Congratulations – you have just enfranchised the block of flats in which you live and you are now a proud member of the freehold company. Or perhaps you have just completed a successful Right to Manage claim and you are now in control of the management of the block. So, erm… now what?
Acquiring the Management Function
There are two ways in which the tenants may acquire responsibility for the management of their building – by enfranchisement pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 or by acquiring the Right to Manage (RTM) pursuant to the Commonhold and Leasehold Reform Act 2002. While there are significant differences between the two processes which are not the subject of this article, broadly speaking a successful claim for either will result in the tenants assuming the rights and obligations of a landlord or actually becoming the landlord, either through the RTM company or the nominee purchaser. These will include the right to enforce leasehold covenants and to grant or withhold approvals, as well as obligations in respect of repairs, maintenance and the provision of services.
While the ability for tenants to control their block, be it through enfranchisement or RTM, is an important one, property management is a specialist business. A poor aftercare service, or the lack of one entirely, can have disastrous consequences.
The Company You Keep
While the articles of an RTM company are defined by law, the articles of a nominee purchaser in an enfranchisement claim are decided by the tenants. These will include the decision-making process and provisions relating to dispute resolution, which are key issues to consider when setting the company up prior to commencing a claim.
On completion, you will probably become a shareholder in a company with a stake in the running of the company but you as an individual are unlikely to have overall control. The attitude of your fellow shareholders – who are also your neighbours – towards issues like development or breaches of leasehold covenants could prove problematic, particularly where decisions are taken either by the board – who may only comprise a small number of residents – or by a shareholder vote.
In addition, you may find yourself being a director of the company, with all the responsibilities (and consequences for failing to stick to them) which comes with directorship. You might already have a full-time job, and may not have the time or the desire to be drafting, circulating and counting the responses to shareholder resolutions when you get home, let alone filing the annual return at Companies House or updating the company’s books every time somebody moves in or out.
Many law firms offer company secretarial services, or alternatively there are various specialist company secretaries available. These can ensure that the significant and at times onerous obligations on all companies are complied with, with the cost recoverable through the service charge.
Managing the Property Properly
The only thing you are certain to have in common with your neighbours is that you reside in the same block. It may be that none of the residents have any background or experience in property management, and it is highly unlikely that every resident will do so. A lot of the problems we see arising from tenants’ acquisition of the management function stem from tenants not being made aware of the responsibilities of management.
For example, ground rents and service charges will need to be collected, utilised and accounted for; maintenance works will need to be undertaken as necessary and compliance with various statutory obligations – fire risk and health and safety, for example – will need to be ensured. Management obligations will also need to be complied with in a timely manner, which can be onerous where you are acting pro bono, and scrutiny of the accounts is likely to be particularly high where the application of your neighbours’ money is concerned.
You may decide to retain a third-party management company for the property management function, which could include dealing with maintenance and repairs. This retainer would be paid by all of the residents through the service charge, and having a third party responsible for these issues can make the process easier and fairer for everybody. Retaining a professional third party to take responsibility for carrying out the management and implementing agreed policies can help avoid the inevitable personality clashes which otherwise can arise. Of course, retainers can be ended and management brought back in-house at a later date should the consensus among the residents change.
Keep Your Friends Close and Your Neighbours Closer
It is important to remember that the shareholders and directors of an enfranchisement company or an RTM company are unlikely to be wholly objective or neutral. Most buildings seem to have at least one “difficult” tenant. Certain political considerations can get in the way of good estate management, particularly when the parties may have a vested interest in, for example, prohibiting your extension or internal reconfiguration, stopping you putting up a satellite dish or blocking your permission to keep pets. Just because the family upstairs received permission from a former landlord does not mean you are guaranteed the same; after all, why keep up with the Jones’ if you can keep them behind you.
It is therefore important to be clear on both the decision making procedure and the dispute resolution mechanisms available to you so you can understand what to do should things go wrong before they do so. A transparent strategy and process which has been agreed in advance will go some way to avoid awkward situations arising where directors have to make quick decisions which a disgruntled tenant will be likely to challenge.
Conclusion
It is important to understand and organise the practical side of the post-completion matters right at the start – it should be a part of the decision whether or not to proceed with your application at the outset. Simply having the conversation with your neighbours as to how this is going to work on a practical level ensures that everybody is on the same page.
It would also be wise to discuss the practical considerations with your solicitor at the outset. Otherwise, you may find yourself visiting them again under different circumstances.
Grant Duranti, Trainee Solicitor at Pemberton Greenish
