AIMS Information Sheet

AIMS Information Sheet The Right to Manage The Right to Manage (RTM) commenced on 30th September 2003. It was introduced by the Commonhold and Leasehold Reform Act 2002 (the 2002 Act). Problems that the Right to Manage has tried to address 1. Although long leaseholders have purchased the right to live in and maintain their own flat, the right to appoint managing agents to arrange insurance and maintenance of the communal parts and grounds remains exclusively with the landlord or freeholder. Leaseholders are made responsible for the costs of managing the estate but, apart from statutory rights to consultation, have very little control or involvement in how these services are delivered. 2. Prior to RTM, there were two ways for leaseholders of flats to remove control from their landlord. Although many leaseholders can force the sale of the freehold using a collective right (see AIMS Information Sheet: Leaseholders Rights to Buy the Freehold of Flats), the main obstacle to this is that leaseholders may not be able to afford to purchase the freehold, particularly if a substantial number do not wish to take part. The government has stated that recent research shows most leaseholders are more concerned with the value and quality of services than owning a share in the freehold. 3. Leaseholders can try to remove the managing agents by making an application to a Leasehold Valuation Tribunal (LVT) for the appointment of a new manager. Although the application fee (currently up to 350), may be reasonable, the cost of legal representation has often proved substantial. In order to have much chance of success, the leaseholders would have to prove serious fault such as consistent failure to comply with the legislation or codes of practice. Even if the leaseholders succeed in ousting the existing managers, they could not recover their legal costs from the other party. Leaseholders whose landlord is a registered social landlord or local authority can not apply to LVT for appointment of a manager. The objective of the new proposals The main objective is to allow residential long leaseholders those with a lease that was originally granted for more than 21 years the right to take over the management of their building without having to prove fault and without having to pay compensation to the landlord or existing managers. RTM is not intended to have any affect on the terms of the lease, other than to transfer the functions and responsibilities to the new management company. RTM does not necessarily mean that leaseholders should use this right to try to manage the block themselves. As RTM is merely a transfer of the responsibility for the management, it would be advisable to appoint an organisation that has the skills and experience to carry out the management effectively. The leaseholders involved may be content to keep their existing managing agents after exercising their right to RTM as they will have gained more control in the decision-making process. 1

Eligibility As RTM only applies to blocks of flats, owners of leasehold or freehold houses or bungalows cannot exercise this right and are therefore unable to participate in RTM on mixed estates which consist of flats and houses. 1. A qualifying tenant for the purposes of RTM is someone who holds a long lease, as defined on page 1, and there can only be one qualifying tenant per flat. 2. The RTM applies to premises if they consist of a self-contained building, this building contains two or more flats held by qualifying tenants and the total number of flats held by qualifying tenants is not less than two-thirds of the total number of flats in the premises. 3. There are some exclusions from RTM which include: premises where more than 25% of the internal floor area is in non-residential use; premises owned by a local housing authority; and premises where the RTM has already been exercised. As the Act only applies to separate blocks of flats, estates consisting of both blocks of flats and houses (ie mixed estates ) cannot use RTM for the whole estate. Each block would be required to exercise RTM separately so there is no guarantee that any new manager would have the responsibility for the management of the whole estate. 4. In order to qualify for RTM, the leaseholders must form a company limited by guarantee (RTM Company) and its memorandum must state that its object, or one of its objects, is the exercise of RTM. The memorandum and articles of the RTM Company are in a prescribed form and will clarify how the company must be run. This RTM Company must include at least one half of the qualifying leaseholders (see 1 above) of flats contained in the premises that RTM applies to. 5. In order to prevent competing bids, a company does not qualify if there is already an RTM Company or a Right to Enfranchise Company in existence. 6. In any block where the RTM Company has lost the RTM for any reason, this block will be excluded from any exercise of RTM for four years from the date the RTM Company ceased to have the right to appoint the managers. 7. Individual leaseholders will be unable to participate in RTM if they have sub-let their flat on a long lease or if they have a shared ownership arrangement where the landlord retains part of the value of the flat. Membership and regulations Any persons who are qualifying tenants of flats in the premises and the landlord/freeholder are entitled to be members of the company. A qualifying tenant will be entitled to become a member of the company at any time, either before or after the company takes over the management of the premises. As concerns have been expressed that some landlords might try to interfere in the leaseholders right to exercise the RTM, the landlord will not be entitled to be a member of the company until after it has taken over the responsibility for management of the premises. Exercise of Rights 1. The RTM Company must serve a notice of invitation to participate on all leaseholders who are not members of the company, inviting them to join for the purpose of exercising RTM. 2. The RTM Company must include at least 50% of the qualifying tenants of flats contained in the premises that the RTM applies to. 2

3. Assuming it can proceed, the Company exercises RTM by serving a written claim notice on the landlord. This notice must be served at least 14 days after the notice of invitation to participate. 4. The claim notice must be served on all landlords under the lease if they can be traced. In the case of an absent landlord, the company can apply to the LVT to exercise RTM. 5. A copy of the claim notice must be sent to each leaseholder, regardless of whether they are members of the RTM Company, so they will be aware that RTM is proceeding. 6. A copy of the claim notice must also be given to the managing agents as this will notify them that the management may need to be handed over. 7. There are minimum requirements for the claim notice. For example, it must specify a determination date, which should be at least one month after the claim notice is issued. Landlords must either accept that the RTM will be exercised on the acquisition date (a date three months after the determination date) or they can dispute the validity of the claim to acquire the RTM. 8. There are only certain reasons whereby landlords can dispute the validity of a claim: (i) insufficient qualifying tenants; (ii) shared ownership; (iii) an RTM Company is already in existence, or (iv) the RTM Company represents less than 50% of qualifying tenants. If a claim is disputed, the landlord must send the RTM Company a counter claim notice before the determination date. 9. When an RTM Company receives a counter claim notice disputing its entitlement to RTM, it can apply to a Leasehold Valuation Tribunal (LVT) for a decision. This application must be made to the LVT within two months of the date of the counter claim notice. When the RTM becomes exercisable The acquisition date is the date on which the RTM Company formally takes control of the management from the landlord: If the landlord has not disputed the claim in any way, the acquisition date will be the date specified in the RTM Company's claim notice (usually three months after the determination date); or If there was a dispute which was determined in favour of the RTM Company by the LVT, the acquisition date is three months after the determination becomes final; or If the landlord originally disputed the claim but subsequently agreed in writing that the company was entitled to the right, the acquisition date is three months after the date of that agreement. Responsibilities The decision to exercise RTM will bring many new responsibilities for leaseholders, particularly those who are involved in running the RTM Company: There will need to be regular meetings at least a few times each year. Leaseholders will need to be found to run and sustain the RTM Company. Some leaseholders will need to be aware of company law or the RTM Company will need to buy in this expertise. The RTM Company may need to be responsive to criticism and manage the high expectations of residents. The RTM Company will have some technical matters to deal with, such as major repair works, in liaison with the appointed managers. 3

The RTM Company will have to perform all of the duties required by a company limited by guarantee such as annual returns to Companies House. The RTM Company will have to monitor any managing agents they appoint and will be answerable to the landlord/freeholder for the upkeep of the building. The RTM Company may find there are tensions or even conflict between the Company and leaseholders who have chosen not to participate in RTM. Can the managers appointed by the RTM Company be ousted? After RTM has been exercised, the RTM Company may decide to appoint managing agents who would be given a contract to carry out the management of the block for a specified period of time. The RTM Company cannot remove these managers during this period unless they are successful in taking action for a serious breach of the contract. However, after RTM has been exercised, freeholders and any leaseholder within that block can apply to the LVT to appoint a new manager. Under the 2002 Act, when RTM is exercised and only when it is exercised housing associations and their leaseholders cease to be exempt from an application to the LVT for appointment of a manager. This means that a member of any RTM Company or any other leaseholder in that block can apply to the LVT for the appointment of a manager, including registered social landlords and their leaseholders. It would appear that, if an RTM Company collapses and the registered social landlord takes back the management, the exemption applies again until RTM is exercised in that block again. Can the level of services be maintained after RTM has been exercised? It is the view of AIMS that some degree of protection may be needed for a minority of leaseholders in retirement housing who would be unlikely to be part of the managing group. The 2002 Act is not specifically for retirement housing so it does not offer protection against significant changes in services, not clearly defined by the lease, that could be brought about by the RTM. These leaseholders may now have to rely on new clauses in the revised Association of Retirement Housing Managers (ARHM) Code of Practice to try to obtain the protection they need. In many cases, the terms of the lease will be sufficient to ensure that services are maintained by the RTM Company or their managers. The terms of the lease remain unchanged following the exercise of RTM. If a level of service is specified in the lease, it would require a deed of variation to alter it. This would usually require the agreement of the landlord and 100% of leaseholders. In most retirement schemes, AIMS would hope that leaseholders who have exercised the RTM would employ professional managers (members of the ARHM or ARMA). The schemes envisaged as likely to encounter the most problems are those where a group of residents attempt to carry out the management themselves. AIMS has experience of several important services being reduced as a result of enfranchisement as the new resident company sometimes decides that reduced service charges are preferable to maintaining the existing level of services. Leaseholders may wish to contact AIMS for impartial and confidential advice if they are concerned that services may be abolished or the level significantly reduced. AIMS can advise the RTM Company or individual leaseholders, and can even provide mediation to try to resolve any disputes that may arise. 4

Consequences that may arise as a result of Right to Manage Although the Right to Manage gives many leaseholders the new right to have far greater control over the management of their block, there may be some potential disadvantages that need to be considered: New managing agents may offer a cheaper service, ie lower management fees, but subsequently provide a poorer standard. Without regulation of organisations that provide management of retirement housing, inexperienced managers may enter the sector. This potential problem should be avoided if the RTM Company appoints new managers who are members of the trade bodies, ARHM or ARMA. A small, powerful group of residents may try to take control of the RTM Company and carry out the management themselves. They may have no experience and may not accept that they will have responsibilities under the lease, the legislation and the codes of practice. This is another reason for leaseholders to try to ensure that the RTM Company employs professional managers. There may be a potential for conflict where some residents want to exercise RTM to appoint a new manager whilst others do not. However, if leaseholders have any concerns about the RTM Company, it may be advisable to join to have some influence rather than opt out. If some leaseholders remain unhappy with the new managers, it will be possible for a group, or indeed one leaseholder, to apply to the LVT to try to oust the managers chosen by the RTM. As RTM is only available for each block, it will not apply to mixed retirement schemes that consist of blocks of flats and houses or bungalows. In some cases, the leaseholders of the blocks may decide to exercise RTM, leaving the separate properties with the existing managing agent. Long-term issues that require planning, such as management of the scheme s reserve funds and arranging long-term contracts, may be problematic if there is a regular change of managers. The current VAT regulations mean that there would be a slight disincentive to take up the RTM if the freeholder was currently managing the block. It appears, following discussions with Customs and Excise, that any new arrangements, where the freeholder is replaced as the manager, would result in leaseholders paying VAT on the management fee element of the service charge. May 2009. AIMS is Age Concern and Help the Aged s Advice, Information and Mediation Service for people living or working in private retirement or sheltered housing. This Information Sheet is a brief introduction to RTM and it does not provide a full, detailed interpretation of the law. There are many additional duties that the RTM Company and landlords must carry out in the exercise of RTM such as issuing and responding to contract and contractor notices, right to information notice, right of access notice, and the handover and transferring of funds etc. If you are interested in finding out more, AIMS has also published a Good Practice Guide on the Right to Manage, which covers the subject in much greater depth than is possible here. It is available free of charge from AIMS (or downloadable free from our website: www.ageconcern.org.uk/aims). For application to the Leasehold Valuation Tribunals (LVT), as outlined in this Information Sheet, telephone 0845 600 3178 for details of your local office (there are five regional offices: London, Manchester, Birmingham, Cambridge, and Chichester). The umbrella organisation, the Residential Property Tribunal Service (RPTS), provides useful information about the LVT service on its website (www.rpts.gov.uk). For Wales, call LVT direct on 02920 922 777. If you are in any doubt about your rights and duties under this aspect of the legislation, you should seek specific advice from an appropriate provider. Age Concern England (charity number 261794) has merged with Help the Aged (charity number 272786) to form Age UK, a charitable company limited by guarantee and registered in England: registered office address 207 221 Pentonville Road, London, N1 9UZ, company number 6825798, registered charity number 1128267. Age Concern and Help the Aged are brands of Age UK. The three national Age Concerns in Scotland, Northern Ireland and Wales have also merged with Help the Aged in these nations to form three registered charities: Age Scotland, Age NI, Age Cymru. 5