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Right To Manage

Parkgate Aspen can assist you in the setting up and operation of a Right to Manage scheme for your block of flats. Following is an article by our Managing Director outlining the qualifications needed to set up an Right to Manage and some of the consequences that need to be considered before doing so.

When is it right to manage?

Why tenants may soon miss the landlords they cast off
By Sol Unsdorfer FIRPM

October 2003 saw the introduction of one of the most important and controversial reforms in Landlord & Tenant legislation to date: the tenants’ Right to Manage.

Long awaited, this right enables 50% of the long-leasehold tenants of qualifying blocks of flats to take over the management of their property, without having to prove fault on the part of the landlord or existing agent. Qualifying blocks must be self-contained, comprise two or more flats and have no more than 25% of space devoted to commercial use. At least two-thirds of all the flats must originally have been let on leases of 21 years or more.

The qualifying group of long leasehold tenants are required to form a ‘Right to Manage’ company whose special articles of association have just been finalised by central government. All other leaseholders, and the Landlord, must be invited to become members of the Right to Manage company. After the necessary protocols have been followed, a date is fixed for the transfer of the management to the tenants’ Right to Manage company or its chosen agent.

Will this prove to be the miracle cure for all residential leasehold abuse? I think not. The experience of 30 years in residential property management tells me it will be no cakewalk and many leaseholders may rue the day they cast off their landlord so eagerly.

Residential leasehold management is probably the most legislated of all service industries. Over the last 50 years, there’s hardly a government - Labour or Tory - that hasn’t had a crack at it once or twice. Every time a major landlord scandal erupts, the government has responded in Dunblane-fashion with blunt legislation that has been more miss than hit. One of the most significant changes was the recent change in the rules of forfeiture. In order to enforce forfeiture of a residential tenant’s lease for disputed arrears, landlords now need a declaration from the Leasehold Valuation Tribunal [LVT] stating that the charges are fair and reasonable.

All this was excellent news for tenants of abusive landlords who could now travel safely on holiday without fearing that their flats would be repossessed or that their nervous mortgage lender would be nobbled for funds. However, not all landlords are crooks and the same legislation has presented major cash flow difficulties for tame landlords and, more significantly, residents’ associations who already own and manage their blocks. Such Residents’ Management Companies [RMCs], which form the majority of my own client base, can face serious difficulties in the collection of service charges from recalcitrant leaseholders who know how to ‘play the system’.

Some years ago I worked in the United States as a consultant to Managers of co-op apartments in New York City. Blocks of flats had been turned into corporations in which each flat had been allocated x number of shares. Each flat bore a share of the annual costs of running the building in proportion to the number of shares owned. These costs included the full range of familiar expenses, such as porterage fuel and cleaning, as well as the costs of financing the underlying mortgage of the building. More significantly, the budget included a ‘working capital reserve’ of perhaps 15 percent of the budget.

Such a working capital reserve is unknown in UK service charges. Only the heads of expenditure specifically listed in our leases may form part of the annual service charge estimate on which charges are based. Moreover, to avoid problems with the LVT, there is little scope to ‘pad out’ costs which may be deemed unreasonable and upset the course of future arrears litigation. Little wonder that most end-of-year audits throw up an excess charge to tenants.

All this puts cash flow under enormous pressure. Let us say that true costs exceed the bare bones budget by 15% and that, at any given time, 10% of the tenants are in arrears. This means that a managing agent often has to get through the year with only 75% of the basic funds required to repair and service the building. In practice, landlords have often funded these shortfalls or exacted generous credit terms with maintenance contractors whose bills can sometimes be left outstanding for months on end. They are prepared to do this for well-established landlords who can offer more and faster-paying work on their other properties.

However, it will no be not easy for Right to Manage companies who may have to borrow extra funds. Case law has fairly well outlawed the recovery of interest through service charges as well as the legal costs incurred in recovering arrears. One must also consider what - if any - credit will be extended by contractors and suppliers to an Right to Manage shell company which has no share capital or assets.

So far we have been talking about the ‘good’ leases. The sad fact is that all too many leases are defective in some way. Many do not allow for the collection of service charges in advance, some provide for only a fixed token sum to be collected in advance and others base their charges on the preceding year’s audited costs. This only widens the funding gap.

Right to Manage companies expecting to wield a new broom in management will find many of the same old bristles. They will be stuck with the same defective leases and whatever repairs are left outstanding by the outgoing landlord or agent. They will be subject to the same constraints on expenditure, having to serve notice of competitive quotes for all works equating to more than 50 per flat. There will still be late payers some of whom might take greater liberties with their fellow leaseholders in charge. (To paraphrase Groucho Marx: I wouldn’t want to be a member of an Right to Manage company who would sue me for arrears.)

Something else Right to Manage’s will be stuck with is the obligation to deal with mischief-makers. The neighbours who refuse to carpet their floors, who play loud music at night, abuse parking regulations and sublet to undesirables in multiple occupation. Until now there has always been a convenient landlord to clamp down on these individuals in a detached and clinical fashion. Right to Manage chairmen may not find it so easy to face down errant co-directors or sue other members of their own company.

However, there are always some that will. The Right to Manage facility is wide open to exploitation by latent dictators only too eager to ride roughshod over their neighbours. They come to power through the apathy of other tenants, few of whom have the time or inclination to get involved in management. Over the past 30 years I have attended hundreds of tenants’ meetings and AGMs. Rarely are more than 10% of the flats represented. It may therefore be relatively easy for an aspiring Right to Manage chairman to collect the required number of signatures - based on the promise of lower service charges - and appoint himself or his unemployed son-in-law as managing agent. When management is messed up, word gets around quickly amongst the local selling agents and flat values can fall sharply.

The government has at least made provision for Right to Manage’s that collapse into receivership or insolvency. Management is then restored to the landlord and tenants are debarred from making another Right to Manage application for another four years.

Wherever possible, Right to Manage’s are advised to appoint agents who are properly qualified and accredited, perhaps by the Royal Institution of Chartered Surveyors [RICS] or the Association of Residential Managing Agents [ARMA]. Their members are bound by strict codes of conduct in the maintenance of trust accounts and indemnity insurance.

In summary, this is very welcome legislation for those tenants who have yearned to rid themselves of an abusive landlord or incompetent managing agent. However, not all landlords are bad and some of the better ones may be sorely missed. If so, it is worthwhile asking tame landlords whether they would consider appointing your own choice of agent and leave the Right to Manage option as a last resort.

The writer is managing director of one of London’s leading property management firms and is a Member of the Institute of Residential Property Management and the Association of Residential Managing Agents.