Right to Manage Directors: The Buck Stops With You!

RTM Directors are required to work within a legal framework comprising of the following key elements:

The Lease

The lease is specific to the individual residential property under management. It is the contract made between ground landlords (what they are bound to do) and leaseholders (what they have contracted to do). RTM Directors need to have a understanding of the terms of the lease (including any restrictions) because any action they rubber-stamp that is contrary to the terms could lead to action being taken against them.

The Management Agreement

This is the contract between the managing parties and their client. Therefore Directors will need to ensure that such an agreement covers the specific needs of the development.
Codes of Practice

RTM Directors will be expected to comply with recognised Codes of Practice and they will be expected to ensure that the managing agent also comply.

Legislation

RTM Directors will need to be familiar with the legislation related to residential block management under 6 main Acts of Parliament (usually referred to as landlord and tenant legislation). They will also need to be familiar with wider legislation not necessarily specific to the sector such as Data Protection, disability discrimination, employment, and company law, primarily the Companies Act 2006. They will also be required to be familiar with Health and Safety legislation. This is because the common areas of blocks of flats are judged by the Health and Safety Executive to be a workplace because they are company run and assumed to be a profit-making business!

Case Law

These are decisions made by the courts on a variety of issues affecting the leasehold sector which can determine how a particular piece of legislation or words used in leases are to be construed.

ACQUISITION DAY

Once the right to manage has been granted, on Acquisition Day (s90 of the Commonhold and Leasehold Reform Act 2002) the RTM Company takes formal control of the management functions from the freeholder under the covenants of the lease. Freeholder covenants surround the repair and maintenance of the ‘common areas’. They can also include improvements to the building if the lease allows for it, (which is rare), cyclical or seasonal maintenance, the levying and collection of service charges, arranging the buildings insurance, accounting and the provision of statutory and other information.

The management functions under s96 are described as ‘functions with respect to services, repairs, maintenance, improvements, insurance and management’ with s97 stating that the RTM Company will be responsible to the leaseholders and the landlord and solely responsible for management functions that are not to be undertaken by others without company approval.

Granting of Approvals

Under s98 and s99 of the 2002 Act, Company Directors will be responsible for the granting of approvals under the terms of the lease. Because leases usually require the leaseholder to seek approval from the freeholder for the assignment of the lease (selling), subletting (underletting), alterations, improvements, and alterations of use, this function passes to the RTM Directors on Acquisition date. They will still need to be aware that they cannot grant approval without giving the freeholder(s) 30 days notice. In any other case it will be 14 days.

The company must be notified if the freeholder objects or seeks to impose conditions. The matter may then be referred to the LVT with the application being made by the freeholder, the RTM company, the leaseholder seeking consent, or, if the issue concerns the approval of an act of a sub-tenant, that sub-tenant.

Enforcement of Tenants Covenants

Under s100 of the 2002 Act, the RTM Directors are responsible for ensuring that all other leaseholders adhere to the covenants and obligations contained within their lease and under s101 they are under a statutory duty to monitor and review as to whether the covenants are being complied with. They must take steps requiring the remedy of any breaches and report to the freeholder any non-compliance. This report must be made before the end of the period of 3 months that begins with the day on which the failure to comply comes to the attention of the RTM company. However, breaches need not be reported if the breach has been remedied, compensation has been paid or the landlord has notified the company that breaches need not be reported.

Whilst the company can sue for debts or seek injunctions for breaches of covenant, such as repairs or nuisance the landlord remains responsible for complying with his own covenants such as providing quiet enjoyment and rights of support of the flats.

Where the lease provides a right of access into the flats by the landlord for compliance or enforcement of covenants, this right is also available to the RTM company.

Filing At Companies House

Directors will be held personally responsible for ensuring that the company accounts and annual returns are delivered to Companies House on time, even if the responsibility is assigned to a company secretary. Failure to do so could mean prosecution. Additionally the registered office address of the company must remain current and attended in order to receive any Notices that are served.

Personal Liabilities And Risk Assessments

Because the common areas of a block of flats are considered a workplace, RTM Directors have the same personal liabilities as Directors of commercial companies and can be sued in exactly the same manner. Claims could result from a number of areas such as someone in the believing that there has been a fall in value to their flat as a result of a failure to identify external dilapidation. They could arise from someone who thinks that the contractors used on the building have carried out poor workmanship. Claims could also be brought if anyone was injured as a result of failure to carry out regular risk assessments. According to the article ‘Questions Raised Over Tenant’s Right To Manage’ published in 24dash.com in 2009, Geoffrey Wolfarth, senior solicitor in Adams & Remers’ property team said that “the right to manage, where tenants take over running a building themselves, has been seen as the panacea for financial disputes with landlords, but what has happened in practice is that tenants are using the right to avoid carrying out legally-required safety checks and repairs.”

Therefore it is essential that Directors and Officers Liability Insurance be taken out.

MY PERSONAL VIEW

We had no freeholder, no managing agent and no interest whatsoever from anyone else in turning around the fortunes of the block. We were actually forced to take RTM because it was the only option that was eventually made available to us by a BTL investor owning enough flats to enable us to meet the criteria.

Apart from being forced to take it, I also have some serious concerns. Managing agents are sourced from an unlicensed and unregulated sector and there is anecdotal evidence to suggest that some are actively encouraging Directors to ‘sit back and let them get on with it’ which must be resisted. Managing agents are employed in exactly the same way as any other company hires its workforce therefore they must be managed accordingly. The success or failure of RTM will not only hinge on securing a better agent than the previous one but also on how effective Directors will be in instructing them, which raises another question. How can RTM Directors instruct effectively if they have no understanding of how to do so? Interestingly there is also no criteria for Directors of RTM companies to meet. Even though our Directors had an idea of what they were letting themselves in for, there was no way they could have instructed effectively because not only did they not have any knowledge of block management, they both had demanding full time jobs.Which is why I do it!

Its also not always realised that because RTM is a no-fault process the freeholder is entitled to membership of the new Board should he wish to take it. If he is part of the problem then the ramifications of that speak for themselves.

SUMMARY

You must be certain that RTM is the right move for your particular development and circumstances. If collective enfranchisement(buying the freehold) is not an option, alternative dispute resolution, setting up a residents association, compulsory acquisition of the freehold and appointing management via the LVT should all be given due consideration.

You should also consider that investor freeholders usually choose to offload the more irritating things about being freeholders onto managing agents right at the start. So if the unprofitable and time consuming necessities of collecting service charges, chasing arrears, and enforcing covenants are not for them, why should they be considered a ‘benefit’ to leaseholders in the shape of RTM?

As Myra Bar Hiller wrote in 2007, ‘We Need Volunteer Directors But..’