The Law Commission recommends a simpler, cheaper and more flexible approach to RTM Claims

The Law Commission published its reports on Leasehold Enfranchisement, Right to Manage (RTM) and Commonhold on 21 July 2020. This Law Now looks at some of the key recommendations in the Right to Manage (RTM) Report.

The common theme in all three reports is to make each process simpler, quicker, more flexible and to reduce costs for leaseholders. RTM is often seen as the next best option if leaseholders are not able to pay a premium to acquire the freehold, and the Law Commission attempts to make this option available to more leaseholders in a wide variety of buildings. The RTM Report can be broken down into three parts (i) Qualification Criteria, (ii) Process and (iii) Post completion of a successful RTM claim.

Qualification criteria

Key recommendations on the qualification criteria include:

1. RTM should be exercisable in respect of leasehold houses as well as flats, thereby removing the current criteria that it should apply only to a building which contains two or more flats;
2. the non-residential limit should be increased to 50% (currently 25%) so that the RTM can be claimed in relation to a mixed use building in which the internal floor area of any non-residential part does not exceed 50% of the total internal floor area of the premises;
3. allowing RTM claims over multiple buildings, such as buildings on an estate where they are managed together, provided that each building meets the qualification and participation criteria in its own right;
4. whilst business tenancies should continue to be excluded, flexibility should be given to live/work units; and
5. shared ownership leases granted for more than 21 years should be a long lease for RTM purposes, regardless of whether it has been staircased to 100%.

The combined effect of these fundamental changes is to open up the RTM to more leaseholders in more properties. Other recommendations such as the removal of the requirement for both qualifying tenants to participate in a two flat building and the inclusion of buildings with resident Landlords, will increase the pool even more.

The Law Commission recommends abolishing the rule that only one RTM company can exist in relation to a building at one given time, instead it seeks to rely on existing legislation to prevent competing RTM claims being established whilst a claim is alive. It also makes recommendations to provide training and assistance to leaseholders who have insufficient knowledge about the rights and responsibilities of managing a building following the acquisition of a RTM.

Process

Key recommendations in terms of the acquisition process include:

1. removing the requirement for leaseholders to pay the Landlord’s costs of an RTM claim, thereby giving leaseholders more control and certainty over the costs they incur;
2. the removal of the requirement to serve notices inviting participation;
3. validity of notices may only be challenged if they fall short of prescribed requirements, thereby reducing the risks of failure for technical defects;
4. all notices should be capable of being signed electronically and served by email; and
5. notices should only be served on freeholders placing an onus on the freeholder to pass the notices to intermediate Landlords.

The RTM report sets out detailed recommendations in respect of information rights, allowing RTM companies to inspect or obtain information from the Landlord in order to decide whether to claim the RTM and placing an obligation on the Landlord to notify RTM companies of material changes to information provided. The costs of complying with requests for information will fall on the RTM company before the claim notice is served. However, after the service of the claim notice, the Landlord should bear its own costs of complying with their duties to provide information.

Post completion of an RTM claim

The consequence of a successful RTM claim is that the RTM company acquires the management functions, meaning the obligations relating to services, repairs, maintenance, insurance and management. One of the key grievances around RTM claims is the lack of certainty on how the management functions are divided between the Landlord and RTM company post acquisition of a RTM claim. The report has sought to clarify some of these points:

1. Insurance - whilst the RTM company becomes obliged to insure the building, the obligation to reinstate the building remains with the Landlord, the Law Commission recommends that both the RTM company and the Landlord should procure insurance cover in joint names and if there is a dispute as to the type of policy, this can be determined by the Tribunal;
2. Management Costs – the RTM companies should be entitled to recover certain prescribed costs of management as an additional service charge;
3. Consents under leases – where currently both the RTM company and the Landlord retain the right to grant consents, the Law Commission recommends that Landlords should only have the right to receive notice of and object to approvals relating to assignment, underletting, charging, the making of structural alterations and change of use; the recommendations also include prohibition on Landlords to charge administration fees for granting consents under the lease; and
4. Costs in Dispute Resolution - the recommendations seek to limit the Landlord’s ability to recover costs in resolution of disputes, including rendering unenforceable provisions in a lease which enables the Landlord to recover costs incurred in litigation.

The Law Commission also seeks to simplify the process to terminate an RTM by allowing the RTM company to apply to the Tribunal if it wishes to give up the RTM in respect of any building, including buildings within an estate. If the RTM is terminated, the management functions should revert to the Landlord or the management company.

Clearly the recommendations will have a significant impact on how RTM claims are dealt with. It is to be seen how the Government decides to take forward the recommendations made by the Law Commission and whether an Act of Parliament is passed to convert the recommendations into law. Watch this Space!

Please also see our Law-Now articles: Law Commission Report on proposed changes to Commonhold and Law Commission Reform: Buying your freehold or extending your lease.