsibility is out-sourced to a professional firm of managing agents, the buck stops with the RMC or RTM company. The responsibilities which are likely to be imposed are the obligation to maintain and repair the building, provide services and generally keep it in good condition. It is also important that any officers of an RMC or RTM company managing the building, should have a decent working knowledge of company law (see p54 for more on this). Over and above that, the menu of statutory rights given to leaseholders, for example challenging unreasonable service charges, and proper consultation over major works, must be addressed by the RMC or RTM company if they are to ensure a harmonious relationship between all flat owners.
Another issue that concerns anyone managing a building is health and safety. The ARMA Leasehold Advisory Note dealing with this subject (go to the ARMA website for more on this) emphasises: “Health and Safety should never be ignored or dismissed because it requires additional expenditure”.
Periodic assessments for the presence of asbestos should be considered to comply with statutory regulations. The same goes for fire risk assessments. Electrical equipment should be safe and water systems tested. A professional can advise on the relevant legislation to follow and how to comply with it.
Whether or not the cost of commissioning an assessment report and implementing any necessary works is recoverable from the flat owners through the service charge, will depend on the lease terms. Hopefully there will be a favourable provision in the lease such as allowing for the recovery of the costs of complying with parliamentary regulations. However, an inability to recover the costs from the flat owners is not an excuse to skimp on compliance with health and safety obligations and it may be necessary to consider a lease variation to insert a clause allowing the recovery of this expenditure.
Other important aspects of building management include insurance, security and maintenance. ●
nicolas kissen is an adviser with LEASE www.leasehold-advisoryservice.org
Proper consultation over major works must be addressed by the RMC or RTM company
Getting the most out of rTM
MArk chick looks at the best way to approach what can be a confusing process
As with Any project, the key to success where the Right to Manage is concerned is proper preparation. While exercising the ‘right to manage’ itself might sound straightforward, if you have a large number of people in your block it may not be quite as clear-cut as you think. Good communication is vital and you will need to have a clear way of keeping in touch with and informing those involved in the process.
This could be by way of using a notice board in the communal hallway, or perhaps by establishing an email circulation list. (If you do this, don’t forget to get consent from everyone to disclose email addresses to everyone else, before you send a group email).
You will also need a few ‘leaders’ to act as the channel for communication between you and your advisors. Be prepared
The best way to get the RTM process off the ground is often to call a meeting. If possible set an agenda beforehand and time limit the meeting. Do not let any one person hog the limelight or the agenda. If there are further questions then these can be dealt with by way of written answers, perhaps circulated by email.
You will need to decide who the directors of the RTM company will be. They will need to be available to give direction to the managing agent when required. If there are insufficient interested parties to run the company on day one, then you really do need to consider whether you should be doing this at all, as a poorly managed building and could damage the value of your property. delivery
The next important thing to do is to select your managing agent. The whole point of taking over the management of the block is to take the decision making power into your own hands. You may need to have a ‘beauty parade’ of the possible managers and the leaders of the process will probably need to meet
Whatever the new management has planned for the building needs communicating...
with them to make sure that they feel happy recommending them to the remainder of the group (see pages 47-51 for more on appointing an agent).
Once a manager has been selected (or you have taken the decision to self-manage) you need to consider other matters such as long term contracts (such as lift maintenance) that the current manager has established and which will need to be dealt with as part of the process. As part of understanding the process you will need to get a good handle on your current service charge budget, so that you can understand what the impact of any changes might be, once the management is transferred. Remember, the service charge might not necessarily go down, particularly if the quality of the services improves.
Don’t forget that the RTM Company can also serve ‘information notices’ requesting information from the landlord about the current maintenance and other contracts.
Once the notice claiming the RTM is served, you need to ensure that the advisors encourage the managing agents to talk to each other in the run up to the handover. You should not assume that all of the contractors who receive notification from the landlord after the determination date will want to renew their services with the RTM company. Often, in a case where there are a large number of contracts to deal with it may make sense to pick a slightly more distant ‘acquisition date’ (the date on which the management functions
will hand over) than the minimum three months after the determination date.the best run blocks are those where there is dialogue between the managers and the residents
Maintaining ContaCt
Once you have taken over the management of your block, whatever the new management has planned for the building needs to be communicated and this may mean holding another meeting. Regular updates to the flat owners will help with this.
The best run blocks are those where there is regular dialogue between the managers and the residents. They also tend to be those where if the RTM Company calls an annual meeting there is not an enormous turn out. This is because if the block is well run, the majority of people will be happy, and also silent! ●
Mark Chick is a solicitor and head of the landlord and tenant team at Bishop & Sewell LLP. He is also a committee member and director of ALEP (The Association of Leasehold Enfranchisement Practitioners). Tel 0207 631 4141 Website www.bishopandsewell.co.uk
Your questions answered The subject of Right to Manage always throws up some interesting queries from flat owners. Here are some of the most frequently asked questions, together with answers provided by the Leasehold Advisory Service.
If we exercise the right to manage (RTM), do we have to manage the building ourselves? The RTM company does not have to carry out the actual management itself. You can appoint a managing agent to manage the building on your behalf. We have taken over the right to manage (RTM), but the landlord insists that they continue to insure the building. Is this correct? No. Your RTM company has taken over the management functions of the landlord (and any management company that might have been in place). The management functions include the insurance of the building. However the Commonhold and Leasehold Reform Act 2002 specifically provides that the landlord is entitled to arrange additional insurance at their own expense.You are likely to require the services of a solicitor and a managing agent. See the list of Leasehold Practitioners on the LEASE website (see below). Is the landlord entitled to join the right to manage (RTM) company? Yes, the landlord is entitled to become a member of the RTM company from the acquisition date. How can I resolve a dispute concerning Right to Manage (RTM)? The Leasehold Valuation Tribunal (LVT) has the power to resolve various disputes relating to RTM including; n That on the relevant date the RTM Company was entitled to acquire RTM n Any question in relation to the amount of the landlords costs payable by the RTM Company n A determination of the amount of service charges to be paid over to the RTM Company. n Application for a determination regarding grant of an approval under a lease.
Is the right to manage (RTM) company bound to carry on with existing contracts entered into by the landlord? It is considered that the RTM process may well frustrate existing contracts, that is to say, the takeover of management responsibilities by the RTM company will bring to an automatic end all existing contracts. The RTM company can then choose whether or not to continue with the contracts. ●
For more FAQs and a list of qualified leasehold specialists who will be able to offer you more detailed advice, go to the website at www.leaseadvice.org
