Law Commission’s proposals on exercising The Right to Manage

The Government’s brief to the Law Commission was to review the existing right to manage (“RTM”) regime with a view to making the procedure “simpler, quicker and more flexible, particularly for leaseholders.  The Law Commission published its report “Leasehold home ownership: exercising the right to manage” on 21 July 2020 (the same date as its reports on commonhold and leasehold enfranchisement demonstrating its co-ordinated approach and recommendations across the three areas).

RTM is a “no-fault right” currently available in relation to flats for leaseholders’ to obtain control of the management of a building.  The Law Commission has made 101 recommendations to transform the current RTM procedure taking into account 275 responses to its consultation received from a range of stakeholders within the residential sector.

The key headlines from the report are:

Qualifying Criteria

• The Law Commission’s proposes the substantial widening of the scope of buildings which qualify for the RTM by recommending:
• that the RTM be exercisable in relation to a new classification of “residential unit” (which includes both flats and houses); and
• increasing the non-residential threshold from 25% to 50%.  In the original consultation, the Law Commission proposed to remove the threshold in its entirety but considered 50% to be the right limit as, in their view, a building with 50% non-residential parts can “fairly be described as a residential building”.  However, an RTM company does not obtain the right to manage commercial units within the building which continue to be managed by the landlord.
• At present an RTM company can only acquire the RTM over a single self-contained building or part of a building even if those buildings have been managed together historically by a single landlord or managing agents.  The Law Commission has recommended that a single RTM company should be able acquire the RTM in respect of more than one building in a single RTM claim and there does not need to be any link between the buildings to form a multi-building RTM claim.  The report also suggests there should be flexibility so that an additional building may join an existing RTM, provided that the qualification criteria is met in relation to the additional building, and likewise that a building should be able to leave a multi-building RTM so that the leaseholders in that building can form their own RTM company and acquire the RTM in respect of their building alone. 

Process

• The Law Commission’s report aims to make the RTM procedure simpler and more accessible.  The proposals also appear to seek to modernise the process by:
• the removal of the requirement to serve notices on all leaseholders inviting them to participate in the RTM;
• the ability to serve notices forming part of the RTM process by email;
• permitting signature of the claim notice and other notices within the procedure, electronically;
• increased rights for leaseholders to obtain information in advance of claiming the RTM.
• The Law Commission has also proposed limiting the circumstances in which the RTM process can be challenged by landlords to failures by the RTM company to comply with certain prescribed requirements or where the qualifying criteria is not met by the RTM company or the premises.  In addition, the Tribunal would have an overall power to waive procedural defects.

Acquisition of the RTM

• The Law Commission recommends that the Tribunal be given 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.
• There is also an emphasis on education and the Government is asked to make training for leaseholders acting as company directors of RTM companies available free of charge.
• One recommendation which may prove difficult for landlords is the proposal for landlords to undertake a reconciliation of each leaseholders’ service charge contribution and transfer the sums which should be in the service charge account on the assumption the landlord has collected sufficient sums from each leaseholder to the RTM Company on the acquisition date.  If the landlord has not collected sufficient sums, it will be able to pursue the leaseholder for the arrears but in certain circumstances will be required to pay the shortfall to the RTM Company (by adding it to the service charge fund).
• It is also proposed that the number of circumstances in which an RTM company must give notice of requests for consent under the lease to a landlord be reduced.  The proposal is for landlords to be given notice of an application for consent by the RTM company and the right to object to approvals relating to assignment, underletting, charging, parting with possession, structural alterations, improvements or change of use but there will be some applications for consent where there is no opportunity for a landlord to object.  Where consent falls within one of the above categories, a landlord will be able to object by applying to Tribunal for determination within 30 days of receiving notice of a request for approval. 

Costs

• The Law Commission aims to reduce the costs of making an RTM claim and the report makes the following proposals:
• An ability for the RTM company to recover certain prescribed costs of management from the leaseholders, even where lease does not allow for this;
• A change to liability so that an RTM company is no longer required to pay a landlord’s non-litigation costs.  Under the current procedure, the RTM company must pay all of the landlord’s costs incurred in connection with the claim notice but the Law Commission recommends that the only circumstance where the RTM company may be required to pay the landlord’s non-litigation costs is if the RTM claim fails and the RTM company has acted unreasonably in proceedings.
• Landlords and RTM companies to bear their own costs of Tribunal proceedings, subject to the usual limited power of a Tribunal to order costs on the basis of a party’s conduct or wasted costs.

What happens next is for the Government and Parliament to decide but it will be interesting to see what shape the RTM process takes in the future.  It remains to be seen whether the proposed procedural overhaul, the widening of the scope of properties falling within the RTM regime and the creation of flexible multi-building RTMs will reduce the number of disputes in this area and strike a balance between the leaseholders’ statutory right to acquire the RTM and protection of the landlords’ reversionary interest.

Please click here for our summary of the overall approach of the Law Commission across the three reports and for links to more detailed notes on Commonhold here and Enfranchisement here.

Please do not hesitate to contact Laura Bushaway or your usual Charles Russell Speechlys LLP contact if you have any queries.  This insight is not a substitute for legal advice on the specific circumstances of the case.