Right to Manage: The Problems

If you’re thinking about going Right to Manage, have you thought if it is right for your development? Have you looked at the alternatives? If not then it might be worth reading on.

RTM gives a group of leaseholders the right to take control of the management of their block without having to prove their manager is at fault. Leaseholders will exercise this right by forming and becoming members of a Right to Manage Company which will work just like a Residential Management Company

                        

Leaseholders will gain full rights over the service charge, how much they will all pay, what it is spent on, what contractors to use and what Managing Agent, if any, to appoint. However every development is different; each has a different layout, different number of units, different mix of tenures, different mix of properties and a different service charge. Sometimes RTM is not the answer, there are alternatives.

Collective Enfranchisement  - In plain English the leaseholders in a block collectively buying the freehold. Where the freeholder has the responsibility of the service charge this will instantly grant the leaseholders management of their development. By buying the freehold, leaseholders will have control over ground rent and lease extensions. This means further savings can be made and they will significantly increase the value of the lease they own. The downside to collective enfranchisement is that it can be hard to organise and very costly. If you can get the capital together to go down this route, then I suggest you do, hands down this is the best option out there.

Residents Association - Offers leaseholders a chance to maximise their rights under the terms of their lease. A strong, well-represented association will also give leaseholders a much better position in the event of conflicts with the landlord or agent. Once a recognised residents association is in place, the landlord is entitled to consult the association on service charge and management issues. Further to this, the association can require the landlord to consult with them on the appointment of a managing agent. For further information I have written an article on Residents Associations.The problem here is that the freeholder still remains in control of the management and if the association is not recognised then its powers are non-existent.

LVT Appointing a Manager  - If leaseholders are not happy with the management they are receiving they can apply to the LVT who will consider their application. If successful the LVT have the power to appoint a new manager to the development. The obvious issue with this route is that fault on the part of the manager has to be proved and therefore a case will need to be put together.

Just like RTM the alternatives are not perfect and all have negatives. However each has a place and should be considered along with RTM before leaseholders make a decision. Let’s look at some of the situations where RTM can fail.

Mixed Use Development

If you live on a development that has a mixed use, most likely some of the block is used for commercial purposes, then it is possible RTM can’t be entered into. In order to qualify for RTM the block must have no more than 25% of the floor space in non-residential use.If this is the case on your development then RTM is a complete non-starter and you will need to consider the other options.

Large Development

One of the main problems with RTM is that it requires 50% of the leaseholders in a block to agree to it. In larger blocks with a high percentage of sub-let properties this can be close to impossible to achieve. If you are having trouble getting 50% of leaseholders to acknowledge you, then perhaps one of the other options may be more suitable. 

Multiple Blocks

Some developments will consist of multiple blocks of flats all paying into the one service charge fund, this presents a decision when thinking about RTM. Do you try and take the whole development RTM or just individual blocks, setting up several RTM Companies. Both will work, but both have their problems.

If you scoop up all the blocks into one large RTM then the blocks will not be able to separate at a later date. RTM can’t happen on a block which already has a RTM in place. Blocks going RTM individually would eliminate this problem but it will present others. RTM can only be exercised on the areas contained within the freehold footprint of the block or the areas specifically serving that block (e.g.  Gardens). Sometimes the lease will not distinguish the external managed areas by block, meaning that you cannot legally state which areas specifically serve each block. The leaseholders would end up paying two service charges. One to the RTM company for the management of the block and the second to the freeholder for the estate areas. This could increase the charges the leaseholder pays; therefore the RTM would not make financial sense. These situations of double service charges can occur frequently with RTM companies it is a real problem you should look out for.

Freehold Properties

It is not uncommon for freehold properties to pay a service charge. See my article on such for details.  However RTM is only a process that can be used by leaseholders, as are the alternatives I have mentioned as well. Unfortunately there is no current legislation where freeholders have the power to take over the management of the service charge they pay. This is in my opinion something that needs to be looked at very seriously by the government.  However I would say that most often when freehold properties pay a service charge they do so via a Residential Management Company. 

All of the examples I have given above have been in the context of the service charge being paid to the freeholder. But it is more and more common today that Residential Management Companies are drawn into Leases.

Residential Management Companies (RMC)

If you pay your service charge to a RMC then in my opinion there is no point in looking at RTM. The whole purpose of a RMC is that each member will have the right to become a director and therefore have the same rights as if the development was RTM. If you have any issues with the management of your development, look to become a director of the RMC, you will then have full control of the service charge without having to apply for RTM. There may already be residential directors in place, find out who they are and discuss your issues with them. If there are no residential directors in place then you will need to have a general meeting convened with the purpose of appointing them. For more information I have already written about RMCs and Company Law (calling general meetings). 

To summarise I think that RTM is a fantastic idea; unfortunately it has been poorly executed in legislation. If you have a development that qualifies, can get the 50% of leaseholders to agree and makes viable financial sense to go RTM then I suggest you do. Just don’t do it if you already have a RMC in place, there really is no point. If you are not lucky enough to be suitable for RTM or are struggling to get the 50% agreement needed;  then I hope some of the options I have mentioned give you some direction. Unfortunately as you will have noticed they also are not full proof. It really is about doing your homework, taking good advice and working out which option works best for your development and the leaseholder’s collectively.

As always I can’t go through every example in my articles as there are far too many. So if you do require any information please get in touch

Year End Balancing Charges

Many service charge payers do not realise that the charge they pay at the start of the service charge year is actually an interim payment. It is an estimate of future expenditure and is not the final service charge payment. In fact the service charge payment cannot be considered to be finalised until after the completion of the service charge accounts.

The service charge accounts will compare the amount budgeted for the year with the amount actually spent.  If the actual is more than the budget then a deficit will be produced, if less was spent than budgeted, there will be a surplus. Although I advise that the lease is always checked to determine what to do in either situation; it is very rare for anything other balancing charges being required.

This balancing charge, which in the event of a surplus will actually be credit, will ensure that the service charge is no longer an estimate. After the charge is invoiced you will only have been billed for the services you received during the service charge year. For this reason (and I have mentioned this in other articles) it is pointless to dispute a service charge when you are invoiced at the start of the year. No services will have been provided and the charge is purely an estimate. Wait until the accounts are produced and the balancing charge applied, if at this point you still think the charge is unreasonable, now is your time to challenge.

In essence the principle of balancing charges is a very basic process however sometimes (as always with leasehold) there are issues you need to be aware of.

Previous Owners - Once you purchase a lease you become responsible for it; this includes the liabilities of the previous owner. For this reason solicitors should always ensure that arrangements are made for the payment of any outstanding service charges prior to the lease changing hands. They should also make enquiries into the financial position of the service charge and determine if a retention is required in case of a deficit. I would always advise a retention is kept as you can never guarantee a financial outcome. Anything could happen! Don’t be surprised if you find yourself given a full balancing charge even if you didn’t own the lease for the full service charge period. Speak to your solicitor.

18 Month Rule - As a leaseholder you can only be charged for expenditure within 18 months of the landlord or management company incurring the costs. This includes the balancing charge. This is the reason why service charge accounts have to be produced within 6 months of the year end (18 months from the year start and the first expenditure). However you may find that this is not the case, instead you could receive a section 20b notice, which provides a summary of charges. This buys the landlord or management company more time to produce the accounts and should also give you notice of the possibility of a deficit or surplus. If you do not receive the accounts or a section 20b notice within 6 months then you are not obliged to pay any balancing charges that are levied.


You may find that even though the accounts are produced within 6 months the charges are not applied for some time after this. This is perfectly fine as long as your landlord or management company provide a notice with the accounts (usually in the form of a covering letter) stating that there is a deficit and you will be invoiced for a balancing charge. If the notice wasn’t provided within 6 months of the year end, then the balancing charge does not have to be paid.

Read the Lease - As I stated above it’s not 100% guaranteed that balancing charges will be required. Leases are all different and some may not have the provision for balancing charges. Some leases have the provision to recover a deficit position by charging however there is no provision to credit back a surplus. Regardless of what your landlord or management company do I suggest you check your lease so you know what to expect and therefore what you can challenge.
     
Charges Not Applied - Unfortunately I have to end this article on the negative side of property management.  Sometimes, even though the lease may specify balancing charges, managing agents do not charge out deficit positions. They will cover the deficit from the reserve fund, which is a serious act of miss-management. There are three issues I can think of with doing this.

1. They are not following the terms of the lease and therefore breaking a contractual agreement.
2. By using the reserve fund they are using funds that are ring fenced to cover future major works. You will therefore find a large one off invoice coming your way when the works are required.
3. The whole point of balancing charges is to ensure that the expenditure of the landlord/management company is recovered and anything extra is given back. By taking from the reserve they are putting the landlord/management company and your development out of pocket twice. Once by not charging out the deficit and again by dipping into the reserve fund.

For these reasons if you have never received any form of balancing charge and you should get one every year (I very much doubt a service charge budget would be bang on what was actually spent) then you need to challenge your managing agent straight away. If they have historically been doing the above then you need to make them pay the money back.

I hope you find this informative and helpful and as always if you need any further advice please get in touch.