Chris Addison of the Business and Property Group at 9 St John Street discusses the opportunity for leaseholders to take over the management of their block of flats from the management company.

Right To Manage

Many long leaseholders of flats are subject to a management charge levied by a management company that controls the running of the block of flats. It is often the case that the leaseholder considers that either the management charge is too high or that the management company is not providing a good service. The leaseholder then seeks to take control of the maintenance and management of the block to reduce costs or improve maintenance.

Prior to the Landlord and Tenant Act 1987 the Court had the power to appoint a receiver to take over the management of a block of flats when it was just and convenient to do so. It was usually the case that the leaseholder had to prove that the managing agent was not performing its duties correctly. Part II of the 1987 Act provided the First-Tier Tribunal with the power to appoint a manager where the current managing agent was in default of its obligations but it did not significantly improve leaseholder rights.

Leaseholders can now rely upon the Commonhold and Leasehold Reform Act 2002 which gives long leaseholders the right to force the landlord/managing agent to transfer the management of the flats to them. The leaseholders no longer need to prove that the managing agent is at fault and are not required to pay compensation.

If successful, the leaseholders become liable to the new management company for any obligations contained in their individual leases.

Considerations

Although at first glance taking control of the management function can appear to be attractive leaseholders must be aware that it is a time-consuming process and does not always lead to the anticipated cost savings. In particular:

• The right to manage can only be invoked by a right to manage company which must be set up by the leaseholders and must comply with the statutory obligation of having officers, being solvent, filing accounts etc. The company must be a private company limited by guarantee and the articles must include the acquisition and exercise of the right to manage.
• Unless the block of flats contains few properties the new right to manage company will usually employ a professional managing agent and/or other professionals.
• The block of flats must still be kept in the condition required by the lease.

Qualifying Criteria

The qualifying criteria can be complex and is contained within Chapter 1 of Part 2 of the Commonhold and Leasehold Reform Act 2002. Legal advice should be sought as to whether the criteria is met and to ensure compliance with the procedure. Generally, the right to manage applies if:

• The premises consist of a self-contained building or part of a building with or without appurtenant property.
• The premises contains 2 or more flats held by qualifying tenants.
• The total number of flats held by qualifying tenants is not less than two thirds of the total number of flats.

A building is excluded if:

• The internal floor area of parts of the property that are not considered to be residential exceeds 25% of the total internal floor area.
• The freeholds of different parts of the building belong to different owners and any of the parts is a self-contained part of the building.
• The building is not a purpose-built block of flats.
• The landlord is resident and the building contains less than 4 flats.
• A local housing authority is the landlord of a qualifying tenant.

The main considerations of whether a leaseholder is a qualifying tenant are that the lease was granted for a period of more than 21 years or was granted for less than 21 years but with the right for renewal, or if not renewable has been renewed under covenants for renewal for a period exceeding 21 years.

There are further considerations as to whether a leaseholder is a qualifying tenant, but they are rare with the most common being whether the leaseholder has a shared ownership lease.

Procedure

The new right to manage company must first invite any qualifying tenants that are not involved to participate. The company must then serve a claim notice on the persons specified in Section 79(6) of the 2002 Act, namely the landlord, any third party (such as a guarantor) and any manager appointed under Part II of the Landlord and Tenant Act 1987. The form of notice must follow the directions contained in Section 80 of the 2002 Act and the Right to Manage (Prescribed Particulars and Forms) (England) Regulations 2010 SI 2010/825.

Any person or entity upon which a claim notice is served can serve a counter notice admitting the asserted right or alleging that the applicant is not entitled to it.

If the counter notice refuses the right to manage the applicant can apply to the First Tier Tribunal for determination. If the applicant fails to apply to the Tribunal or withdraws the claim notice the company will be liable for the reasonable costs of the landlord or any other party involved in the procedure. Therefore, it is important that the process is not used as a tactic to put pressure on the existing managing agent in circumstances where the application is not legitimate as there could be a costs liability.

Landlords should also consider whether any objections are valid as they will only recover costs in the event that the Tribunal dismisses the application.