Right to Manage
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The United Kingdom Commonhold and Leasehold Reform Act 2002[1] provides a right for leaseholders to change the appointment of the management of their building to another provider, by setting up a special company to take over from the freeholder those rights of appointment of management of the building.
Reasons to use Right to Manage
1. To reduce service charges.
2. To gain control of who to use as a manager for your block of flats.
Overview of Right to Manage
Allows lessees to go through a process so they can appoint the management company for their building. This can be used to remove the current managers but can be done in conjunction with retaining the current managers. If the block is 6 or fewer flats, you can manage yourself but with increasing legislative demands, it is often not possible to do so.
What is the Qualification for Right to Manage?
To set up a Right to Manage Company certain conditions must be met and a minimum number of leaseholders are required to take part:
1. 50% of flat-owners must want to go through the process
2. 2/3 must have long leases at time of issue
3. Less than 25% of floor area of building must be commercial
There are a number of obscure matters which may affect you but you are best advised to take legal advice anyway and these matters will then be addressed. They typically affect just 1% of the population who may undertake the right to manage process.
Alternatives to Right to Manage
There are two main alternatives to Right to Manage but both have significant problems:
1. Freehold purchase - expensive if you lease is short, a waste of money if your lease is long.
2. Application to the LVT - at best temporary and usually rejected because burden of proof of negligence is not met.
Advantages of Right to Manage
Right to Manage grants leaseholders the right to control the management of their block through the RTM Company.
It allows leaseholders to gain control of the management of their block from ineffective freeholders by just filling in a few forms and paying a nominal sum of money.
The leaseholders will normally need to outsource management to a competent company but will have at least control over the contractual specification (ie, what services are provided) and the choice of termination of contract.
The criteria which the leaseholders must meet to exercise their right to control the management are usually satisfied by most flat-owners.
The leaseholders are not required to prove that the leaseholder or his managing agent is managing the building poorly.
The only financial obligaton beyond the right to manage company's fees (which are usually low) would be the 'reasonable legal costs' of the freeholder. Typically, these would be recovered in the first year through reduced management fees.
All leaseholders in the property are entitled to be part of the Right to Manage Company and have equal right of access to and voting powers.
Disadvantages of Right to Manage
- To exercise the Right to Manage, some leaseholders may be required to become officers of the company and may become liable to requirements of Company Law, however, this is not particularly onerous and in most cases, the onerous functions would be outsourced to the new managing agents. Officers and members are limited to £1 liability for RTM companies and they are advised to outsource management to a company with professional indemnity insurance to protect their and the other lessee's interests.
- The officers of the Right to Manage Company will have to spend a few minutes each year on either a tele-conference or email or meeting to appoint the managing agents and affirm reports and accounts etc. Most of this work is quite easily done by email and it should not be considered a problem.
- The Right to Manage Company may become vulnerable to criticism by individual leaseholders in much the same way as freeholders do now. This is best avoided by the appointment of professionals to perform the work. If the right professional company is used, the ciriticism is usually replaced with praise.
- The freeholder is entitled to reimbursement for the reasonable legal costs incurred as part of the right to manage process. These are usually very nominal compared with the savings.
There are no real disadvantages to the Right to Manage process except for the cost of it but if you search around on google you will find it is cheaply provided for in this day and age.
Preparation
The preparation is easy, however, there are so many companies out there who will do the service for you - you are best advised to search google for them.
Setting up a Right to Manage Company
Go to a right to manage company formation specialist or better still, go to a company who will perform the whole right to manage legal process for you. The reason for this is that if you mess it up, you will not be able to repeat it for a long time and will have wasted both the opportunity and money. Most specialists can be find by searching online for right to manage and they are very competitive because they want you block management business. Always choose a company that does not bind you to their block management service and one that has insurance and is FSA regulated.
Getting the information needed to proceed
Search Google and look for a company who will help you with management or else, if they are happy to, help you with advice on self-management. Most have some advice on their website.
The Notice Inviting Participation
If you get this wrong, it invalidates the entire claim so it is best to use a professional company to perform the process of claiming your right to manage for you. They are so cheap now that there is no point in doing the work yourself.
Exercising the Right The right is exercised by the service of a formal notice on the freeholder. After a set period of time, the management transfers to the Right to Manage Company which has been set up by the leaseholders. Once the Right to Manage has been acquired, the freeholder is also entitled to membership of the company. Right to Manage is not subject to any requirement for consent or order of a court or LVT. It is exercisable as a right which is begun simply by the service of notice.
The Notice of Claim
The Notice of Claim to Right to Manage may not be served until 14 days after the service of the Notice Inviting Participation. A claim notice for the Right to Manage cannot be served on the freeholder before all qualifying leaseholders have received the Notice of Invitation to Participate.
You really must engage a professional company to produce this otherwise you can jeopardise the entire process.
Deemed withdrawal
A claim to exercise Right to Manage will be deemed to be withdrawn where a Right to Manage Company either fails to apply to a Leasehold Valuation Tribunal within two months of receiving one or more notices which disputes its entitlement to Right to Manage or an application to a Leasehold Valuation Tribunal is withdrawn. It would also occur where the Right to Manage Company is wound up, enters into receivership, becomes insolvent or is struck off.
Right of access
The Right to Manage Company and any recipient of a Notice of Claim, or anyone acting on their behalf, has a general right of access to any part of the building if needed in connection with the claim to acquire Right to Manage. The right of access can be exercised at any reasonable time, if at least 10 days notice has been given.
Freeholder's duty to provide information
The Right to Manage Company will not be able to manage without detailed information and records and the company may require the freeholders and his appointed managing agents to provide whatever the company 'reasonably requires in connection with the exercise of the Right to Manage'. This is a different provision from the request for information. Whereas the earlier right required information for the purpose of serving the Notice of Claim, this right is for information necessary for the management of the building. As with the earlier comments on requests for information, the company must be quite clear on its requirements and it may be prudent to obtain professional advice.
While the freeholder has a statutory obligation to provide the information requested, he is not obliged to volunteer information and the Right to Manage Company must be clear and precise in its notice to him. You may require sight and inspection of documents, or copies of them - for example, contracts, the accounts for the building and the service charges, any proposals or specifications for future works, maintenance schedules etc. Detailed work will have to be put in to ensure that nothing is left out.
If the Right to Manage Company is appointing a new managing agent then they may be able to advise on the information and records to be obtained.
The notice may be served on the freeholder at any time, but he is not obliged to act on it before the acquisition date. He must comply within 28 days of service of the notice, but cannot be compelled to do so before the acquisition date.
For example, if the Right to Manage Company serves the notice on the acquisition date, the freeholder must comply within 28 days of the notice. If the notice is served, say, 20 days before the acquisition date, the freeholder must comply within 8 days of the acquisition date.
This timing allows the freeholder sufficient time to assemble the information but does not require him to release potentially sensitive or confidential material before the Right to Manage company actually takes over the management. In that the Right to Manage company needs the information from the first day of taking up management, the general intention of the provision is that the company should serve the notice at least 28 days before the acquisition date with a view to the freeholder providing the information on, or immediately after, the acquisition date.
A Right to Manage Company has the right to require any person to provide it with information reasonably required for the purposes of ascertaining the information to be included in the Notice of Claim. This information must be provided within 28 days of it being requested.
Where any party to be served with the claim notice is not traceable
Usually, this does not represent a problem. Once the documents are served, the Civil Procedure Rules apply - that is, they are deemed served 2 working days later if posted by first class post.
Best always to use professional company who specialises in right to manage.
The freeholder's costs
Where a Right to Manage Company exercises the right, any recipient of the Notice of Claim is entitled to recover from the Right to Manage Company the reasonable costs incurred in dealing with that claim. The Right to Manage Company must reimburse the freeholder and his appointed managing agents for any costs incurred in the process. Because the Right to Manage is not fault based and may be exercised against the best or most competent freeholders and management companies; there is, therefore, no legal justification for the freeholder of His appointed managing agents to suffer any financial loss from the.
Costs are still recoverable if the Right to Manage does not proceed, for example, if the claim notice is withdrawn by the Right to Manage Company, or deemed to be withdrawn; if the Right to Manage Company is wound up; or if a Leasehold Valuation Tribunal determines that the company is not entitled to acquire the right. It must be appreciated that the liability for the freeholder's costs extends to all members of the Right to Manage Company and all persons who are members of the Company are liable for the costs incurred up to that point by all parties who received the Claim Notice.
Date on which the right is acquired
Where no recipient of a Notice of Claim serves a Counter Notice, the Right to Manage Company will be entitled to take over the management of the building on the date specified for that purpose in the Notice of Claim. As noted previously, this date must be at least three months after the date on which the Counter Notice must be served.
Where any party disputes a Right to Manage Company's Right to Manage, and subsequently agrees in writing that the Right to Manage company was entitled, then the Right to Manage Company would take over the management for their building 3 months after the last of those parties gave their written agreement.
Management contracts
The freeholder of his appointed managing agents are under a legal obligation to serve notices in respect of the management contracts that it has entered into before the date on which a Right to Manage Company is to take over the management of the building. This will allow all parties employed in the management of the property to make the necessary arrangements to prepare for the Right to Manage Company taking over.
Because all responsibility for management passes to the Right to Manage Company, the Right to Manage Company will need to make decisions on whether to renew the contracts or to look elsewhere for the service(s) provided.
It is extremely important that steps are taken in good time to ensure the continuity of management services; it would be very unfortunate, for example, if someone were trapped in the Granary Mansions lift on the day of hand-over and the Right to Manage Company did not have the lift maintenance contract in place.
It is the freeholder’s duty to ensure that parties are aware of the contracts through the service of notices - the contractor notices and the contract notices.
- Contractor notice - this must be served on all contractors appointed by the freeholder or his appointed managing agents and include the following information:
- identity of the relevant contract;
- a statement that the Right to Manage is to be acquired by a Right to Manage Company;
- the name and registered address of the Right to Manage Company;
- the acquisition date;
- a statement advising a contractor who wishes to continue to provide services to the building to contact the Right to Manage company.
Where any of the services are sub-contracted, then the contractor who receives the contractor notice must send a copy to the sub-contractor.
- Contract notice - this must be served on the Right to Manage company and include the following information:
- the particulars of each existing contract and the name and address of the contractor;
- a statement advising the Right to Manage company to contact those contractors whose services it wishes to retain.
It is not required, within service of the contractor notice, to provide a copy of the contract, but simply to inform the Right to Manage Company of its existence and the party to it.
Both the contract and contractor notices should be served by the freeholder as soon as possible after the Notice of Claim is received from the Right to Manage Company, but no later than 'as soon as is reasonably practicable' after the determination date. This is enforceable through the county courts.
The determination date is the date specified in the Notice of Claim for the service of the freeholder's counter-notice. Because there is a gap of three months between the determination date and the acquisition date, the notices should be served well before the management is transferred.
Ideally, a well-organised Right to Manage Company would already have obtained these details at a much earlier stage and have made important decisions on retaining or obtaining new contractors. However, it must not be assumed that all existing contractors will necessarily be prepared to contract with the Right to Manage Company, and the company should therefore investigate alternative providers. Because an existing contract is broken by the process, it gives the company the opportunity to review contracted services to the building and to re-specify or re-negotiate accordingly.
The duty to transfer funds
The legal obligation of the freeholder or previous management company is to pass forward any unspent funds. In practice, if these are less than £2k, it is not economic to pursue them through the courts, but ultimate determination can be made by the Leasehold Valuation Tribunal (LVT)[2]
Enforcement of covenants
The leaseholder’s covenants, or obligations, under the lease become the responsibility of the Right to Manage Company. The company must ensure that all covenants are complied with and must keep the freeholder informed. The company has a statutory duty to review all the leaseholders' compliance with their covenants and to take steps requiring the remedy of any breaches. Any breaches which have not been remedied must be reported to the freeholder (unless he has specifically notified the Right to Manage company that it need not do so). The freeholder then may proceed to enforce the covenant through the remedy of forfeiture.
This is a specific remedy of the freeholder and cannot be exercised by the Right to Manage Company. Therefore, the Right to Manage Company cannot institute forfeiture proceedings in furtherance of recovery of arrears of service charges; if the arrears cannot be recovered through other means, the company will have to seek the co-operation of the freeholder. As leases provides a right of access into the flats for purposes of compliance or enforcement of covenants, this right is available to the Right to Manage Company.
Freeholder's membership of the Right to Manage Company
Immediately upon the Right to Manage Company taking over on the acquisition date, the freeholder becomes entitled to have a single vote for his freehold and one per flat he may own.
The rules on voting are complex if there are multiple freeholders or multiple units and you are best passing this issue to the new managing agents. It is rare that anyone votes on the meetings or that there ever are meetings so these issues are largely academic.
The End of Right to Manage
While Right to Manage is not subject to any time limit there are circumstances in which the Right to Manage Company ceases to be entitled to exercise Right to Manage. This will occur:
where the Right to Manage Company wishes to cease exercising the right and all leaseholders agree;
where the Right to Manage Company is wound up, enters into receivership, becomes insolvent or is struck off;
where a management company appointed to replace the Right to Manage Company begins to act or where an order is made under Part 2 of the Landlord and Tenant Act 1987 which withdraws the Right to Manage from the Right to Manage Company;
where the Right to Manage Company ceases to be a Right to Manage Company (which may happen, for example, because the company is used to purchase the freehold of the property).
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