The consent of the landlord is not required and nor is any Order of the Court. The tenants do not need to prove mismanagement by the landlord or indeed any fault on the landlord’s behalf, whether directly or by the landlord’s own managing agents.
The idea is that once the procedure has been followed and the landlord accepts the entitlement of the tenants to manage their flats, or this has been determined by the Leasehold Valuation Tribunal (“LVT”) as referred to below, then the RTM company will manage the block on behalf of all tenants and indeed the landlord, who is entitled to be a member of that company.
Eligibility
To be the subject of a successful application for the Right to Manage, the tenant’s flats must form part of a building that: -
- Is self contained (or if part of another building, be capable of being redeveloped independently);
- Must include at least two flats;
- At least two thirds of the flats must be let to “qualifying tenants”;
- It can be part commercial but the non-residential part must not exceed 25% of the total floor area of the building as a whole.
A “qualifying tenant” is a tenant whose lease was originally granted for an original term of more than twenty-one years.
Note that there is no requirement for the tenants to have lived in or owned the flat concerned for any particular period and nor is there any limit of the number of flats in the building concerned which can be owned by one person.
However, only the RTM company may exercise the right and that company must comprise a sufficient number of qualifying tenants, the required minimum of those being equal to at least half the total flats in the building. If this is not the case then the RTM company cannot properly be formed and the others who would be entitled to become members of RTM company could not be invited to participate (as to which please see below).
The right relates to a building. In an estate of separate blocks each block would need to qualify separately (because it is self contained) and so an individual RTM notice is served by the company (see below) by each separate block. In the case of an estate of flats under the same management clearly it would be preferable to take over the management of the whole estate so as to have one managing agent for all of the blocks within that estate, although it is not always practical for this to be the case, especially where the tenants of one block may have enfranchised and acquired the freehold of that block and have their own choice as managing agent which may be different from the choice the tenants of a different block may wish to make. A careful assessment of eligibility in these circumstances would be undertaken.
The RTM Company
As it is the RTM company that exercises the function of managing the company it must be set up and run in accordance with statutory requirements under the Act and regulations made thereto. We would normally arrange for the setting up of the company (which must have “RTM company” in its name).
The company must have a minimum of two directors but it is no longer necessary for the company to have a company secretary. If the company chooses not to have one, however, someone must still perform the secretary’s roles of making filings at Companies House etc. (The duty to ensure that filings are made, rests with the directors). Careful consideration must be given as to which of the tenants are prepared to undertake such steps for the others. In a small block all of the tenants may wish to be company officers, but care must be taken that the RTM process is not hampered by too many tenants becoming involved in the process, thus requiring all of their agreement at each step.
Procedure Part 1 - The Notice Inviting Participation
It is important to bear in mind that every single tenant who is a qualifying tenant is entitled to become a member of the RTM company and nobody may be excluded for any reason whatsoever. Hence the need for the RTM company to serve a notice on all qualifying tenants who are not, at the time of service of the notice, members of the RTM company or who have not already agreed to be members.
There are statutory requirements as to what the notice must contain and again we would serve this on behalf of the RTM company.
The effect of the notice is to inform those receiving it that it is the intention of the qualifying tenants who are members to take over the management function of the landlord under the lease, including the enforcement of all of the covenants of the tenants.
The RTM company will not take over the control or management of any commercial property in the building or any flats retained by the landlord.
From service of the notice each member of the RTM company, including those who wish to join it, will be liable for the landlord’s reasonable costs arising from service of the notice (see below).
The RTM company must also explain whether it intends to employ an outside managing agent to manage the building, and if this agent has been identified, then to provide his details. Alternatively, whether the RTM company intends to re-appoint the current managing agent. This is because in certain circumstances the Act envisages the reason for the tenants wishing to take over the management is not because of a poor managing agent, but because of poor communications between the landlord and the managing agent which the tenants believe they can improve on and have the building better managed. If the RTM company intends to manage the building itself then it must provide details of its own management experience.
The notice must be accompanied by a copy of the company’s constitution (Memorandum and Articles of Association) or state where the same may be inspected and copies taken, which is an important requirement because failure to serve this would mean that the notice is not valid.
The notice may be served by whatever is most appropriate method to ensure that the qualifying tenant receives the same, although only reasonable attempts are required to be made to send the notice and the RTM company is not obliged to serve it outside in England and Wales (it is envisaged that if there are any qualifying tenants who are non-resident, that they will have left an appropriate contact address within England and Wales, although of course they may prefer to receive and accept notice by way of email).
The landlord may challenge the formation of the RTM company and obtaining the Right to Manage if the RTM company is not properly constituted or it failed to comply with the service of the notices and so the secretary of the RTM company should ensure that all evidence about service of the notice inviting participation has been kept. As some landlords perceive the process as taking away their control and may challenge the RTM process great care must be taken to ensure that the relevant procedures are followed.
The RTM company must allow those qualifying tenants who respond favourably to the notice enrolment in the company records.
The Information Gathering Process
During the process of serving the notice inviting participation, the RTM company officers should investigate and obtain information about the building so as to ensure that it will be properly managed if the Right to Manage is subsequently achieved. Therefore example the RTM company will need to research and obtain, probably with legal advice, the names and addresses for service of the landlord, or qualifying tenants, and any head lessee or freeholder, any commercial use of the building and the identity of the commercial tenant, any outstanding rent or service charge or sinking fund demands, the insurance arrangements for the building and its present management structure.
Much of this information will be known from the present managing agent, and from demands that the qualifying tenants may have received individually to pay service charges or from the annual statement of service charge account. Information can be obtained from the landlord directly, including inspection of and taking copies of documents, receipts and other information that have caused the service charges to be levied, the Land Registry concerning ownership of the various property interests in the block, and peculiar to the Act, an Information Notice seeking such information as the RTM company needs to know to serve the Claim Notice (see below). A landlord receiving such an Information Notice must comply within twenty-eight days and provide the information requested.
The larger the building, the more preparatory work will be required. Certainly with buildings that contain more than say six flats, or buildings with any commercial use of note, professional assistance from a managing agent (preferably a member of the Association of Residential Managing Agents or “ARMA”) should be sought. Although a tenant may view the ownership of a flat as being somewhat short to medium term compared with the interests of the landlord, the RTM company must manage the building responsibly when it takes over the Right to Manage and ideally should prepare draft plans for maintenance of the building over many years, and consider setting up a sinking or reserve fund if one has not been set up or, if the leases do not permit the same, then to endeavour to do so by agreement. It is important to bear in mind that the purpose of the RTM company and the Right to Manage procedure is not to enable the tenants to cut costs of maintaining the building, but to permit the tenants to have more of a say and control in the way in which management of the building is run and to provide better management of their homes. It is also worth bearing in mind that whilst a tenant may find the RTM company superficially attractive because it would wrest control from the landlord of the management, where that landlord may charge through its own managing agent company a management fee depending on the service charges levied, any professional managing agent will want to receive a not dissimilar fee for its involvement and so this should not be seen to be a “cost-cutting” exercise.
Procedure Part 2 – The Notice Of Claim
The Right to Manage is exercised by serving on the landlord a Notice of Claim. It must be served on the landlord, entering into any intermediate landlords, including the freeholder and any parties to leases in the building other than leaseholders themselves, for example a management company that is a party to the lease. It is conceivable that a manager may have been appointed by a Court or Leasehold Valuation Tribunal under the 1987 Act before, in which case that manager must receive a copy of the notice and so must the Court or LVT as appropriate.
The Notice of Claim may not be served until fourteen days have elapsed after service of the notice inviting participation. It is prudent to allow therefore, at least twenty-one days from the sending out of the notice inviting participation so as to allow seven days for service. If all of the qualifying tenants are members of the RTM company then no notice inviting participation needs to be served.
The contents of the Notice of Claim are set out in the Act and regulations made thereto. We as your solicitors would normally serve the notice.
- The Notice of Claim would set out the name of the building, explain why the RTM company and the members qualify and sufficient details of every single lease of a person who is a qualifying tenant of the building and a member of the RTM company, including the date of the lease, the term of years to which it is granted and the date of commencement of the term.
- It must specify date at least one month after date of service of the Notice of Claim by which each person receiving a notice may respond by giving a counter notice. Again would normally specify a date slightly longer than one month of the date of the Notice of Claim, to allow for a period of service of the same.
- It must specify a date at least three months after the date of the counter notice on which the RTM company intends to acquire the Right to Manage. Note that this period is a minimum, not a maximum, and so the tenants may decide to give themselves longer to acquire the Right to Manage depending on how the information gathering process is going.
Absent landlords – the RTM company may apply to the LVT for an Order entitling it to acquire the rights provided that it can show to the LVT on application that it has made all reasonable steps to find the missing landlord and informs all qualifying tenants (whether members of the RTM company or not) of the intention to seek an Order from the LVT. The LVT will consider the RTM Company’s entitlement in the application. Of course if the landlord is found before the LVT considers the matter then the LVT may decide to give directions as to service of a counter notice by the landlord (see below).
Right of access for inspection – the Act allows tenants to access to any part of the building in connection with the claim, on not less than ten days’ notice being given to the landlord, which would be used for example where the tenants were seeking to instruct an alternative managing agent who wished to inspect or raise inspections of communal areas, for example communal heating boilers, water tanks, roof space, electrical installations and so on. Note that this can only be exercised after the Notice of Claim has been served.
Procedure Part 3 – The Landlord’s Counter Notice
The landlord may (but need not) serve a counter notice.
The counter notice can only either agree to the Right to Manage, i.e. that the RTM company is entitled to the Right to Manage, or alleged reasons why the RTM company is not so entitled. The counter notice cannot do anything else and anything else raised in the counter notice (for example in relation to the RTM company’s proposed management, save as this must be provided in the Notice of Claim) would be irrelevant.
If the counter notice alleges that the RTM company is not entitled to acquire the Right to Manage then it must give reasons to support the allegation, which must be linked only to the RTM company’s eligibility under the Act and the procedures the RTM company has gone through, as set out above.
If the landlord admits the right, the management will pass to the RTM company on the date specified in the Notice of Claim. If the landlord does not serve a counter notice then the acquisition date for the right will be the same date.
If the landlord does serve a counter notice denying the right of the RTM company to acquire the Right to Manage then the counter notice must state that the RTM company may apply to the LVT for that issue to be determined and that the RTM company may not acquire the right unless the LVT determines it is in favour of the RTM company or the landlord subsequently agrees.
The RTM company must make the application to the LVT within two months of the date of service of the landlord’s counter notice, otherwise the Notice of Claim is deemed withdrawn.
If the RTM company’s application to the LVT is unsuccessful then it must pay, on application of the landlord, the reasonable costs of the landlord in defending itself at the LVT hearing. The LVT will determine what is reasonable. (There is also the possibility of an appeal against an adverse LVT decision to the Lands Tribunal.)
If the LVT determines the RTM company is entitled to acquire the Right to Manage then the acquisition date is not the date originally proposed in the Notice of Claim (because that would have expired by the time of the LVT hearing) but three months after the LVT makes its decision (or the Lands Tribunal makes its decision on appeal) or the landlord subsequently agrees in writing that the company is entitled to the right, where the landlord originally disputed that right.
Costs Of The Landlord
As the Right to Manage process under the Act is not fault based the Act does not contemplate the landlord suffering any reasonable financial loss from the process (apart from any subsequent loss of management fees that it might have been entitled to under the leases had the Right to Manage not been successfully exercised). The RTM company must therefore reimburse the landlord for any reasonable costs incurred in the process.
Such costs include legal costs, accountancy costs, audit costs or other costs associated with the handover of the management to the RTM company or to an appointed managing agent at the RTM company’s direction.
It is therefore important to be aware that if the Notice of Claim is deemed withdrawn or, indeed, if the qualifying tenants subsequently fall out amongst each other or cannot agree what steps should be taken such that time limits are missed, the landlord would still be entitled to the costs it incurs and those costs must be paid by the qualifying tenants as members of the RTM company. A fighting fund of those costs must have been set up to ensure that the RTM company can pay.
Voting Rights In The RTM Company
The qualifying tenants will appreciate that in most cases the landlord would wish to become a member of the RTM company so as to maintain some control over management of the building. Voting rights between landlords, including intermediate landlords, and the qualifying tenants are provided for under the Act by way of a complicated formula, and depending on the extent of any non-residential parts of the building which parts are still taken into account in allocating voting rights, even though the management of those commercial parts does not pass to the RTM company.
What Happens To The Landlord’s Existing Management Contracts?
The tenants will be aware that as the effect of the Right to Manage may require the landlord to pass control to the RTM company in the middle of a financial accounting year, then almost certainly there will be ongoing management contracts between the landlord and companies in relation to the day to day management of the building, whether in relation to cleaning, gardening, caretaking or maintenance.
It is clearly in all parties’ best interests to ensure the continuity of management services and this is why it is so important for the RTM company to carry out all reasonable investigations before it serves its Notice of Claim or before the date of the Right to Manage is intended to pass as set out in the Notice of Claim itself.
The landlord is under an obligation the Act to serve Contractor Notices on all contractors appointed by the landlord informing it of the intention of the RTM company to acquire the Right to Manage. Any contractor receiving a Contractual Notice must send a copy to any sub-contractor of his.
The landlord is also under a statutory obligation to serve a Contract Notice on the RTM company including similar information as to the nature of each existing contract and that the RTM company should contact those contractors whose services it wishes to retain.
Practically speaking the landlord should serve the Contract and Contracting Notices as soon as possible after it receives a Notice of Claim, assuming that the landlord accepts that the RTM company is entitled to acquire the right to manage. The landlord must serve these before the date for a response for the landlord to serve a counter notice as set out in the Notice of Claim (i.e. within one month after service of the Notice of Claim) or, if disputed, then by the final day of determination by the LVT or any subsequent agreement reached with the landlord.
As a consequence of these time limits a well advised RTM company would have already found out most of this information at or before serving the Notice of Claim anyway and would have reminded the landlord of the need to comply with these obligations.
The Landlord’s Duty To Provide Information
The RTM company may serve a notice different from a notice seeking information referred to above requiring the landlord to provide whatever the RTM company “reasonably requires in connection with the exercise of the right to manage”.
This Information Notice may be served at any time, but the landlord is not obliged to act on it before the acquisition date although he must comply within twenty-eight days of service of the notice. This means that the landlord does not have to release confidential information to the RTM company before it actually takes over the management. However, ideally such a notice should be served as soon as possible and before the acquisition date, because a difficult landlord may decide to delay in responding until twenty-eight days after the RTM company has taken over the management.
If a landlord fails to comply with this provision then the RTM company must apply to the County Court for enforcement; costs of that process will be awarded to it against the landlord if the application succeeds.
The Landlord’s Duty To Transfer Funds
The unallocated service charges or sinking fund contributions should already be held in a Trust account and the landlord has a statutory duty under the Act to hand over all such sums to the RTM company.
The sums must be paid over as soon after the acquisition date as reasonably practicable.
The landlord is entitled to deduct only those sums in respect of outgoings spent by him on the provision of services for those sums chargeable in the service charge up to the acquisition date.
Any dispute about this payment will have to be dealt with by the LVT. Practically speaking, and to avoid delays in a swift handover of management, it may be sensible for the landlord and the RTM company to agree an external audit by an independent accountancy firm to ensure that the correct amount has been handed over. This will ultimately probably be cheaper than fighting this issue before the LVT and it will save delays. Note that a professional managing agent would probably expect some independent verification before it would be prepared to hand over any funds to the RTM company anyway.
If the qualifying tenants’ members of the RTM company believe the landlord will be difficult, and if those tenants know that there will need to be a substantial payment of sums shortly after the acquisition date, then loan finance or contributions from the qualifying tenants may have to be obtained or made as the case may be. This very much depends on the attitude and approach of the landlord in each case.
If a landlord fails to comply with this provision then the RTM company must apply to the County Court for enforcement.
The RTM Company’s Responsibilities Post-Acquisition Of The Right To Manage
The RTM company becomes responsible for all management functions from the acquisition date and includes approvals and enforcement of covenants under the lease.
Excluded is the landlord’s right to receive ground rents, if any, although the landlord may still employ the RTM company’s managing agent to collect the ground rents for him by separate arrangement. Also excluded is the management of any non-residential parts of the building or any non-qualified flats (for example where a flat was not let on a lease that was originally granted for twenty-one years). Nor does the RTM company take over the rights that are normally reserved in leases of the landlord to seek forfeiture and possession of any flats. It may mean co-operation between the RTM company and the landlord where a particular flat owner does not pay his ground rent and service charges and the RTM company wishes to apply pressure on that tenant to do so by pursuing forfeiture, where allowed by the law.
The RTM company must give appropriate notice as required by the Act to the landlord in relation to the giving of approvals, for example structural alterations, improvements, change of use, assignment or sub-letting, and the landlord may object to the same in which case the LVT will have to determine the issue. If the landlord does not respond to the notice served by the RTM company on it in accordance with the process under the Act then the RTM company may give or refuse the request for approval.
The RTM company must ensure that the landlord is kept up to date in relation to any breaches of covenant by the tenants, whether as to payment of service charges or otherwise (unless the landlord has specifically notified the RTM company that it need not do so in certain cases).
Disputes about these functions will normally be resolved in the County Court unless the parties can negotiate a settlement.
Termination Of The Right To Manage
The right to manage as acquired under the Act is for an indefinite period. There is no time limit. However the right may end in the following circumstances: -
- By agreement between the parties;
- By the RTM company being wound up and thereby the whole process of the RTM company managing the building collapsing;
- If the LVT appoints a manager by way of an application under the 1987 Act, for example as a consequence of an application being made by any flat owner or the landlord where the RTM company is perceived not to be exercising its obligations correctly. The LVT may also make an order to cease the right to manage in favour of the RTM company which would then mean reverting back to the landlord unless the LVT appointed a different manager itself.
It is important to note that if the right to manage is terminated as above or for any other reason then no further application may be made by the flat owners for four years from date of termination unless the LVT consents. This consent is only likely to be forthcoming if, for example, the landlord has gone missing or would consent to a new RTM company being set up on the basis that the ownership of flats in the building have changed since the last attempt at pursuing the RTM process.
This document sets out our views on the subject addressed and gives general guidance and advice only. The views expressed in this document are not therefore intended to constitute advice in relation to any specific points and the readers should not rely on them as such. Prior to taking any action in relation to any such matters you should consult one of our solicitors for specific advice .
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