Right to Manage companies: The limitations

What is a Right to Manage company?

The Right to Manage (RTM) was introduced through the Commonhold and Leasehold Reform Act 2002. It gives leaseholders the right to take over the management of their property from the freeholder by setting up a special company – a Right To Manage company (RTM).

Sometimes the freeholder is happy for the leaseholders to take over the management of a block or estate. However, at other times a takeover is hostile and the RTM process is undertaken in circumstances where the leaseholders are unhappy with the way that the property is being managed by its freeholder (or their managing agents).

RTM is an important right for leaseholders. However leaseholders of managed property blocks or estates should be aware that there are limitations in their powers when they take over the management of their property from their freeholder (or their managing agents)

The limitations

A recent case has highlighted the difficulties that might arise where an RTM had taken over the management. In Eastpoint Block v Otulaga the Lower and Upper Property Tribunals decided that the RTM (Eastpoint Block) had no right to make an application to the Tribunal to determine that a leaseholder was in breach of their lease. The application was dismissed on the basis that Eastpoint was not ‘the landlord’ and only a landlord can bring such a breach determination application under the Act.

How could this effect you?

Imagine the following scenario: a leaseholder (or perhaps more than one) decides that they are not going to pay their service charges which leaves a shortfall in the service charge budget. According to the decision quoted above, the RTM would not be able to make an application to the Tribunal. The RTM could approach the freeholder but the freeholder may have lost interest in the management of the block and/or may not want to assist. In this scenario could the RTM bring a money claim against the defaulting leaseholder in the County Court? According to the commentary (but not the decision itself) on the above case, the Court would take the same view that the RTM has no power to bring a claim.

In another scenario, what if the defaulting leaseholder broke other covenants in the lease, for example by running a business from their flat or by causing a nuisance to other leaseholders/occupiers? It would appear in this instance that the RTM would also have no power to apply to the Tribunal or to the Court to restrain the breach of covenant. This could have an effect not only on the day to day lives of the occupants of the block but also on the value of the flats!

One possible solution is if the members of the RTM (and any other leaseholders who want to participate) have sufficient funds and are able to force the freeholder to sell the freehold interest to them, provided they can comply with the relevant legislation. They would then own the freehold and exercise the powers of the freeholder, as a ’landlord’, which includes enforcement of the lease covenants and ultimately forfeiting leases.

However, what if the leaseholders do not have funds to buy the freehold interest? RTM members need to be aware of the limitations of their powers of management.