Important changes to Right to Manage and Mixed Use buildings

Last Monday (3rd March) saw the coming into force of several provisions of the Leasehold and Freehold Reform Act 2024 (“LAFRA 2024”) relating to Right to Manage (“RTM”) claims. These are designed to improve the lives of flat owners by enabling more of them to take over the management of their buildings giving them control over expenditure on service charges, insurance and repairs. High service charges and insurance costs are a common complaint of flat owners who often have little say in how these charges are set. Also on that list are the costs of managing agents appointed by the landlord who might offer very poor service and also who might have been indulging in the practice of receiving hidden commissions for placing buildings insurance.

In brief Right to Manage is the right of flat owners to take over the management functions of their buildings without having to acquire the freehold or obtain the agreement of the landlord. It was introduced by the Commonhold and Leasehold Reform Act 2002 (“CLRA 2002”) and operates as a useful and cheaper alternative to collective enfranchisement.

A key element is that there is no need to prove fault against the landlord. The right exists no matter how well the landlord is managing the building.

The RTM process is well mapped out in the CLRA 2002. An invitation must be sent to owners of all flats in a building that are held on long leases inviting them to participate in the claim. If a majority is formed a specialist RTM Company with specific articles of association prescribed by CLRA 2002 is set up of which the participants will all be members. A notice is then served on the landlord by the RTM Company claiming the right to manage.

The landlord has a period of one month within which to serve a counternotice which should admit the right to manage – unless there is some procedural or qualifying issue that would entitle the landlord to reject it. There is no opportunity for the landlord to defend its current management of the building and reject the RTM claim.

Assuming the right is admitted, a handover date for the management functions is set. This must be at least three months from the counternotice date.

The Leasehold and Freehold Reform Act 2024 (Commencement No. 3) Regulations 2025 published on 6^th February 2025 have introduced some key changes as from 3^rd March 2025:

Under CLRA 2002 buildings only qualified for the right to manage if no more than 25% of the building was used for non-residential purposes. That percentage has now been increased to 50%. This means that a much greater number of buildings will qualify for RTM claims and many more landlords will be vulnerable to it. This is of particular concern to many commercial investors who were well shielded from many leasehold reforms due to the non-residential floor area being of their buildings being more than 25%. Many recent developments were designed and constructed to keep the non-residential element above 25% and the increase to 50% is a blow to the investment strategy of a number of large investors.

CLRA 2002 Act included a requirement to pay the landlord’s reasonable costs when making a claim the payment being made on conclusion of the claim when the management was actually taken over. For large buildings with numerous flats landlord’s recoverable fees could be significant. Although a landlord could only recover “reasonable” fees, it was hard to prove what constituted “reasonable” especially where landlords sought to obstruct or delay the process.

LAFRA removes the requirement for participants / the RTM company to cover the landlord’s costs except in very limited circumstances. Therefore the cost to the participants is just their own fees which makes the process much cheaper.

This is a further blow to landlords who whilst already facing the prospect of having the management of their building removed from them now face having to pay their own costs incurred in that process. And with the increasing number of buildings now eligible for RTM claims to be made the number of landlords facing the threat of RTM claims also increases as it becomes more affordable.

Costs can now only be claimed in limited circumstances mainly where the RTM claim is withdrawn, or should be withdrawn or causing it to be deemed withdrawn or cease to have effect.

There are also provisions preventing first instance applications to the High Court in order to circumvent the costs provisions.

A further change is to the Articles of an RTM Company. Those are prescribed by the RTM Companies (Model Articles) (England) Regulations 2009. When the management of building is handed over the landlord is entitled to become a member of the RTM Company and therefore entitled to a vote for each interest that it has in the building. This can include multiple interests if the landlord holds any of the flats which it lets out on assured shorthold tenancies for example. This could mean that the landlord had more votes in the company than any individual flat owner and therefore could exert control over it.

To curtail this control the RTM Company (Model Articles) (England) (Amendment) Regulations 2025 have amended the standard RTM company articles so that now the votes exercisable by landlords cannot exceed one third of the votes. This prevents a mixed use building from being managed by a RTM Company controlled by persons from whom the right to manage has been claimed.

Finally where a party seeks to enforce obligations arising under the Right to Manage those applications must now be made in the first instance to the First Tier Tribunal of the Property Chamber (FTT) rather than to Court.

A further development in the Government’s mission to “ban leasehold” is the publication of a White Paper proposing a reinvented form of Commonhold as a new form of flat ownership.

The framework of Commonhold was set out in the CLRA 2002 and introduced in September 2004. It allowed for freehold ownership of a flat (known as a commonhold unit) within a larger development plus membership of a company (known as a commonhold association) that owned and managed the common parts of the development resulting in all flat owners being in control of the development. However take-up was negligible for a variety reasons – procedures were complex and many lenders were unwilling to lend on it. Now a re-jig is being discussed as the next cure to our increasingly unpopular leasehold system.

More on that subject soon.

Our Residential Property & Enfranchisement team has considerable experience in this specialist area of law. For further information, please contact Rosie McCormick Paice or Katherine Simpson.

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