© 2025 News On The Block. All rights reserved.
News on the Block is a trading name of Premier Property Media Ltd.
© 2025 News On The Block. All rights reserved.
News on the Block is a trading name of Premier Property Media Ltd.
This article looks at the landlords position with regard to existing maintenance contracts after tenants take over the management of a block of flats by exercising their right to manage or purchasing the freehold. This article will not look at the criteria required to take over the management, merely the consequences. Prior to either of the above events the landlord may have the liability to manage the block (with or without the separate management company) and he may have entered into a number of contracts.
These contracts are typically lift maintenance contracts, insurance aerial and satellite dish contracts, door entry phone contracts, garden maintenance contracts and contracts with managing agents. Also, staff may be employed - eg caretakers, porters, commissionaires, gardeners, handymen etc. The RTM Company will take over from the landlord (or an existing management company or manager) those obligations in the flat leases which constitute ‘management functions’. These relate to services, repairs, maintenance, improvements, insurance and management. The RTM Company is responsible for these functions to the landlord and the tenants, including the collection of service charges. However, the landlord does not lose the right to collect services charges relating to expenditure incurred before the management has passed to the RTM Company. Where the RTM Company requires a landlord to pay towards services expenditure the landlord has the same rights as if he were a tenant of the relevant flat(s). Where contracts exist with contractors for the provision of services or works, the RTM can take over those contracts. However the RTM Company need not take over these contracts if it does not wish to or if the contracting party objects. What happens to these contracts, if they do not automatically end? Any contract made prior to CLRA 2002 will probably end because of frustration. The performance of the contract is frustrated because the landlord no longer has the power to permit the services to be performed. This was the Government’s view when it framed the legislation. It explains why there is nothing in the Act explaining what happens to these contracts. However, this may not apply to contracts made after CLRA 2002. Frustration in this context is considered in Halsbury’s Laws of England.
If the possibility of an RTM taking over the management was something which could have been foreseen when they entered into the contract, then it would not be frustrated. To date there has been no court decision relevant to this matter but the law is probably as follows:- contracts made before CLRA would probably be frustrated; contracts made after CLRA where the contractee shows there was no possibility an RTM company would be formed, probably will have been frustrated by the taking over of the management by the RTM company; contracts made where there was known to be a possibility that the RTM might be exercised will probably not have been frustrated. Therefore in all service contracts now entered into by a landlord or a management company there should be an express provision allowing termination in the event the Right to Manage is exercised. Otherwise, the landlord would be liable in breach of contract for damages. Where the freehold is sold there is no automatic requirement for the purchaser to take over the service contracts of the vendor. LVT’s may refuse to include any such provision, dependent upon their interpretation of the words ‘or otherwise’ in Section 24 (8) of the Act. Section 34 of the Act provides that the conveyance may be subject only to such encumbrances as may have been agreed or determined by the LVT, the encumbrances subject to which the Estate should be granted. Therefore landlords entering into any service contracts must ensure that there is a term in those contracts allowing for early termination in the event of a collective enfranchisement. Otherwise, the landlords could be liable for damages if the contract is not taken over by the purchaser. If the lessees refuse to take over an existing contract (and there is no provision for early termination) the position would be similar to an RTM Company taking over the management. The provisions relating to RTM’s only came into existence in 2002, whereas the ability for tenants to collectively acquire the freehold dates from 1993. Only those contracts which were entered into prior to the enactment of LRHUA 1993 could be frustrated. After then, it must be argued there was no real possibility of a collective enfranchisement, but this is a difficult argument to sustain. Although there is no obligation on the tenants to take over service contracts, where they do there is no automatic right for them to disclaim these contracts if they no longer wish them to continue. They could attempt to do so by forming an RTM Company and then exercising the Right to Manage against the freeholder even though the shareholders in the freehold company will be the same as the qualifying lessees. In view of the relationship between the parties, the service contracts may not be frustrated. The better route would be for the acquiring lessees to form an RTM Company prior to their acquisition of the freehold which will then take over the management and disclaim those contracts which it did not want to continue. Afterwards, the tenants can acquire the freehold with the RTM Company in place to manage the block. The landlord will only benefit from this arrangement if the service contract was entered into prior to the enactment of CLRA 2002.
With regard to employees, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known as TUPE) will apply on the acquisition of the freehold. The existing terms and conditions of all contracts of employment will transfer automatically to the new employer. Thus the vendor must make a condition of the sale that all employees solely engaged in the services of management of the building must be taken over as part of the acquisition, although this might be a legal requirement anyway. If by agreement employees are not taken over then the vendor would be faced with making his employees redundant which may cause difficulties. If the contract makes no provision for the takeover of employees then it would appear that these would have to be taken over by the lessees.If they dismiss an employee then they could be liable for damages for unfair dismissal or redundancy. Specialist advice is recommended if the tenants do not wish to take over the employees. Landlords cannot merely walk away from their service contracts if an RTM Company takes over the management or if the tenants collectively acquire the freehold. Considerable attention should be given to the terms of all service contracts to ensure that in the event of an RTM Company being formed to take the management then the service contracts are automatically terminated unless adopted by the tenants with no ongoing liability for the landlord. The same principle should apply so that contracts can be terminated in the event of the acquisition of the freehold by the tenants. Where there are existing contracts then it would appear that only those contracts which were entered into prior to the enactment of the Commonhold & Leasehold Reform Act 2002 and the Leasehold Reform, Housing & Urban Development Act 1993 could be the subject of the doctrine of frustration. Those contracts entered into after the enactment of those Acts would not be so subject and there could be an ongoing liability for landlords in connection therewith. Landlords should include within all contracts of sale a provision that the lessee should take over the service contracts where there is no automatic right of termination on sale.
Eric Shapiro