By Rachel Coyle, Pupil Barrister at Arden Chambers and Ibraheem Dulmeer, Legal Adviser at LEASE
In Avon Ground Rents Ltd v 51 Earls Court Square RTM Co Ltd  UKUT 22 (LC), the Upper Tribunal highlighted the fact that the creation of a Right to Manage Company (RTM Company) has wide legal implications. It is not only the member leaseholders of the RTM Company who are affected, but also those leaseholders who are not members, landlords and their managing agents.
It is imperative that the procedure to acquire the Right to Manage is followed properly and all parties understand that there will be a significant change to the legal and management landscape of the building subsequent to any successful establishment of a RTM Company.
In this article, the reader will note specific references to the relevant legislation. It is important that these sections of the legislation are read in conjunction with this article for a better understanding of the law.
When does the RTM Company take over?
Acquiring the management functions and powers previously exercised by the Landlord or another party to the lease will depend on how the RTM Company was established.
An RTM Company acquires the right to manage on the date specified in the ‘notice of claim’ provided there has been no challenge from the landlord.
If, however, there is a dispute, then if the First-tier Tribunal (Property Chamber) (the Tribunal) determines in favour of an RTM Company, the acquisition date is three months after the Tribunal’s determination becomes final.
In circumstances where the landlord could not be found or traced, then an application must be made to the Tribunal, and the acquisition date will be specified in the order made by the Tribunal.
What does the RTM Company take over?
References in the lease as to the obligations of the landlord or a third party with management responsibilities will become the responsibility of the RTM Company. This is not a slow and steady trickle down process. The RTM Company takes control of management functions under the lease instantly. These functions include: services, repairs, maintenance and improved works, insurance and management. Moreover, a Landlord is not permitted to carry out any function which an RTM Company is empowered to do, without the agreement of the RTM Company.
There are some provisos to the RTM Company’s functions:
- An RTM Company is not permitted to deal with matters concerning only ‘part’ of the property, or other unit/s held by a qualifying tenant;
- An RTM Company cannot determine re-entry and forfeiture.
An RTM Company is entitled to collect service charges and any reserve funds and accrued service charges. Those with management responsibility prior to the RTM Company acquiring the Right to Manage are under a duty to hand over these funds on or as soon after as is reasonably practicable.
Anything the outgoing manager is obliged to hand over to the RTM Company is monies currently held in bank accounts relating to the property not necessarily what should be in those accounts. In OM Ltd v New River Head RTM Co Ltd  UKUT 394 (LC) for example, the appellant was the former manager of the property. The parties had previously attended proceedings which resulted in a reduction in the service charge by £121,742.39. The RTM company brought proceedings in what was then the Leasehold Valuation Tribunal (‘LVT’) for the payment of uncommitted accrued service charges. It argued that the £121,742.39 was uncommitted service charges that the appellant was due to pay over. It also claimed that there was interest of 4%.
The Appellant argued that these were not uncommitted service charges:
- The LVT could not award interest because it had no power to do so;
- The money had been spent;
- The money was no longer held by OM Ltd.
On appeal, the Tribunal stated that the RTM Company had no power in relation to service charge matters that arose before the date of transfer. The RTM Company had stepped into the shoes of the previous landlord/manager. Therefore, it was entitled to whatever monies were available at the date of transfer and not what the outgoing manager should have had but no longer had. The Tribunal also confirmed that it did not have the power to award interest.
If a service charge and/or reserve fund figure is not agreed, the RTM Company or landlord/other party responsible for management may apply to the Tribunal to determine the amount to be paid. No interest is awarded on these sums.
Not all flats within a building or part of a building contain a qualifying tenant i.e. a leaseholder whose lease was originally granted for an original term of more than 21 years. In such circumstances the relevant flat will be an ‘excluded unit’, and when service charges are calculated as a proportion of the total expenditure but the total recoverable is less than 100 per cent of the service charge expenditure (due to the existence of excluded units), the holder of the excluded unit (often the landlord) must contribute towards the shortfall. This is calculated with reference to the internal floor area of the excluded unit. This can be challenged in the Tribunal.
Once an RTM Company has acquired the Right to Manage, issues where consent is required e.g. structural changes, can be given by the RTM Company. However, it is advised that the RTM Company must give at least 14 days’ notice of its proposed decision to the landlord. If the consent relates to assignment, sub-letting, charging, parting with possession, making of structural alterations or improvements of the use then the notice period can be increased to up to 30 days.
If the landlord objects during the notice period, the RTM Company may only grant its approval if the landlord later consents (in writing) or the Tribunal determines that consent be given.
Any pre-existing contract between the current manager and another person, in respect of a matter which will become the functions of the RTM Company once it acquires the right to manage, the current manager must give notice to the contractor and the RTM Company.
Role of the landlord after acquisition
A landlord can enforce covenants against an RTM Company. The RTM Company should monitor any breaches of covenants by leaseholders and report breaches to the landlord.
It is important for landlord, leaseholder or existing managing agent to understand the ramifications of exercising the RTM and the ongoing management of the premises.