FAQ - Collective Exercise of Right to Manage
The Commonhold and Leasehold Reform Act 2002 gave a new right to tenants of blocks of flats to take over the management of their building without having to acquire the freehold. This came into effect on 30th September 2003. This is a new area of law and there are numerous complexities and nuances which can arise. Therefore what follows is necessarily of a general nature and you should not act or refrain from acting without taking advice on the specific circumstances of your case.
Q: Why should we exercise the Right to Manage?
A: Numerous reasons exist for exercising this right. The main reason is to ensure the effective management of your building, particularly in circumstances where it is not desirable or practicable to acquire the freehold. Exercising the Right to Manage would allow you to remove the existing managing agents and appoint new ones. A well-managed building may also result in the value of the flats increasing. In addition to management issues tenants would have a degree of control over the granting of consents, required by their leases, for example in respect of carrying out alterations to flats, although this is subject to certain restrictions. What this right does not allow tenants to do, is extend the terms of their leases or reduce their ground rent to a peppercorn, which they could do if they acquire the freehold interest in their building. See FAQ Collective Enfranchisement.
Q: What are the qualifying criteria?
A: The main criteria are that:
- The building must be a self-contained block of flats (which includes a converted building as well as a purpose built one).
- The building must have no more than 25% non-residential use.
- Two thirds of the flats must be let to qualifying tenants.
- A qualifying tenant is one who holds a flat under a long lease, namely one which is for a term of more than 21 years.
- The qualifying tenants of flats comprising 50% of the total flats in the building must participate.
Q: What happens to the existing managing agents and other persons appointed by the Landlord to provide services to the building?
A: If you are dissatisfied with the services provided by your managing agents then you need not retain their services when the Right to Manage is acquired. If however you wish to keep your managing agents, you could do so by entering into negotiations with them prior to the Right to Manage being acquired. The landlord is obliged to notify tenants with details of all contracts it enters into for the provision of services at the building well in advance of the Right to Manage being acquired. Therefore, tenants should have plenty of time to consider whether they wish to retain the services of any contractors.
Q: What is involved in the process?
A: The legislation lays down detailed steps which must be complied with prior to the Right to Manage being acquired. First, a Right to Manage Company ("RTM Company") must be formed by the tenants. It is this company that will take over the Right to Manage on behalf of the tenants.
Once formed, the RTM Company will serve notices on those qualifying tenants who have not yet elected to participate in the process, advising them of their right to participate and become members of the RTM Company.
Next, the RTM Company will serve a Claim Notice on the landlord, informing it that, amongst other things, the RTM Company wishes to take over the management of the building and specifying two dates. The first date is the date by which the landlord can reply by serving a counter-notice and the second date is that on which the RTM Company proposes to acquire the Right to Manage.
The landlord can serve a counter-notice, by the first date specified in the Claim Notice, objecting to the right of the RTM Company to take over the management of the building by asserting a number of grounds.
Where the landlord fails to object, and in the absence of any dispute, the RTM Company should take over the management of the building on the second date stipulated in the Claim Notice. Where however, the landlord objects to the right of the RTM Company, then the matter may have to be referred to the First Tier Tribunal ("FTT") for determination, which could delay the date on which the right is acquired.
Prior to acquiring the Right to Manage, the RTM Company will have to obtain all information necessary to effectively manage the building. This can be done by serving an Information Notice on the landlord, requesting all information it reasonably requires. In addition, the RTM Company has the right to access parts of the building for similar reasons.
Q: How long will it take?
A: The right must be exercised within the time frame laid down by the legislation. The Claim Notice cannot be served until 14 days after the RTM Company formally invites the qualifying tenants to participate. Once the Claim Notice is served the latest date on which the landlord can be required to serve a counter-notice is one month after the date the Claim Notice is given and the earliest date on which the Right to Manage can be acquired is three months after the date detailed in the Claim Notice for serving a counter-notice. Therefore, in most cases, the earliest period within which the Right to Manage can be acquired is four months from the date the Claim Notice is given.
Q: How much does it cost?
A: The costs involved for each participating tenant depend on numerous factors, including the size of the building, number of intermediate landlords and the number of participating tenants. Clearly, the more tenants that participate the less the costs will be for each tenant. In addition to the legal costs, the tenants may have to pay certain disbursements, including the costs of an accountant, surveyor, new managing agents and counsel, should a barrister's opinion be required on any technical issue.
If you instruct us, then once we obtain all the relevant details from you we will be in a position to provide a costs estimate. However, any estimate we provide is based on the assumption that no dispute will arise to the exercise of the Right to Manage and the matter will not have to be referred to the FTT for determination. We regularly keep our clients informed of the costs they incur at each stage of the process.
Q: Do we need to pay the landlord's fees?
A: You would be liable to pay the reasonable costs the landlord incurs in having to comply with the steps laid down by the legislation.
Q: Do we need to form a company?
A: Yes. The legislation requires that the Right to Manage be exercised through a specially formed RTM Company, which has a constitution specified by legalisation.
Q: How do we get ourselves organised?
A: It is normal for a residents committee to be formed, if this has not already been done, and for one or two key tenants to drive the matter forward. Clearly, prior to proceeding, the tenants may wish to canvas the opinion of the other tenants. Once it is established that there is support for the idea, it would be a good idea to invite a solicitor to attend a meeting of the committee to answer questions, to explain what is involved and to advise on the advantages and disadvantages. To work well the process should be run like a military campaign!
Q: Do we need a binding commitment for participating tenants?
A: It is recommended. We have standard forms of participation agreement which are intended to bind the participators to themselves and to the process. The commitment is often dealt with in stages. For example, there is a preliminary commitment to contribute to the investigative costs. Once a decision in principle has been made to proceed, potential participators are then invited to commit themselves to proceed with the formal RTM process.