Law Commission: reforming RTM, commonhold and enfranchisement: Part 2

There is some evidence that developers are constructing new developments so that they can take advantage of ‘structurally detached’ and other technical exemptions in the CLRA, and prevent the RTM ever arising. While developers know what the position is, they do not make clear to prospective buyers of flats that they will never be able to have an RTM. There is no reason, in principle, why a Broad Quay-type block of flats could not be managed separately by an RTM company. The commission admits that the one-size-fits-all approach that the CLRA currently creates is not particularly well-suited for a Broad Quay North scenario.

Estates with more than one building

The commission is proposing, provisionally, a flexible model of multi-building RTM. This would mean a single RTM company for an estate, with the possibility of other RTMs for individual buildings on the estate. It says that this would give leaseholders an opportunity of working out what works best for them.

However, each building on an estate proposing to set up its own RTM company would separately have to meet the RTM criteria. The commission candidly admits that estates are a dificult issue, and provisionally proposes that the decision in Gala Unity Ltd v Ariadne Road RTM Company Ltd [2012] EWCA Civ 1372 should be reversed.› Disappointingly, and despite the large amount of experience that the tribunal has built up on RTM applications over the last 15 years, the commission does not appear to favour a less rigid framework, with any gaps or questions about the scope of the framework left to the discretion of the tribunal.

Corporate governance

Perhaps surprisingly, at present there is no requirement for an RTM company to hold an annual general meeting. The commission wants to make this a requirement for all RTM companies.

There is concern too about RTM company directors lack of knowledge about their role. The commission wants directors to have training which, it proposes, must come from the government rather than industry for such training to be provided free of charge.

The commission has not identified any fundamental problems with the prescribed articles to which RTM companies are subject. It considers that the RTM articles ‘should be maintained in their current form’, with the exception of some minor amendments suggested in the consultation paper (para 5.49). It also wants RTM companies to be able to recover its reasonable management charges from all leaseholders.

The commission is also mulling over whether it should be a requirement that professional managing agents be appointed for ‘larger’ blocks, but has not come off the fence to say how large they will have to be (paras 5.147–149). The commission’s view is that RTM companies are ‘typically undercapitalised’, but there is little in the consultation to try and address this concern (para 10.54 and see discussion in Chapter 5).

Service of notices to set up an RTM company

Presently, under the CLRA an RTM company must serve notices on all qualifying tenants to start the process. However, the commission is proposing that this requirement be abolished, with a simplified claim notice and the tribunal being given discretion to waive errors and allow amendments.

At the moment, while an RTM company can by notice require a freeholder to provide information, the freeholder is not obliged to provide the information until the acquisition date; nevertheless, the commission is considering if the date information is provided should be brought forward. Furthermore, an RTM company needs to ask for specific documents, especially those relating to a block’s claims’ history. The commission is proposing new prescribed forms of information notices for RTM companies to use.

Existing management contracts

Where an RTM company takes over the management of a block, surprisingly any existing contracts, for example, relating to gardening or cleaning, do not come to an end automatically. A freeholder must tell those contractors that an RTM company will be acquiring an RTM.

The commission is proposing that a freeholder should give a list of all management contracts and contractors to the RTM company, with a copy of the contracts and/or full details of the management contracts. The commission then wants a period to be allowed for an RTM company to negotiate future terms with existing suppliers.

Block insurance

The commission says that new RTM companies find it ‘dificult’ to obtain competitively priced insurance because an RTM company does not have a claims history in its own right (para 8.55).

Furthermore, freeholders often cancel existing block insurance as soon as an RTM is acquired. There is a concern too that some RTM companies underinsure their buildings, for example, by not having adequate rebuilding cost cover. The commission proposes that certain insurance details be given to an RTM company before the acquisition date.

It also proposes that a freeholder be given a right to apply to the tribunal (ie, the First-tier Tribunal (Property Chamber) in England and the Residential Property Tribunal Wales in Wales) where it has concerns that a block is underinsured or insurance is defective in scope. It further proposes that the tribunal be given power to order that any top-up insurance acquired by the landlord is recoverable and/or, in future, that the RTM company must take out insurance ‘which satisfies particular criteria (for example, to cover full rebuild value)’ (paras 8.93 and 8.94).

Uncommitted service charges

Presently, a freeholder must hand over these funds to an RTM company on the acquisition date. The commission proposes this be changed so that only half these funds are paid on this date, with the remainder paid six months later. Freeholders would be under an obligation to use ‘reasonable endeavours’ to pursue service charge arrears, and then transfer recovered debt to the RTM company (para 8.120).

Lease consents

An example might include where a lease prohibits a tenant from keeping a pet. Now, a leaseholder needs consent from both the freeholder and the RTM company. To minimise some of the ‘delays and confusion’ in the present system of lease consent, one of the commission’s proposals is that consent request letters be sent to both parties at the same time (para 9.35). In addition, where a leaseholder wants to make structural alterations, the commission proposes that, for example, a surveyor be appointed jointly to act for both the freeholder and the RTM company so that a leaseholder is only responsible for one professional adviser’s costs.

Freeholder’s legal costs

It is invariably the case that a lease will provide that a leaseholder will have to pay the freeholder’s legal costs. The wording of these provisions, and the events which will trigger this liability, will differ in the drafting of each lease. The commission candidly admits that the biggest weakness is that a landlord is always entitled to their costs.

For cases that reach the tribunal, the costs budgeting rules in Practice Direction 3E to the Civil Procedure Rules 1998 do not apply. The commission is proposing that existing one-way costs shifting provisions in a landlord’s favour should be abolished; however, this is likely to be a controversial provision. This proposal comes on top of concern expressed by Lord Justice Peter Jackson about mortgagee’s costs, which he lambasted as a ‘disturbing’ state of affairs (Green v Southern Pacific Mortgage Ltd and Equality and Human Rights Commission (intervener) [2018] EWCA Civ 854 (see paras 91–97). He stated his wish that this be examined by the Civil Procedure Rules Committee.

The commission, in this consultation, is considering whether a putative RTM company should still be required to pay the freeholder’s legal costs. However, the commission is mulling over whether to grant the tribunal costs powers but if it does decide this is the way to go, then it says that the tribunal costs powers would ‘go beyond this project’.

Disputes

Currently, the tribunal, the county court and the High Court have jurisdiction in RTM matters. Disputes concerning an RTM company may be allocated to either the tribunal, the county court or the High Court depending on subject matter, value, complexity and the remedy sought.

The commission is proposing that the tribunal be given exclusive jurisdiction over all RTM disputes. This will mean that the tribunal’s powers will need to be extended so that it can grant injunctions and award enforceable money judgments.

The commission is also mulling over whether either mediation or arbitration should be advised or made compulsory before any disputes reach a court or the tribunal.

(A majority of CILEx members want to keep the requirement that a commonhold association has to join an approved ombudsman scheme (see (2018) Spring CILEx Journal pp20, 22 and 26–27)).

The commission also wants to abolish the rule that the tribunal may only make an order in respect of costs where it considers that a party’s representative has wasted costs or a party’s conduct has been unreasonable in relation to bringing, defending or conducting proceedings (Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules SI No 1169 r13(1)(b)).

Government response

When the commission issues its final reports on leasehold enfranchisement, right to manage and commonhold, they are highly likely to contain draft legislation. Any proposals are likely to appear in the 2020–21 parliamentary session; however, this depends on the ambition of the Ministry of Housing, Communities and Local Government to push through change.