Right to Manage

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In the United Kingdom the Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to change the appointment of the management of their building to another provider, by setting up a special company to take over from the freeholder those rights of appointment of management of the building.

Reasons to use Right to Manage[edit]

  1. To reduce service charges but with the precaution that service charges should always be kept at a "reasonable" level (as defined by Sections 27A and 19 of the Landlord & Tenant Act 1985 and always within the covenants of the Lease.
  2. To gain control of who to use as a manager for your block of flats in the event that the RTM Company may elect to contract with an agent for the management of their affairs. The RTM Company itself retains ultimate legal responsibility.
  3. In some cases your landlord may wish to undertake large scale repairs as required by the lease but using a method which may result in charges being higher than they might otherwise be if a collective of lessees, organised as a RTM Company, undertook to seek tenders for the work. RTM Companies, by giving authority to the board of directors, who are usually lessees, can be effective in controlling what are sometimes perceived as being unnecessarily high charges for works.

Overview of Right to Manage[edit]

Allows lessees to participate in a Right to Manage Company (established in accordance with the provisions of the Commonhold and Leasehold Reform Act 2002) which will assume the role of the Landlord for management purposes on a day-to-day basis (the current Landlord also being entitled to become a member of the RTM Company. Whilst this process can then appoint a new manager, it should also conduct a review of the current instructions of the property manager to see if it would be best to retain them (thus saving many years of specialist knowledge of the building and the leases that may be invaluable in the future). Of course, the Directors of the RTM Company if competent and qualified to do so, might consider there is no need to appoint a management specialist but self-manage instead. With increasing legislative demands this may be impracticable - if not inconvenient, time consuming and placing individuals directly in confrontation with their neighbours!.

What is the Qualification for Right to Manage?[edit]

To set up a Right to Manage Company certain conditions must be met and a minimum number of leaseholders are required to take part:

  1. 50% of flat-owners must want to go through the process
  2. 2/3 must have long leases at time of issue
  3. Less than 25% of floor area of building must be commercial
  4. If your building is part of a larger building or complex, those who may not become subject to your RTM Company's control must not be made to endure 'significant disruption'

There are a number of obscure matters which may affect you but usually do not - you may be best placed to seek advice from the wealth of companies who specialise in RTM Claims on these.

Alternatives to Right to Manage[edit]

There are many alternatives to Right to Manage including:-

  1. Management Audits - these are usually a requirement of the lease contract but where they are not, there are companies which can audit management processes and costs, however, this is an expensive route and usually results in the auditor being provided with a list of irrefutable reasons why the relevant costs have been incurred.
  2. Appointment of a Manager - a Tribunal appointed professional (with backing of the Leasehold Valuation Tribunal) to undertake the proper management of the building / estate in accordance with the lease provisions (and any other power given to him by the appointment. This requires first that the incumbent is notified of the reasons for the objection to their management. They are given a period of time to explain issues or correct them. It is then subject to an application to the tribunal. Unlike RTM Claims, it puts the burden on the Applicant to show that the freeholder has defaulted on the provision of their obligations under the lease contract or prevailing legislation. This will usually be difficult to do and it is an expensive process to procure effective representation at the Property Tribunal.
  3. Challenge to Unreasonable Service Charges at the Property Tribunal (First Tier), however, there are application fees for this and unless the charges levied are objectively unreasonable, you may not be able to satisfy your claim.
  4. Freehold purchase - though this is usually more expensive and takes longer to bring about.

Advantages of Right to Manage[edit]

The Right to Manage Company controls (but is also liable for) the proper management function of their building.

It allows Members to take control of the management of their building from absent and/or ineffective Landlords.

The RTM Company (unless its Directors have sufficient time and expertise) will usually need to outsource management of the Building to a competent and preferably qualified professional who will act in accordance within its direction, the law, the RICS Code of Practice and the Lease covenants.

The criteria which the Building and Leaseholders must meet to exercise their Right To Manage are not always easily satisfied and professional advice is almost always the most appropriate initial route for your proposal before committing to the establishment of an RTM Company.

The leaseholders are not required to prove that the Landlord (or his agent) is managing the building poorly.

The financial obligation can be substantial and should be considered BEFORE any action is taken to establish an RTM Company and it is almost never the case that the costs of establishing the Company fall within the lease covenants nor the subsequent running of the Company (as opposed to the management of the Building). Also and initially the RTM may need substantial interim funding before unexpended service charge funds (if any) are transferred to it. In addition The RTM Company's costs and the 'reasonable costs' of the Landlord also have to be covered (whether or not the matter is fanilsed and successful) by the individual participants.

All leaseholders in the property (as well as the Landlord) are entitled to be part of the Right to Manage Company. Generally speaking each party has equal voting rights (although the Landlord's rights are slightly more complicated to calculate).

Disadvantages of Right to Manage[edit]

  • If you self manage, you may experience problems which you are not able to resolve without expert assistance.
  • To exercise the Right to Manage, some Members will be required to become Directors of the RTM Company and will have to comply with the Companies Act. This can be onerous but if you appoint an agent, they are usually able to undertake these functions.

In most cases it is sensible and prudent to outsource the management of the Building to a competent management company.

  • The Directors of the Right to Manage Company will have to spend time throughout the year meeting to discuss and agreement the policies and procedures of the Company and to give appropriate instruction to their appointed agent in order that the Building can be managed effectively.

Preparation[edit]

Proper preparation is not easy and should not be taken lightly. A management audit may be the best method to adopt to ensure that all the necessary and pertinent information is available to the RTM Company members BEFORE deciding if this is the best course of action. Too many RTM Companies run into difficulty because they fail to prepare properly for their responsibilities. If in doubt, seek proper professional advice.

Setting up a Right to Manage Company[edit]

Go to a right to manage company formation specialist or better still, go to a company who will perform the whole right to manage legal process for you. The reason for this is that if you mess it up, you will not be able to repeat it for a long time and will have wasted both the opportunity and money. Most specialists can be found by searching online for right to manage and they are very competitive because they want you block management business. Always choose a company that does not bind you to their block management service and one that has insurance and is FSA regulated.

Right to Manage companies use a set of model Articles as specified in the 2002 Commonhold and Leasehold Reform Act 2002. Due to the Companies Act 2006, new model Articles for Right to Manage Companies are due to come into force on 9 November 2009 under Statutory Instrument 2009 No.2767. [1]

Getting the information needed to proceed[edit]

Search Google and look for a company who will help you with management or else, if they are happy to, help you with advice on self-management. Most have some advice on their website.

The Notice Inviting Participation[edit]

If you get this wrong, it invalidates the entire claim so it is best to use a professional company to perform the process of claiming your right to manage for you. They are so cheap now that there is no point in doing the work yourself.

Exercising the Right[edit]

The right is exercised by the service of a formal notice on the freeholder. After a set period of time, the management transfers to the Right to Manage Company which has been set up by the leaseholders. Once the Right to Manage has been acquired, the freeholder is also entitled to membership of the company. Right to Manage is not subject to any requirement for consent or order of a court or LVT. It is exercisable as a right which is begun simply by the service of notice.

The Notice of Claim[edit]

The Notice of Claim to Right to Manage may not be served until 14 days after the service of the Notice Inviting Participation. A claim notice for the Right to Manage cannot be served on the freeholder before all qualifying leaseholders have received the Notice of Invitation to Participate.

You really must engage a professional company to produce this otherwise you can jeopardise the entire process.

Deemed withdrawal[edit]

A claim to exercise Right to Manage will be deemed to be withdrawn where a Right to Manage Company either fails to apply to a Leasehold Valuation Tribunal within two months of receiving one or more notices which disputes its entitlement to Right to Manage or an application to a Leasehold Valuation Tribunal is withdrawn. It would also occur where the Right to Manage Company is wound up, enters into receivership, becomes insolvent or is struck off.

Right of access[edit]

The Right to Manage Company and any recipient of a Notice of Claim, or anyone acting on their behalf, has a general right of access to any part of the building if needed in connection with the claim to acquire Right to Manage. The right of access can be exercised at any reasonable time, if at least 10 days' notice has been given.

Freeholder's duty to provide information[edit]

The Right to Manage Company will not be able to manage without detailed information and records and the company may require the freeholders and his appointed managing agents to provide whatever the company 'reasonably requires in connection with the exercise of the Right to Manage'. This is a different provision from the request for information. Whereas the earlier right required information for the purpose of serving the Notice of Claim, this right is for information necessary for the management of the building. As with the earlier comments on requests for information, the company must be quite clear on its requirements and it may be prudent to obtain professional advice.

While the freeholder has a statutory obligation to provide the information requested, he is not obliged to volunteer information and the Right to Manage Company must be clear and precise in its notice to him. You may require sight and inspection of documents, or copies of them - for example, contracts, the accounts for the building and the service charges, any proposals or specifications for future works, maintenance schedules etc. Detailed work will have to be put in to ensure that nothing is left out.

If the Right to Manage Company is appointing a new managing agent then they may be able to advise on the information and records to be obtained.

The notice may be served on the freeholder 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.

For example, if the Right to Manage Company serves the notice on the acquisition date, the freeholder must comply within 28 days of the notice. If the notice is served, say, 20 days before the acquisition date, the freeholder must comply within 8 days of the acquisition date.

This timing allows the freeholder sufficient time to assemble the information but does not require him to release potentially sensitive or confidential material before the Right to Manage company actually takes over the management. In that the Right to Manage company needs the information from the first day of taking up management, the general intention of the provision is that the company should serve the notice at least 28 days before the acquisition date with a view to the freeholder providing the information on, or immediately after, the acquisition date.

A Right to Manage Company has the right to require any person to provide it with information reasonably required for the purposes of ascertaining the information to be included in the Notice of Claim. This information must be provided within 28 days of it being requested.

Where any party to be served with the claim notice is not traceable[edit]

Usually, this does not represent a problem. Once the documents are served, the Civil Procedure Rules apply - that is, they are deemed served 2 working days later if posted by first class post.

Best always to use professional company who specialises in right to manage.

The freeholder's costs[edit]

Where a Right to Manage Company exercises the right, any recipient of the Notice of Claim is entitled to recover from the Right to Manage Company the reasonable costs incurred in dealing with that claim. The Right to Manage Company must reimburse the freeholder and his appointed managing agents for any costs incurred in the process. Because the Right to Manage is not fault based and may be exercised against the best or most competent freeholders and management companies; there is, therefore, no legal justification for the freeholder of His appointed managing agents to suffer any financial loss from the.

Costs are still recoverable if the Right to Manage does not proceed, for example, if the claim notice is withdrawn by the Right to Manage Company, or deemed to be withdrawn; if the Right to Manage Company is wound up; or if a Leasehold Valuation Tribunal determines that the company is not entitled to acquire the right. It must be appreciated that the liability for the freeholder's costs extends to all members of the Right to Manage Company and all persons who are members of the Company are liable for the costs incurred up to that point by all parties who received the Claim Notice.

Date on which the right is acquired[edit]

Where no recipient of a Notice of Claim serves a Counter Notice, the Right to Manage Company will be entitled to take over the management of the building on the date specified for that purpose in the Notice of Claim. As noted previously, this date must be at least three months after the date on which the Counter Notice must be served.

Where any party disputes a Right to Manage Company's Right to Manage, and subsequently agrees in writing that the Right to Manage company was entitled, then the Right to Manage Company would take over the management for their building 3 months after the last of those parties gave their written agreement.

Management contracts[edit]

The freeholder of his appointed managing agents are under a legal obligation to serve notices in respect of the management contracts that it has entered into before the date on which a Right to Manage Company is to take over the management of the building. This will allow all parties employed in the management of the property to make the necessary arrangements to prepare for the Right to Manage Company taking over.

Because all responsibility for management passes to the Right to Manage Company, the Right to Manage Company will need to make decisions on whether to renew the contracts or to look elsewhere for the service(s) provided.

It is extremely important that steps are taken in good time to ensure the continuity of management services; it would be very unfortunate, for example, if someone were trapped in the Granary Mansions lift on the day of hand-over and the Right to Manage Company did not have the lift maintenance contract in place.

It is the freeholder’s duty to ensure that parties are aware of the contracts through the service of notices - the contractor notices and the contract notices.

  • Contractor notice - this must be served on all contractors appointed by the freeholder or his appointed managing agents and include the following information:
  • identity of the relevant contract;
  • a statement that the Right to Manage is to be acquired by a Right to Manage Company;
  • the name and registered address of the Right to Manage Company;
  • the acquisition date;
  • a statement advising a contractor who wishes to continue to provide services to the building to contact the Right to Manage company.

Where any of the services are sub-contracted, then the contractor who receives the contractor notice must send a copy to the sub-contractor.

  • Contract notice - this must be served on the Right to Manage company and include the following information:
  • the particulars of each existing contract and the name and address of the contractor;
  • a statement advising the Right to Manage company to contact those contractors whose services it wishes to retain.

It is not required, within service of the contractor notice, to provide a copy of the contract, but simply to inform the Right to Manage Company of its existence and the party to it.

Both the contract and contractor notices should be served by the freeholder as soon as possible after the Notice of Claim is received from the Right to Manage Company, but no later than 'as soon as is reasonably practicable' after the determination date. This is enforceable through the county courts.

The determination date is the date specified in the Notice of Claim for the service of the freeholder's counter-notice. Because there is a gap of three months between the determination date and the acquisition date, the notices should be served well before the management is transferred.

Ideally, a well-organised Right to Manage Company would already have obtained these details at a much earlier stage and have made important decisions on retaining or obtaining new contractors. However, it must not be assumed that all existing contractors will necessarily be prepared to contract with the Right to Manage Company, and the company should therefore investigate alternative providers. Because an existing contract is broken by the process, it gives the company the opportunity to review contracted services to the building and to re-specify or re-negotiate accordingly.

The duty to transfer funds[edit]

The legal obligation of the freeholder or previous management company is to pass forward any unspent funds. In practice, if these are less than £2k, it is not economic to pursue them through the courts, but ultimate determination can be made by the Leasehold Valuation Tribunal (LVT)[1]

Enforcement of covenants[edit]

The leaseholder’s covenants, or obligations, under the lease become the responsibility of the Right to Manage Company. The company must ensure that all covenants are complied with and must keep the freeholder informed. The company has a statutory duty to review all the leaseholders' compliance with their covenants and to take steps requiring the remedy of any breaches. Any breaches which have not been remedied must be reported to the freeholder (unless he has specifically notified the Right to Manage company that it need not do so). The freeholder then may proceed to enforce the covenant through the remedy of forfeiture.

This is a specific remedy of the freeholder and cannot be exercised by the Right to Manage Company. Therefore, the Right to Manage Company cannot institute forfeiture proceedings in furtherance of recovery of arrears of service charges; if the arrears cannot be recovered through other means, the company will have to seek the co-operation of the freeholder. As leases provides a right of access into the flats for purposes of compliance or enforcement of covenants, this right is available to the Right to Manage Company.

Freeholder's membership of the Right to Manage Company[edit]

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 (if he wishes to take it up). 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, and therefore would have no votes, he is allocated one vote as the landlord.

As the right to manage is not default-based, there is no reason why the landlord, who retains an interest in the building, should not have some input to the practicalities of its management. It is different where the manager has been appointed by a Tribunal to replace a poor or incompetent manager – there the landlord is removed entirely as a consequence of his mismanagement. With the right to manage, it is assumed that the landlord is not necessarily at fault and so there is no justification for his exclusion from the management process.[2]

The rules on voting are complex if there are multiple freeholders or multiple units and you are best passing this issue to the new managing agents. It is rare that anyone votes on the meetings or that there ever are meetings so these issues are largely academic.

The End of Right to Manage[edit]

While Right to Manage is not subject to any time limit there are circumstances in which the Right to Manage Company ceases to be entitled to exercise Right to Manage. This will occur:

where the Right to Manage Company wishes to cease exercising the right and all leaseholders agree;

where the Right to Manage Company is wound up, enters into receivership, becomes insolvent or is struck off;

where a management company appointed to replace the Right to Manage Company begins to act or where an order is made under Part 2 of the Landlord and Tenant Act 1987 which withdraws the Right to Manage from the Right to Manage Company;

where the Right to Manage Company ceases to be a Right to Manage Company (which may happen, for example, because the company is used to purchase the freehold of the property).

References[edit]

External links[edit]