Right to Manage
The second major right granted to leaseholders under the Commonhold and Leasehold Reform Act 2002 was that of the Right to Manage, introduced in s71 (Part 2 Chapter 1) of the Act in September 2003 and hailed as a great right as it was the most radical attempt at addressing the problems caused by negligent and incompetent managing agents. It’s a ‘no-fault’ process allowing leaseholders to either replace their own managing agent with one of their own choosing with no premium payable and without needing to go to court to prove ‘fault’ on the part of the freeholder. Smaller developments can choose to self-manage.
There is criteria that has to be met for both the building and the leaseholders, and a company that has to be established, which can be read here.
LANDLORD VOTING RIGHTS AND NON-QUALIFYING UNITS
Because this is a ‘no-fault’ process the freeholder is entitled to voting rights as it was considered that they should not be penalised in terms of the management of the building.
Although the RTM company’s management does not include non-residential and commercial units, their overall management of the building will have some impact on the general operation of these other parts so the landlord will also be able to exercise votes in respect of these units. Allocation will be proportional to the relative internal floor areas of both the residential and non-residential parts of the building but will exclude the common areas. It is calculated by taking the total votes allocated to the residential parts and multiplying that number by the formula A/B so:
- A is the total floor area of the non-residential parts;
- B is the total area of the residential parts (calculated in square meters with fractions of less than half a square meter being ignored).
A six-storey block of flats has five residential floors comprised of 20 flats with 1 landlord. The ground floor of the building is non-residential, a mix of shops and storage areas. Working on the assumption that the internal area of each floor is 1,000 square meters (or 950 square meters when the staircase, corridors, entrance hall and other parts are excluded), the non residential internal floor area is 950 meters and the total residential floor area is 5 x 950 = 4,740 square meters.
The landlords’ votes for the non-residential parts will be the total votes allocated to the residential flats multiplied by the relative floor area.
Assuming that the 20 flats each have 1 vote then the calculation is:
20 x 950 = 4750 = 4 votes = 20 for the leaseholders and 4 for the landlord.
If there is a dispute on the measurement of the floor area the prescribed Articles of Association provide for this to be referred to an independent chartered surveyor who will act as an expert, not an arbitrator. He should be selected by agreement between the parties is possible and if not, by the President of the RICS. His fees will be payable by the RTM company but the surveyor has the discretion to direct that some (or all) of his fees be reimbursed by the individual member(s) of the RTM company that raised the initial question.
His decision, based on his own measurement will be final and binding upon the RTM company.
There are however a number of reasons why an RTM claim may be rejected by the landlord because they are deemed not to have met the legal requirements which are:
- Less than two thirds of the flats are held by qualifying tenants;
- Less than 50% of leasehold owners are members of the RTM Company;
- The member register has not been correctly updated at the correct location;
- There is insufficient documentation that prove members are qualifying tenants;
- The RTM Company formation is incorrect because the company has not been set up as limited by guarantee;
- The Memorandum and Articles of Association are incorrect;
- There is no certificate of incorporation;
- If there is more than 25% of commercial space in the building, anything close to this number is likely to be disputed and require detailed measurements from a surveyor);
- The date for a Counter Notice being insufficiently long;
- Non-participants not being served the correctly worded invitation to join in the RTM process (Notice of Participation);
- Non-participants not being given enough time to respond;
- No proof of RTM members receiving copies of the RTM Claim.
UNSPENT SERVICE CHARGE MONIES
If the landlord has collected service charges in advance, with the unspent sums being held in an investment trust account, under s94 of RTM legislation he is under an obligation to hand over these monies as well as any interest paid to the company after he has deducted proper expenses he has accrued up to the acquisition date. Unspent sums will also include any reserve account or sinking fund. The RTM doesn’t have to serve a notice for these monies because legislation requires the landlord to act and to make to payment to the RTM company on the acquisition date ‘or as soon after that date as is reasonably practical. It is important that these unspent funds are obtained as soon as possible because the RTM company is not required to have any capital.
Whilst some landlords are happy to rely on the FTT to fix the sum, others only pay what they consider appropriate which is often disputed and taken to the Lands Tribunal for them to resolve. This is where an independent audit could prove valuable both in the pursuit of fairness as well as being time saving.
Note: Monies due to the landlord before acquisition date but not yet paid, remain payable to and collectible by the landlord, not the RTM company.
Under s90 (acquisition date) the RTM Company takes control of the management functions that should have been directly exercised by the former freeholder with s96 of the Act (management functions under leases) those functions are described as ‘functions with respect to services, repairs, maintenance, improvements, insurance and management.’
Whilst the positive elements of RTM are promoted, there is particular difficulty attached to two of its requirements: s100 (enforcement of tenant covenants) and s101 (tenant covenants: monitoring and reporting) of the 2002 Act.
These two sections need the RTM Company to ensure no breaches of the lease are being committed and to report to the freeholder any that occur. Whilst the company gets enforcement powers to sue for debts, seek injunctions for breaches such as repairs or nuisance and gets the right of entry into a property for the compliance of covenants, it becomes decidedly complicated when a) when there is an absent freeholder and b) flats are sublet in breach of the subletting covenant. There are also the legal issues surrounding the accessing of rented flats.