Imagine you have purchased a leasehold interest in a flat. Over time you realise that the common parts have been neglected, reports of disrepair from leaseholders are going ignored and you really start to wonder what the point of the service charge payments are. It is almost impossible to speak with the landlord about any of your frustrations and you baulk at having to pay increased management fees and ground rent to a landlord or managing agent that seems to do nothing. The lack of any management of the property has gone on for too long and you have decided that enough is enough.
Collective enfranchisement refers to a group of leaseholders in the same building who compel the purchase of the freehold interest from the landlord. In practice, the leaseholders will form a company of which they are all shareholders and the company will purchase the freehold interest. As shareholders of the landlord company, the tenants effectively become their own landlord and can take over the management of the property by entering into their own contracts and ensuring they gain better value for money.
Other benefits may include the ability to extend the length of leases at no extra cost and no ground rent charges, although there may be tax implications. Moreover, owning a share of the freehold in addition to your leasehold interest can often increase the value of your property.
- To qualify for collective enfranchisement, a strict set of criteria must be met:
- There must be at least 2 flats in the freehold.
- No more than 25% of the freehold building must be used for non-residential purposes.
- 50% of the leasehold owners must want to participate in the enfranchisement process.
At least two thirds of the flats must be let to ‘qualifying tenants’ i.e. who hold a lease granted for 21 years or more.
In practice, the enfranchisement process can be expensive for leaseholders as the freehold owner must be paid a sum to reflect the market value of the freehold as well as payment of their legal costs. Nevertheless, the result is one of ultimate control for the participating leaseholders, which is clearly an attractive prospect.
Right to manage (RTM)
Another way of gaining control over the management of the building is to form a Right to Manage company (an “RTM company”). The RTM process does not give the leaseholders an interest in the freehold, but merely allows them to create a company with a view to managing the building in place of a landlord or other managing agent.
The RTM does not need to prove that the landlord or managing agent are managing the premises poorly, but just need to ensure that the statutory process is followed for the RTM to become effective.
As the freehold is not being purchased, the process is cheaper and quicker than collective enfranchisement, however, as the RTM company will not become the landlord, it will never have ultimate control over the property. The RTM will still need to deal with a difficult landlord and permission will still be needed (and payment made) for lease extensions or alterations etc. Indeed, the landlord’s costs generally will still need to be paid for.
The RTM company can only really deal with service charges. It may be attractive to those leaseholders who feel that the landlord is disinterested in ensuring that residents get value for money from their service charge. To qualify for the Right to Manage scheme, the same criteria required for collective enfranchisement (set out above) must be met.
The First-Tier Tribunal
For those leaseholders who are disappointed with the management of their building, but do not qualify for collective enfranchisement or the RTM scheme, relief may come in the form of a claim to the First-Tier Tribunal (Property Chamber- Residential Property) pursuant to section 24 of the Landlord and Tenant Act 1987.
An application can be made by just one leaseholder, or a group of leaseholders, for a new managing agent to be appointed in place of the landlord or existing managing agent. In theory, there is nothing stopping leaseholders from forming their own management company for this purpose, although note the Tribunal’s interest in the identity of the managing agent as set out below.
Notwithstanding the above, whilst any leaseholder can make the application, they must show that there has been fault on the part of the landlord or existing managing agent, which will be considered closely by the Tribunal. This is in contrast to the Collective Enfranchisement or RTM scheme, where no fault needs to be demonstrated. For the purposes of the Appointment to Manage claim, fault on the part of the existing managing agent or landlord can be demonstrated where there has been:
- A breach of the terms of the lease; or
- Unreasonable service charges levied; or
- A failure to comply with the Codes of Management Practice; or
- Where some other ground exists to make it just and convenient in all the circumstances to make the order; and
- That it is just and convenient in all the circumstances to make the order.
In considering whether it is just and convenient in all the circumstances to make the order, the Tribunal will consider the likely future conduct of the landlord as well as the leaseholder’s proposed new managing agent. The new managing agent will be cross examined and scrutinised by the Tribunal and consideration will be given as to whether or not the new managing agent is satisfactory.
If appointed, the new managing agent is deemed to be an officer of the Tribunal and has no duty towards the landlord or the tenants. The agent will be deemed independent from either party and can apply to the Tribunal for directions in the event of any difficulty going forward. Indeed, if the tenants remain dissatisfied with the services of the new managing agent, they would need to apply to the Tribunal once again to vary the terms of the order. In light of the tribunal’s involvement this can add significantly to the costs of managing the building which are likely to be paid by the tenants.
Whilst there are some ways in which leaseholders can exercise control over the management of a building, all of the routes have their pros and cons to contend with. None of the routes are straight forward and some are more costly and more complex than others. Nevertheless, it may well be possible to exercise a degree of control over the management of a property and each matter will need to be considered on a case by case basis.
Karen Bright is a Partner and Head of the Litigation and Dispute Resolution teams at Bishop & Sewell. If you are looking for assistance with regard to a property dispute matter please contact her on +44 (0)20 7079 4143 or email: [email protected]
About Bishop & Sewell LLP
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