Episode Four: Property Management

In the previous articles, I examined the right of the flat owners acting collectively to compel the landlord to sell them the freehold in the property, the right of individual flat owners to compel the landlord to extend their lease and the first refusal rights of the flat owners acting collectively. In this article, I look at the right of the tenants to take over the management of the property. This may well be useful where it is not possible to compel the landlord to sell the freehold, perhaps because a substantial number of the flats are still rented out.

The right to manage

This is the right for flat owners acting collectively to wrest day to day management of their building from the landlord and do it themselves. This would include insurance of the building as well as day to day maintenance, cleaning, gardening, painting and repairs.

The right must be exercised through a “right to manage” (RTM) company. This must be a private company limited by guarantee and its constitution documents must comply with specific statutory requirements.

It is not necessary to show that the landlord has been at fault and no payment is due to the landlord in return for relieving it of the burden.

If a RTM company ceases to manage, it will not be possible to take over the management within 4 years without an order of the Leasehold Valuation Tribunal but this does not apply if the RTM company was used to acquire the freehold.

Preconditions

There are several preconditions as to the building and the flat owners.

  1. The building will qualify if:
    • At least two thirds of the flats are let to “qualifying tenants” (see below).
    • Two or more flats are held by qualifying tenants.
    • It is a structurally detached building.
    • If it is not a structurally detached building, it can still qualify if it is a self-contained part of a building that is vertically separated from the rest, it could practically be demolished and redeveloped or services (ie gas, electricity, phone and anything else provided by pipes, wires or other fixed installations) are or can practically be provided independently of the rest of the building.
  2. The building will not qualify if:
    • More than 25% of the internal floor area (ignoring communal areas) of the building is in used for non-residential purposes.
    • It contains self-contained parts where the freeholds are owned by different landlords – this would be very unusual in practice for technical reasons.
    • The landlord is the local authority.
    • There is already a right to manage scheme in force.
  3. A “qualifying tenant” is any flat owner whose lease was originally granted for more than 21 years, even if it has now expired. A flat owner with a shared ownership lease is only a qualifying tenant if s/he owns 100%. A shared ownership lease is one where the flat owner shares ownership with a housing association or similar as a means of making the flat affordable for the flat owner to buy. The flat owner buys a percentage of the flat from the housing association and pays market rent for the percentage he does not own. You will know if you have a shared ownership lease!
  4. At least 50% of the qualifying tenants in the building must be members of the management company and they must own at least 50% of the flats in the building. If there are only 2 flats, both must be owned by a qualifying tenant and both of them must be members of the company.

Procedure

The procedure is, once again, detailed and somewhat elaborate. It is essential to get it right and the following is only an imprecise indication of the steps to be taken.

  1. First of all the tenants must set up a company to take on the management of the building. This must have special constitution documents.
  2. Once this has been done, any qualifying tenants who are not already members of the company must be invited to join – a prescribed form of invitation must be used.
  3. Then the company must serve a claim notice on the landlord and all qualifying tenants, even the ones who are members of the company – a prescribed form must be used.
  4. If the landlord cannot be found, it will be necessary to apply to the Leasehold Valuation Tribunal and proceed under its guidance.
  5. The landlord can only resist a claim by showing it is invalid because either the building does not qualify or that insufficient qualifying tenants are members of the company.
  6. The Leasehold Valuation Tribunal deals with any disputes that arise.
  7. Once the company has established its right to manage the building, it takes over. It will be responsible for carrying out all the obligations placed on the landlord by the flat leases, including repairs, decoration, insurance, garden and open space maintenance etc etc. The money for this is provided by the service charges due under the leases. The company also takes over the role of the landlord in granting any approvals under the flat leases, such as consent to assign or sublet or to carry out alterations.
  8. The management company must comply with all the rules protecting the flat owners from excessive service charges and poor standard of services. This will be very important as the company might be forced into insolvency if it found that it was not legally able to recoup expenses it had incurred.
  9. The landlord and/or its managing agents must give full details of all of contractors currently used on the building and the company can carry on with them and any other long term arrangements made by the landlord or it can renegotiate or terminate them. Formal notices have to be given at every stage, of course.
  10. The landlord retains the right to let any flats that have not been sold. The landlord also remains entitled to any ground rents due on the flat leases but the service charges etc are in future payable to the management company.
  11. The landlord is entitled to become a member of the management company once the company has taken over the management.

Costs

No price is payable to the landlord when the management is taken over but the landlord is entitled to be reimbursed for any reasonable costs it incurs in dealing with the claim. There will also be expenses in setting up the company and then meeting the annual requirements of the Registrar of Companies to avoid it being struck off.

Written by David Barnes, Commercial Property