21 July 2020

Exercising the Right to Manage, The Law Commission's final report

The Law Commission has today published its three final reports on leasehold reform and the future of home ownership. Their recommendations about leasehold enfranchisement and the right to manage are aimed at improving the existing system of leasehold ownership, whilst the third report about commonhold seeks to create a viable alternative to leasehold ownership, with a view to its widespread use in the future.

In this article we consider the proposed reforms to the right to manage (“RTM”) regime which is a right for leaseholders to take over the management of their building without buying the freehold.

In summary, the Law Commission's recommendations look to:

  • make the RTM available to more leaseholders in more types of property;
  • reduce the costs of making an RTM claim, and give leaseholders more control over those costs; and
  • make the process of claiming the RTM less complicated and less likely to be frustrated because of mistakes in the process.

Having had significant input into its consultation from a range of stakeholders including leaseholders, freeholders, lawyers and managing agents it is clear that the Law Commission have fully appreciated the numerous problems with the existing RTM regime. Of the reforms proposed many are potentially very significant and will inevitably lead to an increase in claims if implemented by the Government. Those of particular note are set out below.

Qualifying Criteria – Making RTM more available

Currently, the RTM applies only to flats (houses are excluded) and can only be claimed in respect of premises which:

  • constitute a self-contained building or self-contained part of a building;
  • have 25% or less of the total internal floor area occupied by non-residential parts; and
  • contain at least two flats held by qualifying tenants (broadly speaking, these are leaseholders with leases of more than 21 years).

These criteria often generate legal disputes and the limit on non-residential floor area excludes many newer mixed-use developments. It is also not unknown for developers to alter construction of premises to ensure that over 25% of the scheme is commercial, such that RTM and enfranchisement rights would not be available to residential leaseholders.

The current law also prevents leaseholders in multiple buildings acting together to take over management through a single RTM company in a single claim, even where they are on the same estate and share appurtenant property such as gardens or car parks.

The solutions recommended include:

  • Increasing the non-residential limit from 25% to 50% - this means that only premises in which more than half of the total internal floor area is occupied by non-residential parts will be excluded from the RTM.
  • Premises can qualify for the RTM if they are a (or part of a) building reasonably capable of being managed independently, even if they do not satisfy the requirements for self-containment - in practice, this means that leaseholders in premises currently managed independently can simply point to that existing management arrangement as evidence that the premises qualify for the RTM. The recommendations therefore mean that the RTM will be exercisable in relation to premises which consist of:
    • a self-contained building;
    • a self-contained part of a building (with a more relaxed version of the vertical division test - perhaps by clarifying that a part of a building would not satisfy the vertical division requirement where a material part of it lies above or below another part of the structure);
    • or any other building or part of a building which is reasonably capable of being managed independently.
  • In order to integrate houses into the RTM, no distinction should be drawn in the legislation between a “flat” and a “house”. Instead, there should be a single concept of a dwelling, such as “residential unit” – premises will accordingly have to contain only one unit to qualify, and for premises with only two residential units, the existing rule that both leaseholders must participate in the RTM claim is to be removed.
  • Multi-building RTM is the best way to facilitate giving leaseholders more control over the management of their homes on some estates, and the law should be changed to make this possible – the Commission does not recommend that there needs to be any particular link between buildings, such as a common service charge or shared appurtenant property, although they expect that leaseholders are unlikely to claim the RTM in respect of unconnected buildings. The recommended model would allow any combination of buildings to progress an RTM claim through a single RTM company. The multi-building RTM would not necessarily cover all of the buildings on an estate and indeed individual block claims will still be possible. The qualifying and participation criteria will still need to be met by each individual building which is to be included in a multi-building RTM claim.

Reducing Costs and Simplifying the Process

In addition to these changes to the qualification criteria, the following are proposed to reduce costs and simplify the process:

  • Removing the requirement that leaseholders pay the landlord’s costs of an RTM claim - including in any Tribunal proceedings. The exception to this rule is the case in which an RTM claim fails and the RTM company has acted unreasonably in proceeding with the claim; in such circumstances, the landlord will be able to recover its reasonably incurred non-litigation costs. In addition, any term of a lease which purports to enable a landlord to recover costs incurred in litigation or otherwise as a result of the acquisition of the RTM as a service or administration charge should be unenforceable. Currently disputes concerning the RTM company are allocated, depending on subject matter, value, complexity and the remedy sought, to either the Tribunal, the County Court, or the High Court. These different jurisdictions have different procedural and costs rules but cases in the Courts usually follow the rule that the 'loser' will pay the 'winner's' costs. It is recommended that the Tribunal should be given exclusive jurisdiction to deal with RTM disputes as it is largely a no cost forum.
  • Reducing the number of notices that leaseholders must serve in order to claim the RTM, and giving the Tribunal the power to waive procedural mistakes in claim notices - this is designed to ensure that an RTM claim is not prevented due to technical, minor and inconsequential mistakes in the claim process. The requirement to serve notices inviting participation should be abolished, and service by email/electronic signatures will be permitted.
  • Clearer rules for the management of property which is not exclusive to the premises claiming the RTM, such as shared gardens and carparks should be put in place - the recommendations are designed to ensure that either the parties or the Tribunal will have set out how dual management will be carried out, if the RTM company is to acquire management functions in respect of such property. In particular it is noted that the Commission suggest that the Tribunal should have the power to order a variation to a lease if the acquisition of the RTM makes management of premises in accordance with the leases unworkable. This applies to premises affected by the RTM, regardless of whether they are subject to the RTM or not. The variation would last only for the duration of the RTM and any party with an interest in affected premises will be able to apply to the Tribunal.
  • The RTM company should have the right to request information about the premises early on in the process so they can make an informed decision about claiming the RTM, and can properly prepare for the handover of management functions - it is also recommend that free training should be made available to RTM company directors and prospective directors, ensuring that they are aware of their obligations under company law and in respect of building management.

Next Steps

The Law Commission has now set out their recommendations for wholesale reform of the enfranchisement, right to manage, and commonhold regimes. They have also previously set out the options for reducing the price of enfranchisement.

Ultimately, for the recommendations to become law, an Act of Parliament is required. It remains to be seen whether, in the current political climate, leasehold reform will be seen as a priority for the legislative agenda. Leaseholders will certainly be hoping that is the case.

Emma Gosling is a Senior Associate in our Property Litigation team.

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