Commonhold and Leasehold Reform Act 2002 In the fourth of a six-part series on mixed-use properties, Peta Dollar looks at the leaseholders’ right to manage
Since 1987, leaseholders have been able to apply to the court under the Landlord and Tenant Act 1987 for the appointment of a manager – and even to compulsorily acquire the landlord’s interest – if they can establish the required landlord default. By way of contrast, Part 2, Chapter 1 of the Commonhold and Leasehold Reform Act 2002 (the “2002 Act”) allows qualifying leaseholders the right to take over the management of their block of flats without any necessity for showing default on the part of the landlord or the management company, known as a “right to manage” (the “RTM”).
The 2002 Act takes control from landlords and places most of their duties and liabilities on the leaseholders in the form of the right to manage company (the “RTM Co”). The landlord loses control over the standard of management, repairs, major works and improvements, provision of services, budgets and reserve funds for the building. In a purely residential building, this may have an adverse effect on the value of the landlord’s reversionary interest, with the possibility for conflict between the landlord’s essentially long-term interest and the leaseholders’ sometimes shorter-term focus. However, in a mixed-use building, the effect on the landlord’s interest may be greater, even though the leaseholders’ rights do not extend to commercial and other non-residential parts.
When does the legislation apply?
In order for leaseholders to exercise their rights under the 2002 Act, the building and sufficient leaseholders must meet the qualifying criteria. In addition, a sufficient number of qualifying leaseholders must act together.
Building
The 2002 Act requires that:
- the building be a self-contained building or part of a building, such that it constitutes a vertical division of the building that could be redeveloped separately and contains at least two flats;
- no more than 25% of the internal floor area (after excluding common parts) must be for non-residential use;
- at least two-thirds of the flats must be let to qualifying leaseholders.
Qualifying leaseholders
A qualifying leaseholder must have a long lease, generally with an original term of more than 21 years (or less where the lease contains a non-perpetual renewal clause, operable without payment of a premium), with break clauses and forfeiture provisions being disregarded. There is no residence requirement, but if both the tenant and the sub-tenant are eligible, the sub-tenant will take precedence. Unlike in the case of collective enfranchisement, there is no limit on the number of flats that a qualifying tenant may own, and nothing to prevent a company from taking part.
At least half of the flats in the building must support the RTM application, which is made by the RTM Co set up by the leaseholders for the purpose of exercising the right. All qualifying tenants are entitled to join (and, indeed, must be invited to join), as is the freeholder and any intermediate leaseholder between the freeholder and the flat leaseholders.
If the legislation applies, what must be done to exercise the right?
There are various notices that must be served and requests that may be made by the RTM Co. From the landlord’s point of view, the most pertinent are:
Notice of claim
- This must be served in a prescribed form on the landlord, who must be given at least one month to respond. The notice gives a further date, being not less than three months after the first date, which is the date on which the RTM Co intends to take over management. It is therefore possible, if unopposed, that the RTM Co could take management from the landlord four months after service of this notice.
- A claim notice can be signed by an RTM Co’s solicitor or other authorised agent, and does not need to specify whether any appurtenant property is involved.
- Failure to provide the correct name for the landlord in a notice inviting participation will invalidate the subsequent notice of claim.
Landlord’s counter-notice
- This must also be in a prescribed form and must be served by the date specified in the notice of claim.
- The landlord can oppose only on certain grounds:
- The building does not qualify.
- The RTM Co does not comply with legislation.
- The RTM Co has insufficient members.
- The landlord cannot raise queries or dispute the notice on any other ground.
- Case law suggests that the landlord is not obliged to set out all its grounds of opposition in the original counter-notice, as additional grounds can subsequently be relied on (see for example Albion Residential Ltd v Albion Riverside Residents RTM Co Ltd [2014] PLSCS 56).
Request for information
In addition, the landlord may receive from the leaseholders or the RTM Co a request for information, seeking details of the landlord as well as details of intermediate/superior interests, current arrears, insurance and management arrangements, details of all contracts in force relating to the building, other leaseholders’ details, and details of the overall state of repair. The landlord must respond within 28 days. The RTM Co has the right to inspect any plant and the fabric of the building on giving at least 10 days’ notice to the landlord.
Any dispute will be determined by the First-tier Tribunal (Property Chamber) (formerly the Leasehold Valuation Tribunal) (the “FTT”).
The landlord’s costs are covered by the RTM Co in any event, to the extent that they are reasonable. This does not include the costs of the FTT where the landlord loses.
In addition, the landlord has further obligations on the handing over of management. Contractor notices must be served by the landlord on all contractors, stating that the RTM has transferred and advising them to contact the RTM Co. These should be served as soon as reasonably practicable after the “determination date” – the date specified in the Notice of Claim for service of the landlord’s counternotice or, if the claim is disputed by the landlord, the final date of determination by the FTT, or the date of any subsequent agreement by the landlord. The landlord must also serve a contract notice on the RTM Co, setting out details of the contracts that the landlord has for maintenance and services, as soon as reasonably practicable after the determination date. The landlord may be required by the RTM Co to supply additional information. Finally, the landlord will be obliged to transfer to the RTM Co all funds comprising advance service charges not yet spent and any reserve or sinking fund.
The landlord has a right to be a member of the RTM Co, and there are complex provisions to ascertain how many votes the landlord will have. However, the landlord will always be in a minority when it comes to voting.
Potential problems
Problems may arise after the RTM Co has taken over, particularly in the following areas:
- Commercial and other non-residential parts of the building will remain the landlord’s responsibility, but there is no provision in the legislation for resolving disputes relating to such issues as the external appearance of the whole building and the maintenance of common parts used by both residential and commercial leaseholders.
- The RTM Co will lack financial standing, being wholly dependent on contributions from the residential tenants under the service charge. The landlord retains the right to forfeit a lease for non-payment, so the RTM Co lacks “teeth” when dealing with individual tenants. Maintenance companies may be reluctant to enter into a contract with a company that may not be able to pay them – if a number of residential tenants fail to pay their service charge, the RTM Co may quickly become insolvent.
- Non-management covenants remain the landlord’s responsibility, and the RTM Co must ensure that leaseholders comply with their covenants and notify the landlord of any default.
- Any approval required by a tenant under its lease – such as to assign the lease or to carry out alterations – will need to be given by the RTM Co rather than the landlord, although notice must also be given to the landlord, who may object.
- Where the landlord owns and lets flats in the building, other than on long leases, the landlord will be responsible for the general management of the tenants of the flats but will be liable to the RTM Co for the service charges on those flats. Where repairs need to be carried out, the landlord will be responsible for works within the flat; but where the repair relates to the structure of the building, this will generally be a matter for the RTM Co.
Exclusions
The RTM does not apply:
- where the immediate landlord of any qualifying tenant is a local housing authority;
- in the case of a non-purpose-built building containing four or fewer flats, where either the landlord or a family member has lived there as their only or principal home for the past 12 months.
Acquisition date
The acquisition date, when the RTM Co takes over, will be:
- the date in the notice of claim, where the claim is undisputed; or
- three months from the landlord’s later agreement to the claim; or
- three months from determination by the FTT.
Peta Dollar is a freelance lecturer, trainer and writer, with particular expertise in relation to mixed use and residential tenants’ rights and is co-author of Mixed Use and Residential Tenants’ Rights: The Landlord and Tenant Act 1987 and Enfranchisement
