The right to manage

Prior to the recent change in the law if you wanted to appoint a new manager the most obvious route was an application to the Leasehold Valuation Tribunal (the LVT). If the Tribunal decided that the management was bad and there was no other remedy available that would achieve an improvement then the Tribunal can make an Order displacing the landlord’s control and management arrangements and put in place a manager appointed by the Tribunal. Unreasonable service charges could have been a reason as well as any failure to comply with a provision in an approved code of management practice.

The problem with this procedure was that fault had to be proved. The hearing could be lengthy and complicated. The Tribunal had a wide discretion as to what Order might be made. There was no guarantee of success or certainty as to what the Tribunal might decide was the appropriate course and what is more even after an Order was made the landlord could re-apply to vary or discharge such an Order with the management reverting back to the landlord.

The new legislation gives leaseholders the power to manage themselves without this need to prove fault or buy the Freehold as under previous legislation. The rationale behind the change is that there is now recognition that the equity value in a block of flats is really substantially that of the leaseholders. If you had a block of ten flats with each flat worth, say, £100,000 the combined value of the interest would be £1m. If the ground rent were, say, £50 per flat, the landlord’s interest may not be worth much more than £10,000 but certainly a fraction of the equity value of the lessees’ interests.

In order to qualify for this new right to manage without proving fault, the building must be self-contained with at least two or more flats. Two-thirds of the flats must be held by leaseholders who had leases originally granted in excess of 21 years and not more than 25% of the internal floor areas (excluding common areas) must be in non-residential use. Local authority properties are outside the new legislation but registered social landlords such as housing associations are to be bound.

The procedure first involves the leaseholders in setting up a right-to-manage company (the RTM company) and serving what is called the ‘claim notice’ on the landlord. When this notice is served there must be a minimum number of leaseholders as members of the company being not less than half of the total number of flats in the building. The only basis on which the landlord can dispute the notice is if there is an argument about the qualification of the building or the leaseholders and that would be decided by the LVT. The RTM company would have to pay the landlord’s reasonable costs.

There are provisions to ensure that the handover of management goes smoothly. The existing manager has to serve existing contractors with a notice that gives details of the new management company and the date that they are taking over so contracts can be re-negotiated. There are provisions to enable details of contracts to be given to the RTM company. There is a potential problem in that the RTM company is not bound by the old contracts which could create difficulty for the landlord who will have to argue that the contracts no longer have any legal validity. Unused service charges have to be paid over to the new manager and if there is a dispute on how much is involved the LTV can decide.

The RTM company then takes over anything relating to services, repairs, maintenance, improvements, insurance and management. There are also provisions that enable the RTM company to decide matters relating to consents on transfer and sub-letting of flats.
It is not all quite plain sailing for the RTM company because the landlord will have a share in the RTM company. The right to use the old provisions to apply for the appointment of a manager by the LVT can still be used. Although the RTM company does not have to appoint a professional manager nor prove that it is professionally competent, common sense would suggest that the RTM company would need to appoint a professional manager or otherwise the benefits of removing the old manager are likely to be lost.

In today’s market many of the larger managers of blocks of flats are giving up the task as being too troublesome, too labour intensive and too unprofitable. We will have to wait and see how often this right to manage is used. Except in cases of obvious bad management it may well still be better to work with the existing management to get improvements than to change the management and run the risks that can involve. The pressure of the new rights given to leaseholders should make existing managers more receptive to lessees wishes. The new legislation is likely to be implemented at the end of September.