What it means for a building to be subject to Right to Manage
Here is a short guide as to the implications for a landlord where a building has been the subject of a successful Right to Manage (RTM) claim made by the tenants.
RTM management functions and responsibilities
When an RTM company completes a successful claim it takes over the management functions for the building with effect from the management handover date. Normally these will be the functions which have been directly exercised by the landlord or by the head lessee where relevant or even by a management company if there is one. However, no matter who is responsible for managing the building, the functions pass to the RTM company on the management handover date.
What are the management functions?
These are the provision of services, repairs, maintenance, improvements, insurance and management of the building, in effect the duties which the landlord promises to carry out in the leases and charges for in the service charge. Typically these will include:
- repairs, redecorations and maintenance of the structure of the building and the common parts, including both regular and one off items and the maintenance of plant and facilities, lifts, communal central heating boilers etc.
- improvements to the building (where this is permitted under the leases)
- provision of services such as the lighting of the common parts, heating, cleaning, outside maintenance of any grounds, caretaking and porterage
- insuring the building
- calculating and collecting the service charge and drawing up budgets and accounts
- compliance with statutory requirements relating to the management and fabric of the building such as health and safety inspections, fire safety and regular building audits
- general day-to-day management of the building
The RTM also takes over responsibility for dealing with applications which are received from the tenants for approvals (such as licences to assign, alter or change use) and the enforcement of the covenants under the leases. See further comments below.
What is not included
- the right to receive the ground rents does NOT pass to the RTM company but remains with the landlord
- the management of any non-residential parts of the building or any non-qualifying flats
- functions relating to forfeiture and possession
If the building contains non-residential or commercial units such as shops, offices, garages or storage areas which are not included in any of the leases, the management of these parts remains the responsibility of the landlord. The resulting split management can be confusing and may lead to practical problems. The RTM company presumably may wish to provide certain services to the whole building such as insurance but we can see that disputes may arise eg over the management of shared access ways or the external appearance of the building. Conceivably the landlord as the freeholder of the building may wish to see certain works such as external decorating take place which may have an impact on other buildings which it retains in the vicinity but which the RTM company may be reluctant to carry out. On the issue of buildings insurance the landlord is permitted under the statute to undertake its own insurance but it may not be commercial for it to do so as it cannot recover the premium. The landlord should ensure that it obtains regular copies of the insurance schedule and review it at each renewal date.
Where the landlord owns and lets flats in the building, other than on long leases, it will be liable to the RTM company for paying the service charges on those flats. The landlord will also be liable to pay service charges for other parts of the building which are excluded from the claim. Where internal repairs need to be carried out, the landlord will be responsible for works within those excluded areas but where the repairs relate to the structure of the building, these will be a matter for the RTM company.
Forfeiture and possession
This is a specific remedy which may only be exercised by the landlord and cannot be delegated or taken over by the RTM company. Whilst the RTM company can sue the tenant for arrears, it cannot take the ultimate action of forfeiture proceedings. The RTM would need to ask the landlord to deal with such but cannot insist upon it.
Thus, in summary, the day-to-day functions and responsibilities of the management of the building pass to the RTM company but the landlord is still the landlord under the leases and is therefore responsible for the performance of the landlord’s covenants outside the general duties of management, for example, for providing quiet enjoyment and rights of support and shelter.
Arrears of service charge
Upon receipt of an RTM claim, if the landlord is owed arrears of service charge, it should take steps to collect these urgently. The RTM company is under no obligation to pay such arrears to the landlord and the tenants may feel less incentive to pay arrears to the landlord once the RTM company takes over and they are paying service charges to the company under the new regime.
Consents and Licences
Under the terms of the leases, the tenants are likely to require the consent of the landlord to do certain things such as assignment, sub-letting, changing the user and making alterations to the flat. The responsibility to grant such licences passes to the RTM company, although the RTM company must keep the landlord informed. Therefore before granting any such approval, the RTM company must give notice to the landlord.
For approvals relating to assignment, sub-letting, placing a charge on the unit, parting with possession, making structural alterations or improvements or changing the use of the unit, the RTM company must give 30 days’ notice. For all other approvals, 14 days’ notice is required.
The RTM company does not require the specific consent of the landlord as such and if the landlord does not respond to the notice which it receives from the RTM company that consent is about to be granted, the RTM company may proceed and grant the approval. Where the landlord objects, consent may not be granted until the landlord withdraws its objection or the matter is decided by the First-tier Tribunal (Property Chamber).
Where the landlord intends to object, it must do so by notice to the RTM company and to the leaseholder and if the case concerns a sub-letting, to the sub-tenant. Applications to the Tribunal may be made by any of the parties.
There can be a practical issue in that the parties might forget about the existence of the RTM. The RTM is not registered as such, for instance at the land registry, and a tenant and its advisers may forget or not realise about the RTM and submit an application for consent to the landlord in the standard way. The landlord needs to be mindful to check its own records and point the tenant to the RTM company upon receipt of such an application which has been submitted in error.
On what basis might the landlord object?
Where under the terms of the lease the landlord has the absolute control to refuse consent to something or only to do so on certain conditions, which could include the charging of a premium, the landlord can make an objection and demand that any such consent be granted only on the terms required by the landlord. If agreement cannot be reached this would need to be determined by the tribunal. It is vital however that the landlord replies to the RTM company notifying it of the objection within the time limits mentioned above (14 or 30 days). The landlord cannot afford to delay at this critical early stage or the opportunity to object will be lost. Whether the landlord could take action against the RTM for authorising something which is absolutely prohibited in the lease would need to be considered further but ideally the landlord would not put itself in that position. The RTM company in its defence is likely to point to its having complied with its requirement to keep the landlord informed and deny any liability for something which results from the landlords own delay.
Enforcement of covenants
Responsibility for policing the tenant’s covenants and obligations under the lease becomes the responsibility of the RTM company. Therefore the RTM company must ensure that all covenants are complied with and must keep the landlord informed. The company has a statutory duty to review compliance with the covenants by the tenants and to take steps requiring the remedy of any breaches. Any breaches which have not been remedied must be reported to the landlord. The landlord then may proceed to enforce the covenant by forfeiture.
Where the lease provides a right of access into the flats by the landlord for purposes of compliance or enforcement of covenants, this right is available to the RTM company.
Membership of the RTM company
The landlord is entitled to apply to become a member of the RTM company. This may be regarded as an opportunity to retain some involvement in the future running of the building, although the ability to become involved in decision making is limited and with it might come an actual or implied shared liability for any problems which may arise as a result of mismanagement of the building by the company.