Right to Manage & Service Charges

Brian Jones

• Publisher: Estates Gazette
• Year: 2014
• ISBN:
  9781135324452
• Edition: 1
• Topic: Jura
• Subtopic: Eigentumsrecht

This book will be essential reading for anyone involved in the management of blocks of flats, or considering acquiring the management of their block. Written by a lawyer well versed in leasehold law, the book'saim is to give a practical guide to a wide variety of management issues, concentrating especially on the pitfalls presented by the Commonhold and Leasehold Reform Act 2002 and how they may be avoided or overcome.

Part 1

Right to Manage

Chapter 1

Qualification and the Preliminary Steps

Qualification for Right to Manage (RTM) is superficially straightforward.

Qualifying tenants

A qualifying tenant, subject to a few limited exceptions, is any long leaseholder of a flat (section 75(2)). The exceptions are set out in section 75(3)–(6) Commonhold and Leasehold Reform Act 2002 (‘CLRA’). They are:

• Business tenancies.
• A lease granted out of a superior lease other than a long lease, in breach of the terms of the superior lease where the breach has not been waived by the superior landlord.
• There can be no more than one qualifying tenant for a flat at any point in time.
• Where there is more than one lease, any superior lease will not qualify.

In the case of joint tenants, they will be regarded as a single qualifying tenant (section 75(7)). As we shall see later, there are certain consequential problems arising from this point when it comes to voting rights and assessing the numbers for qualification for RTM. Similar complexities will occur in relation to tenants in common, who are not mentioned in this context in the Act.

A ‘long lease’ is defined by sections 76 and 77 of the Act. Essentially, it is a long lease if:

• It is for a term exceeding 21 years, whether or not it is terminable by notice by either side or by forfeiture within that period.
• It is for a term fixed by law with a covenant or obligation for perpetual renewal.
• It is a lease terminable after death or marriage (section 149(6) Law of Property Act 1925).
• It was acquired under the ‘right to buy’ legislation (Housing Acts 1985 and 1996).
• It is a shared ownership lease where the tenant’s total share is 100%.
• The lease was originally for a term of less than 21 years, but has since been renewed (without payment of a premium) for a term totalling in excess of 21 years, or
• There is more than one lease for a flat between the same parties, and the flat is wholly demised by reading the leases together.

Thus, taking a simple lease structure, the tenant of a residential flat under a lease for more than 21 years will qualify to participate in RTM, whether or not he* lives at the property and no matter how long he has owned the flat.

Qualifying premises

The next question to consider is what premises qualify. The criteria here are set out in section 72 of the Act. Again, the criteria are notionally straightforward. Premises will qualify for RTM if:

• They consist of a self-contained (meaning structurally detached) building or part of a building, with or without appurtenant property.
• Qualifying tenants hold two or more flats.
• The total flats held by qualifying tenants make up at least two-thirds of the flats in the building.
• They are not exempt by virtue of Schedule 6 to the Act.

The rules are a little more complicated in the case of a part of a building. Section 72(4) states that it will be regarded as selfcontained if it constitutes a vertical division of the building which could be redeveloped independently of the remainder of the building and services are provided independently or could be so provided (without a ‘significant interruption’ to the services to other occupiers).

Schedule 6 provides that premises are excepted if:

• 25% of the internal floor area is used for non-residential purposes.
• The freehold of different self-contained parts of the premises is in different ownership.
• There are no more than four units in a property converted into flats and the freeholder (or an adult member of his family) has occupied a qualifying flat for the last 12 months (see paragraph 3 of Schedule 6 for further details).
• The immediate landlord of any of the qualifying tenants is a local housing authority.
• Premises where RTM has already been exercised within the last four years (unless the freehold had been acquired by the RTM company so that it had ceased to be an RTM company).

It is worth noting at this stage that there is no bar to RTM where the freehold is already held (or the property already managed) by a Residents’ Management Company, a Right to Enfranchise company or the like.

Put simply then, a self-contained building or part of a building containing two or more flats let on long leases and which does not contain a significant commercial area is likely to qualify for RTM. In the case of an estate consisting of more than one building, RTM could be exercised separately in respect of each building which qualifies in its own right.

The Right to Manage company

Having established that the premises qualify and that there are sufficient qualifying tenants, there is only one remaining requirement before Right to Manage can be exercised. This is not an obligation to prove fault on the part of the existing manager (as is pointed out in the Introduction), but the necessity to have formed a Right to Manage company which complies with sections 73 and 74 of the Act.

A RTM company must:

• Be a private company limited by guarantee (as opposed to shares). The requirement is for a guarantee of a sum not exceeding £1 from each member.
• State in its memorandum of association that its object (or one of them) is to acquire and exercise the right to manage the premises concerned.

But it cannot be an RTM company if:

• It is a Commonhold Association (under Part 1 of the Act).
• There is already an RTM company in respect of the same premises.
• It has acquired the freehold of the premises.

Section 74(1) provides that each qualifying tenant is entitled to be a member of the RTM company. From the date that the right to manage is eventually acquired (‘the acquisition date’ – see below), any landlords under any leases for the whole or any part of the premises (including, obviously the freeholder) are also entitled to membership (section 74(1)(b)).

So far as the formalities for the company are concerned, section 74(7) of the Act exempts it from sections 2(7), 3 and 8 of the Companies Act 1985, so as not to fetter the uniqueness of an RTM company as a creature of the 2002 Act. Otherwise, the regulations made by secondary legislation under the 2002 Act¹ prescribe the content and form of the company’s governing instrument, its memorandum and articles of association. In the event that an RTM company was formed before 30 September 2003 (when the regulations came into force), its memorandum and articles will be deemed to incorporate the prescribed contents to secure compliance with both the Act and the regulations.

Clause 4 of the prescribed memorandum covers the powers the company may use in furtherance of its objects, and in particularising them provides a useful checklist for the range of things an RTM company will have to be ready to do from acquisition of the Right to Manage. Perusal of this clause is advisable for RTM company directors in this context, quite apart from gaining an understanding of what is required by the memorandum and articles generally.

The most startlingly different topic covered in the memorandum and articles of association of an RTM company is how voting rights are to work, particularly after the acquisition date when the landlord is entitled to join.

A detailed analysis of the practical effects of the voting system, and the decision-making processes generally, can be found at Chapter 7.

Preliminary considerations

By drawing together section 79 (4) and (5), it can be seen that the very minimum number who can exercise the Right to Manage in the very smallest block is two qualifying tenants. For practical purposes, two is also the minimum number for setting up an RTM company and proceeding to the next preliminary step: the service of the Notice Inviting Participation.

It is at this stage that any leaseholders should be giving serious consideration to obtaining professional advice and assistance, if they have not done so already. It should be possible to set up the RTM company without help as the documentation and guidance notes will be easily accessible from Companies House. Further free assistance will be available from the likes of the Leasehold Advisory Service (‘LEASE’).

Setting up a company is one thing; managing a block of flats quite another. As we shall see from consideration of other parts of the Act, and as is evident from earlier statutes in any event, managing residential developments is fraught with legal and practical complexities which far exceed those concerned with practically any other endeavour: for example, Landlord and Tenant Acts 1985 and 1987.

Among the points which need to be examined at this very early stage (and upon which advice should be sought) are:

• Is Right to Manage the best way to achieve the result sought?
• Always consider alternatives such as purchasing the freehold (perhaps using the threat of RTM as a bargaining chip) or applying to the Leasehold Valuation Tribunal for the appointment of a manager.
• Do the leaseholders have the time, energy and expertise between them to take on the task?
• Are the leases sufficiently well drafted to allow an RTM company to function efficiently?
• Will adequate funding be available to keep up repair and maintenance programmes?
• Has a business plan been prepared?
• Is adequate liability insurance available?
• Are there any special features affecting the building which will exacerbate the difficulties of management (for example, a high proportion of sub-let flats)?

Professionals who ought to be in a position to give helpful advice include:

• Managing Agents (details can be obtained from organisations such as ARMA (the Association of Residential Managing Agents), ARHM (the Association of Retirement Housing Managers) and LEASE.
• Solicitors and other lawyers.
• Surveyors and valuers.
• Accountants.
• Some local authorities operate Housing Advice Centres, who may be able to assist.

It can generally be assumed that managing agents of residential properties will have the necessary expertise, and indeed may well have links to other professionals who are appropriately equipped. With others such as solicitors, surveyors and accountants there may only be a few in a given location (or none at all in some places) who have developed relevant expertise in this field (which is not always a tremendously popular practice area). It is advisable to ask searching questions concerning their abilities, or at least make inquiries of independent bodies such as LEASE, ARMA or ARHM before committing to a particular firm.

Notice inviting participation

Assuming that the intention is still to proceed, the RTM company must prepare the Notice Inviting Participation under section 78. This is a mandatory procedure, although presumably it could be dispensed with if 100% of the qualifying tenants are already on board. Having said that, there may be a risk (particularly in larger developments) that a flat changes hands at around the same time the notice should have been served, and failure to serve the incoming purchaser could invalidate the process. Therefore, it may be prudent to serve it in any event.

Section 78(1) requires that the notice must be served upon each qualifying tenant who has not already joined or agreed to join the RTM company. The notice must follow the prescribed form and content, covering such things as:

• A statement that the company intends to acquire the right to manage the premises.
• The names of the RTM company members.
• An invitation to join the company.
• The company’s registered number, its registered office address and the names of its directors and secretary.
• The names of the landlord and any third parties to the leases (such as a residents’ management company (‘RMC’), presumably whether or not it exists in practice).
• A statement that the company will be responsible for the landlord’s duties and powers under the leases (except as provided below) regarding services, repairs, maintenance, improvements, insurance and management.
• A statement that the company may enforce untransferred tenants’ covenants.
• A statement that the company will not be responsible for the landlord’s duties or powers in respect of flats or other units not held by qualifying tenants, nor in respect of re-entry or forfeiture.
• A statement that the company will be subject to the statutory provisions contained in Schedule 7 to the Act (see later).
• A statement as to whether the company intends to appoint a managing agent and, if so, the proposed agent’s name and address and if it is the landlord’s agent. If not, the notice must set out any qualifications or experience on the part of company members relating to the management of residential property.
• Acknowledgement that company members may be personally liable for the costs of the landlord ‘and others’ in relation to a subsequent claim notice. (‘Others’ are not defined. If it was intended that this should be restricted to third parties to the leases, this would be so stated in the legislation (specifically paragraph 3(h) of the Right to Manage (Prescribed Particulars and Forms) (England) Regulations 2003). That it does not do so perhaps implies that ‘others’ is to include the likes of managing agents.)
• A statement that, if the recipient does not fully understand the purpose or implications of the notice, he should seek professional help.
• The information inserted as notes to the prescribed form. These notes run to some 10 paragraphs, in addition to the 12 paragraphs in the body of the notice and its schedule.

In addition, the notice must be accompanied by a copy of the company’s memorandum and articles of association, or details of how and where they may be inspected or copied (section 78(4) and (5)).

Finally, and intriguingly, section 78(7) provides:

A notice of invitation to participate is not invalidated by any inaccuracy in any of the particulars required by or by virtue of this section.

Note that this does not protect a notice which omits a prescribed item entirely. Neither should this apparently generous provision be taken as licence for deliberate or careless lack of attention to detail. As we shall see later a defective notice will give the landlord an opportunity to delay and possibly circumvent the exercise of RTM, so it is important to prepare the notice as accurately as possible.

Preparation of the section 78 notice will be an onerous and timeconsuming task. This underlines the probable need for professional assistance in drawing it up. Likewise, it will not be an easy document to read. Particularly in smaller developments where the numbers of potential members of the RTM company are more man...