Right Of A Group Of Tenants To Take Over The Landlord’s Management Functions
Provided certain criteria are met, qualifying owners of residential leasehold flats have the right to compel the landlord to transfer its management functions to a Right to Manage Company, which is set up and owned by them. The following provides you with additional information as to the stages involved if you decide to exercise this right under the provisions of the Commonhold and Leasehold Reform Act 2002 (“the Act”). Please note that it is only meant as a guide and does not cover every part of the process.
Certain aspects of the eligibility criteria are detailed and have been the subject of considerable legal debate. As such, a thorough review of each case will need to be undertaken before we proceed. However, the basic criteria can be summarised as follows:
(i) the right applies to a self-contained building or a structurally separate part, along with any common areas;
(ii) the building must contain at least two flats;
(iii) at least two-thirds of the flats in the building must be owned by “qualifying tenants” i.e. tenants who own leases which were originally granted for a term of over 21 years; and
(iv) the internal floor space of the building must not exceed 25% non-residential use.
1.2. RTM Company
The management of the building can only be exercised by the Right to Manage Company and, before the Notice of Claim is served on the Landlord, the members of the RTM company must comprise a sufficient number of qualifying tenants. The required minimum number of qualifying tenants must be equal to at least half the total number of flats in the building. All qualifying tenants are entitled to become members of the company, and the landlord is also entitled to become a member.
Prior to serving the Notice of Claim it will therefore be necessary for you to form the RTM Company, which must be set up and run in accordance with statutory requirements, with a prescribed Memorandum and Articles of Association. These are the documents that specify the objectives of the company and the rules which govern the company.
Setting up the company is a relatively straightforward process and we can do this on your behalf. At the initial stage, any number of qualifying tenants can set up the company, so long as a Director, Chairman and Secretary are appointed. Before we set up the company, it will therefore be necessary to ascertain who is willing to fulfil these roles.
1.3 Notice Inviting Participation
Once the RTM Company has been registered, it must then formally invite the rest of the qualifying tenants to join. The notice must be in the prescribed form and contain certain information about the RTM Company. The notice must be served on every qualifying tenant who has not already become or agreed to become a member of the RTM Company. We will draft and serve the notice on your behalf.
Before making the final decision to issue the notice of claim and begin the process that will lead to the RTM Company taking over the Landlord’s managerial responsibilities, it is likely that you will want to know more about the present management arrangements. For example: the current arrears position, insurance position, details of the current service contracts and the overall state of repair of the building, so as to ascertain whether any major works are likely to be required in the future.
This information can be obtained in a number of ways; for example:
– serving a notice under the Act requiring the Landlord to disclose certain information that will need to be set out in the Notice of Claim
– requiring that certain documents and information be provided under the provisions of the Landlord and Tenant Act 1985 (for example, documents relating to insurance and service charge)
– inspecting service charge accounts
– making enquiries at the Land Registry
We will be happy to assist with these enquiries.
In the case of much larger buildings, it might be prudent to instruct a professional managing agent to draw up a budget or maintenance programme.
2. Tenants’ Notice of Claim
After we have conducted the necessary preliminary processes and enquiries, we must serve a Notice on the freehold owner. The enforcement process is triggered when the notice is served. The notice must be in a prescribed form and contain certain prescribed information about the RTM Company, the tenants and the premises covered by the claim. It will also specify:
– a date for the service of the Landlord’s Counter Notice, which cannot be any sooner than one month from the date of the Notice of Claim; and
– a date at which the Company intends to take over the Landlord’s management function, which can be no sooner than three months from the date of the Notice of Claim.
The Notice may not be served until at least 14 days after the Notice Inviting Participation has been served. It must be served on the freehold owner, any intermediate leasehold owner and any third party to the lease. A copy of the notice must be sent to each qualifying tenant.
Once again, we will draft and serve the notice for you and ensure that the conditions are met.
3. Right of Access for Inspection
The RTM Company has the right to inspect areas that might not normally be accessible to tenants, so long as those areas are connected to the claim and it is reasonable to inspect them. For example, it may be a good idea to instruct a surveyor to make an assessment as to whether any repairs or renovations might be necessary.
This right is only exercisable after the Notice of Claim has been served, and in order to exercise the right, the RTM Company must give the Landlord at least ten days written notice.
4. Landlord’s Counter Notice
The Landlord must serve a Counter Notice no later than the date specified in the Notice of Claim, which will be at least one month from the date the Notice of Claim was served.
The Counter-Notice will either admit the right or dispute the claim and provide reasons as to why the claim is being disputed. The Landlord may only dispute the right if:
(i) the eligibility criteria have not been satisfied or
(ii) the RTM Company does not meet the statutory requirements or
(iii) the members of the RTM do not constitute half the flats in the building
Where the Landlord disputes the claim, the RTM Company must make an application to the Leasehold Valuation Tribunal to determine the issue within two months of the date of the Counter Notice. If it does not do so, the claim is deemed to have been withdrawn.
Where the Landlord admits the claim, and also if the Landlord fails to serve a Counter-Notice, the RTM Company will acquire the right to manage on the date specified in the Notice of Claim.
5. Acquiring the Landlord’s Management Functions
The RTM Company will formerly take control of the management of the building from the Landlord on the date specified in the Notice of Claim. If the claim was disputed but the LVT finds in favour of the RTM Company, or the Landlord later agrees the right, the acquisition date will be three months from the date of the determination or the agreement, respectively.
The Landlord is entitled to membership of the RTM Company, and his votes will be determined in accordance with the number of units held. If he holds no units he will simply be entitled to one vote.
The RTM Company may either undertake the day to day managerial responsibilities in respect of the estate itself, or instruct a managing agent.
5.1 Service Contracts
There will be a number of contracts in place which relate to the provision of various services to the building. The RTM Company will need to compile a list of service contracts relating to the estate and ensure the continuity of those services. It is the Landlord’s responsibility to inform the RTM Company of the service contracts that are currently in existence by way of a “contract notice” and also to inform the contractors appointed by the Landlord for the provision of services of the transfer of management. These notices must not be served any later than “as soon as is reasonably practicable” after the date at which the Counter Notice should be served or, of the claim is disputed, the date of the LVT determination.
Existing contracts will be terminated by the process, and the RTM Company will need to conduct a review and decide whether to continue existing contracts or find alternative providers.
5.2 Notice Requiring Further Information
The RTM may serve a notice on the Landlord requesting anything that the company ‘reasonably requires in connection with the exercise of the right to manage’ (for example: contracts, the accounts for the building and the service charges, any proposals or specifications for future works and maintenance schedules).
The Landlord must respond to the notice within 28 days, but does not have to respond before the acquisition date.
5.3 Transfer of Funds
The Landlord is obliged to transfer any service charge funds that have been collected in advance, and remain uncommitted, to the RTM Company. These funds should be kept in a separate account.
In the event of a dispute, an application can be made to the LVT to determine the amount to be paid.
5.4 Managing the Estate
Once the RTM Company has acquired the Landlord’s management function, it will be necessary for the new Directors to ensure that the Management Company carries out its duties and responsibilities. These will include renewing or replacing existing contracts relating to the provision of services to the Estate, gardening, repairs, maintenance and redecoration; ensuring that the Estate is adequately insured; enforcing tenants’ covenants if necessary; issuing approvals and licences relating to assignments; collecting and chasing unpaid service charges and ensuring that the company’s accounts are in order and comply with statutory requirements.
Depending on the size and complexity of the estate, it may well be advisable to seek the appointment of a new managing agent, which would be ultimately answerable to the tenant-owned Management Company.
The Landlord retains functions relating to forfeiture and possession and the management of any non-residential parts.
The RTM Company does not have to pay the Landlord a purchase price or premium for acquiring the right to manage, but it does have to reimburse the Landlord for any reasonable professional costs he has incurred in the process. These will include legal fees and possibly managing agent fees.