Many leaseholders have welcomed the opportunity to claim the right to manage (RTM) their blocks and take control over what is spent and how the building is managed, often changing managing agents or deciding to run the block themselves. Either way, it is not an easy route to take, and leaseholders will be involved in extra work.

Getting started

The procedure for claiming the right to manage is well-defined and should only take a few months.

It will involve setting up a dedicated management company, and a block can go ahead if a minimum of 50% of the leaseholders of flats within the building agree to become company members. It’s not necessary for everyone to take part.

There are plenty of solicitors offering their specialist services. After that, though, it is down to them to run the ‘business’.

However, before leaping, it’s wise to consider who will do all the work – because even if leaseholders choose to appoint a new managing agent, there’s a lot involved, and their RTM company has key responsibilities – and potential liabilities – from day 1.

Despite early enthusiasm for taking over, the day-to-day workload typically falls on a few willing volunteers. A 2023 government focus group project found that most leaseholders were not interested in playing an active part in the management of their building. They hesitated towards the idea of taking on management responsibilities due to issues with working with neighbours, a lack of time, and a general reluctance to take on additional duties beyond those necessary as a homeowner.

What does management involve?

Directors of new right to manage companies may initially be bemused by the rules and regulations. These, however, are designed to ensure they do not inadvertently jump from the frying pan into the fire, missing deadlines and important safety inspections and precautions, and losing the all-important support of neighbours in the block.

Managing the property requires knowledge of landlord and tenant law, building construction, health and safety regulations, and basic accounting. Whoever manages the building is also responsible for collecting service charges, planning, and supervising repair work, resolving issues and disputes, and administration relating to communal areas.

The  M&As (Memorandum and Articles of Association) of the right to manage companies are “prescribed” – that means they are pre-written and laid down in law. They should ensure that the RTM company represents the interests of all those owning the flats in the block now and in the future.

Directors must understand that they are subject to company law and could be sued for actions (or failures to act) that cause losses to someone else. If the RTM company doesn’t have the assets or reserves to cover those losses, directors could face personal liability.

That’s why we think the people doing all the work and keeping the blocks running, who are almost certainly doing their level best, should consider the protection of an affordable directors’ and officers’ liability insurance policy written specifically for blocks of flats. Ask your broker about this.

Day 1- remember the block insurance.

On the acquisition date of an RTM Company all existing management contracts end automatically unless otherwise agreed by the RTM company in advance.

On that day, the RTM becomes responsible for all contractors and suppliers. You will need a business bank account for the company. There will probably still be time to advise utility companies, cleaning, or other contractors of the change as they aren’t going to cut anyone off overnight, however, it will have been prudent to do some research and shop around in advance.

However – and this is very important – the building could become uninsured as it is almost certain that arranging insurance will be the RTM company’s responsibility under the terms of the leases.

An amicable landlord might work with the new company to transfer the current policy. On the other hand, they might cancel it.

This means a new RTM company must arrange immediate cover and be able to pay for what is probably the biggest budget item in your service charge budget, most likely a four-figure sum.

It’s worth starting to research insurance needs with specialist blocks of flats brokers early on and being ready to put appropriate cover in place as soon as necessary. Freeholders might have just renewed an old commercial property owner’s cover year on year without really checking if it still offers the best value for money, after all, they haven’t been paying the premiums, they will have been passed straight onto leaseholders.

A habit of automatic renewal may also mean it is many years since anyone checked the amount the building is insured for – the building’s declared value – and it may be worthwhile arranging a revaluation to ensure the block is appropriately covered. Remember, if a risk is underinsured, it’s not just a total loss that will be affected. Any claim may be reduced in proportion to the underinsurance.

More importantly, how is a brand-new RTM company going to find the premium? What if directors don’t yet have access to the service budget funds held, or if there isn’t enough cash available pending future service charge contributions from leaseholders?

It might be necessary to arrange a short-term loan from leaseholders. Directors should not be tempted just to raid the sinking or reserve fund:  the lease may prohibit its use for regular spending.

The bottom line is that thousands of blocks have chosen the right to manage as a way of having control over their homes and budgets, and it’s working for them. There are a lot of leaseholders who owe a debt of gratitude to the volunteers who run their RTM companies, not to mention the managing agents who support them.

Disclaimer:

The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.

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