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Legislation Brief No.2 – The Right to Manage

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21st December 2023

In Tanfield’s Legislation Brief no 2, Mark Loveday takes a look at the proposed reforms to the Right to Manage.  You can find more articles and links to the draft legislation on our Leasehold & Freehold Reform Hub.

The Right to Manage 

 

Summary of Proposals

1. The Leasehold and Freehold Reform Bill was published on 27 November 2023[1]. This Legislation Brief deals with the provisions in the Bill relating to the statutory right to manage They appear in Part 2 of the Bill (clauses 22-25).
2. The reforms to the right to manage as currently drafted are limited in effect. They can be summarised as follows:
   • Leaseholders will be able to claim the right to manage provided no more than 50% of a building’s total floorspace is in non-residential use – rather than the current limit of 25% (clause 22).
   • Costs provisions (clause 23).
   • Minor changes to jurisdiction of courts and tribunals (clauses 24-25).

But it is likely these provisions will be amended at the Committee stage of the Bill[2].

Background

3. The right to manage appears in Ch.1 of Pt.2 of the Commonhold and Leasehold Reform Act 2022 (“CLRA”). It was succinctly described by Lord Briggs in Settlers Court RTM Co Ltd v FirstPort Property Services Ltd[3]:

“In bare outline, the 2002 Act enables long leasehold tenants of residential flats to take over the management of the building of which their flats form part through the medium of a company (“the RTM Company”) of which they are members, in place either of the landlord or any other person upon whom management rights are conferred under the terms of the leases of the flats”.

4. From the start, it was intended as a simple and cost-effective alternative to collective enfranchisement:

“The main objective is to grant residential long leaseholders of flats the right to take over the management of their building collectively without having either to prove fault on the part of the landlord or to pay any compensation. The procedures should be as simple as possible to reduce the potential for challenge by an obstructive landlord. The allocation of responsibilities should be clear-cut, and the body through which the leaseholders take on management responsibility should enjoy all necessary powers to properly discharge its functions.^[4]”

5. The political significance is shown by adoption of the “Right to Manage” label – a conscious echo of the Right to Buy for local housing authority tenants in the Housing Act 1980.

Problems with the right to manage 

6. Despite these happy intentions, the right to manage proved problematic in practice. The problems culminated in the Law Commission’s Final Report on exercising the Right to Manage^[5] – one of the trilogy of residential leasehold law reform papers published in 2020. The Law Commission summarised the difficulties with the Right to Manage as follows:

“2.14 The “simple” RTM process envisaged in the original consultation which led to the 2002 Act has not come to pass. The requirement for strict compliance with the statutory procedures, such as the service of certain notices on particular parties, can be unforgiving to leaseholders. In many cases, small mistakes made by the RTM company have afforded landlords opportunities to frustrate or delay otherwise valid claims. The Court of Appeal has noted that while the procedures “should be as simple as possible to reduce the potential for challenges by an obstructive landlord”, in fact they “contain traps for the unwary”.

2.15 Stakeholders have told us about numerous problems with the existing RTM regime, including:

(1) the impact of seemingly small errors, leading to lengthy technical arguments about whether the process has been carried out correctly, and wasted costs and failure of the process if not;

(2) restrictive preconditions to exercising the right, such as the inability of an RTM company to manage multiple buildings on an estate, the maximum percentage of non-residential space permitted, and the exclusion of leasehold houses;

(3) information about the building and management functions being provided to the RTM company too late in the process to allow them to manage effectively from the date that the RTM is acquired;

(4) legislative provisions that put the landlord’s costs onto the RTM company, including the landlord’s litigation costs in some circumstances;

(5) uncertainty as to the extent of the obligations that transfer to an RTM company, particularly in relation to appurtenant property (such as gardens and carparks) and services shared with other buildings; and

(6) concerns about the adequacy and validity of the insurance taken out by RTM companies.”

Reform Proposals

8. The Law Commission made no fewer than 101 detailed recommendations for reform^[6] which received widespread support^[7]. 
9. On 11 January 2022, the government announced a consultation aimed at “expanding access to the right to manage [so that] … more leaseholders will be able to take … management responsibility for their buildings, if they choose to”^[8] . The consultation focussed solely on qualification for the right to manage^[9]. The government response to the consultation was eventually published on the same day the Bill itself was published[10]. It accepted two specific Law Commission recommendations at paragraph 1.15:

“For right to manage claims: we accept the Law Commission’s Leasehold home ownership: exercising the right to manage report Recommendation 7. It will be possible for qualifying leaseholders living in a mixed-use building to claim the right to manage provided they meet all other requisite qualifying criteria and no more than 50% of a building’s total floorspace excluding common parts is occupied or intended to be occupied for non-residential use.”

            And:

“Landlords voting rights in right to manage companies: we accept the Law Commission’s Leasehold home ownership: exercising the right to manage report RTM voting rights Option 3. The total votes exercisable by landlords under leases in RTM companies will be reduced such that they do not exceed one third of the votes exercisable by qualifying tenants.”

9. The Explanatory Notes accompanying the Bill[11] included the following reference to the right to manage at para 42:

“42 The Bill will implement a streamlined package of the enfranchisement and right to manage (“RTM”) reforms recommended by the Law Commission in their reports of July 2020 [details in Related Documents], together with other leasehold and homeownership reforms.”

            It is hard to see how the modest right to manage reforms in the Bill meet this objective. Of the Law Commission’s 101 recommendations, fewer than five have been specifically adopted.

Pre-legislative material

10. In limited circumstances, pre-legislative material is relevant as an aid to interpretation of unclear statutory provisions[12]. The right to manage provisions of the Bill were preceded by the 2020 Law Commission report[13] and the above consultation. It is probably unnecessary to go beyond these as relevant pre-legislative material.

Clause 22: Buildings excluded from the right to manage

11. For right to manage claims: we accept the Law Commission’s Leasehold home ownership: exercising the right to manage report Recommendation 7. It will be possible for qualifying leaseholders living in a mixed-use building to claim the right to manage provided they meet all other requisite qualifying criteria and no more than 50% of a building’s total floorspace excluding common parts is occupied or intended to be occupied for non-residential use.
12. The original right to manage only applied to buildings with more than 75% residential parts. This was achieved by Sch.6 to the 2002 Act, which listed various premises excluded from the right to manage. Para 1(1) provided that premises did not qualify under s.75 if the internal floor area of any non-residential part exceeded 25%. Some surprising borderline cases emerged in practice.
13. The Law Commission consulted on this extensively and identified various problems with the 50% threshold[14]. Its Recommendation 7 eventually proposed that the non-residential limit be increased to 50%, such that the RTM cannot be claimed in relation to premises in which the internal floor area of any non-residential part (or where there is more than one such part, all of those parts taken together) exceeds 50% of the total internal floor area of the premises. The government’s 2022 consultation focussed largely on this issue. Its response was as follows[15]:

“For right to manage claims: we accept the Law Commission’s Leasehold home ownership: exercising the right to manage report Recommendation 7. It will be possible for qualifying leaseholders living in a mixed-use building to claim the right to manage provided they meet all other requisite qualifying criteria and no more than 50% of a building’s total floorspace excluding common parts is occupied or intended to be occupied for non-residential use.”

14. This is the most significant change in the right to manage, although one of the simplest in drafting terms. Clause 22 of the Bill amends Sch.6 to the CLRA 2002 so that a building is excluded from the RTM if more than 50% of the internal floorspace is used for non-residential purposes (such as a ground-floor shop).

Clause 23: Costs of right to manage claims

15. Costs will be dealt with in a separate Legislation Briefing.

Clause 24: Compliance with obligations

16. The usual forum for applications relating to the right to manage is the first-tier Tribunal (Property Chamber) in England, and the Leasehold Valuation Tribunal in Wales. The primary jurisdiction to determine whether an RTM company is entitled to acquire the right to manage is given to tribunals by CLRA s.84(3). There are further tribunal powers in s.85(2) (missing landlords), s.88(4) (costs) s.94(3) (uncommitted service charges) and s.99(1)(b) (approvals).
17. CLRA includes only one significant express jurisdiction for the courts, namely the power of the county court power to enforce obligations in s.107 of the Act. Such applications are comparatively rare, although the writer has dealt with two in the past year.
18. Clause 24 of the Bill amends s.107 to provide that the tribunal may enforce obligations. This appears to be contrary to the recommendations of the Law Commission consultation report[16]. Subsection (3) amends various provisions to permit or require certain ‘payments into court’ to be made to the tribunal.

Clause 25: No first-instance applications to the High Court

19. Right to manage issues occasionally arise in court proceedings, rather than in the tribunals. In theory, the High Court has the power to make declarations on matters that would otherwise fall within the jurisdiction of another court or tribunal, and there is therefore a risk that parties may issue proceedings in the High Court rather than the tribunal. The Law Commission Final Report referred to a single unreported 2017 example of right to manage proceedings in the High Court[17]. A recent search of Westlaw does not provide any further examples of this happening. Nevertheless, the Law Commission’s recommendation 84 was that the risk of High Court proceedings should be eliminated by giving the Tribunal exclusive jurisdiction to determine whether a requirement of the RTM provisions of the 2002 Act has been met.
20. Clause 25(1) implements the Law Commission’s recommendation. It provides that where jurisdiction is conferred on the appropriate tribunal under Ch.1 of Pt. 2 of CLRA 2002, a person may not apply to the High Court in respect of that matter. It is a standalone provision, rather than an amendment to the 2002 Act. Subsection (2) preserves the right to appeal tribunal decisions to the High Court or to apply for a judicial review.
21. The amendment therefore deals with a minor potential jurisdictional problem, which does not seem to have arisen frequently. It is hard to see why this Law Commission recommendation was adopted, whilst others were not.[1] https://publications.parliament.uk/pa/bills/cbill/58-04/0013/230013.pdf.[2] On 11 December 2023, the Secretary of State for Levelling Up Housing and Communities (Rt Hon. Michael Gove MP) suggested the right to manage was one of two areas “that we should look at in Committee” and that “I am very open to improving the Bill in Committee”: Hansard HC Deb (11 December 2023) vol 742.[3] [2022] UKSC 1; [2022] 1 WLR 519 at [1].[4] Commonhold and Leasehold Reform, Draft Bill and Consultation Paper (CM 4843), August 2000. Pt.II Residential Leasehold Reform Consultation Paper Section 3 Ch.1 para 10.[5] Law Commission, Leasehold home ownership: exercising the right to manage (HC585, Law Com No 393), July 2020. See also, Law Commission, Leasehold home ownership: exercising the right to manage (Consultation Paper 243), January 2019.[6] Ibid, Ch.14.

    [7] For example, the Association of Leasehold Enfranchisement Professionals welcomed the Law Commission recommendations unreservedly https://www.alep.org.uk/article/831/alep-responds-to-law-commission-rsquo-s-leasehold-reforms-recommendations. The writer is a member of the ALEP Advisory Board.

    [8] Reforming the leasehold and commonhold systems in England and Wales, consultation.

    [9] Ibid, paras 40-44.

    [10] Reforming the leasehold and commonhold systems in England and Wales: summary of responses and government response, DLUHC, 27 November 2023.

    [11] Guidance: Information relating to the Leasehold and Freehold Reform Bill which was introduced to Parliament on 27 November 2023, DLUHC, 27 November 2023.

    [12] See Bennion, Bailey & Norbury on Statutory Interpretation (8^th Ed) at 24.9.

    [13] Leasehold home ownership: exercising the right to manage (Law Com No 392).

    [14] Paras 3.94 to 3.125.

    [15] Reforming the leasehold and commonhold systems in England and Wales: summary of responses and government response(27 November 2023).

    [16] Leasehold home ownership: exercising the right to manage (Law Com No.393) at para 12.34.

    [17] Hayes Point RTM Co Ltd v Avon Freeholds Ltd (11 July 2017) D90CF004 High Court, Cardiff District Registry. See Leasehold home ownership: exercising the right to manage(Law Com No.393) at para 12.35

 

Mark Loveday

Mark Loveday is a senior member of Tanfield’s property team. He is General Editor of Service Charges & Management (5^th Ed) and a contributor to other legal texts. His “Ask the Expert” column on consumer property issues appears every Friday in the Times Bricks & Mortar Property Supplement.

20 December 2023

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