RTM Directors: The Buck Stops with You!

Most leaseholders will by now be aware of the Right to Manage, and it would appear that RTM is also being promoted as a key platform from which managing agents can increase their portfolios. What doesn't get so much publicity is the level of responsibility the Directors of RTM Companies take on because such companies are treated exactly the same way as any other commercial company. So what is the role of the RTM Company Director?

RTM Company Directors are requred to work within a legal framework that consist of the following:

1. The lease which is specific to the indvidual residential property under management. It is the contract made between freeholder landlords (what they are bound to do) and leaseholders (what they have contracted to do), both in the form of covenants;
2. The Management Agreement which is the contract between the managing agents and the RTM Company (the client). Directors will be expected to ensure that the managing agent complies with the government-approved RICS Service Charge Residential Management Code, (or the ARHM Code for retirement developments). It should also be born in mind that there is nothing in place to provide leaseholders with confirmation that the Codes are being adhered to, such as an annual audit. Therefore the Directors are required to be familiar with the Codes themselves in order to ensure that the managing agent is complying with it and to instruct accordingly if they are not. 
3. Legislation: This is legislation specific to the leasehold sector and usually referred to as 'landlord and tenant law'. Such law provides leaseholders with a considerable number of rights under 6 main Acts Of Parliament related to block management. RTM Directors will also need to be familiar with company law, primarily that of the Companies Act 2006 because whilst such law wasn't designed for RTM Companies, the Directors of RTM companies are nevertheless bound by it.
4. The Directors will also be required to be familiar with Health & Safety legislation because the common areas of blocks (i.e. any areas not individually owned by the leaseholders) of flats are judged by the Health and Safety Executive to be a workplace because they are company run and assumed to a profit making business.
5. Wider Legislation: This wider legislation is not necessarily specific to the leasehold sector but nevertheless Directors need to be aware of them and the impact any of them could have on their particular block;
6. Case Law: This cover decisions by the courts on a variety of issues which can determine how a particular piece of legislation or how words used in leases are to be construed.

DIRECTORS AS EMPLOYERS

It is the RTM Directors who ultimately decide which managing agent to use, hiring them just like any other company hires its workforce. As such, they will need to manage the new agent accordingly and cannot simply sit back and let them get on with it.

PERSONAL LIABILITIES

Because RTM Directors have the exactly the same personal liabilities as Directors of commercial companies it follows that they can be sued in exactly the same way. Claims can result from a number of areas such as someone believing that a failure to identify external dilapidation has resulted in a fall in value to their flat or someone who thinks that the contractors used on the building have carried out poor workmanship. Claims could also be brought if anyone was injured as a result of failure to carry out regular risk assesments.

Probably the biggest liability facing RTM Directors is that of insolvency, where the responsibilities change from being owed to the company to those set out in the Insolvency Act 1986 (and related statutes). These are designed to protect the company's creditors and the penalties that can be imposed upon a director are not just those of personal liability but the subsequent disqualification as a company director.

ENFORCEMENT OF LEASEHOLDER COVENANTS

RTM Directors are also placed under a statutory duty to monitor and review whether all leaseholders are adhering to the covenants and obligations contained within their lease. They must take steps take to remedy any breaches and they must also report to the freeholder (unless the freeholder has stipulated that no such report is required).

OTHER CONSIDERATIONS

The requirement to enforce leasehold covenants in sublet properties is going to be a major problem, not least when it comes to dealing with any problems caused by sub-tenants. The freeholder will rely on the individual leaseholder/landlord to use the mechanisms contained within the tenancy agreement to deal with them. If they do not (and many don't) then the ultimate sanction of the freeholder is forfeiture. However, if the freeholder is absent, how can the RTM Directors deal with these particular issues when the company does not have the right to forfeit the lease?

The no fault element of RTM has a curious anomaly that allows the freeholder to be part of the management company. This was actually noticed by Lord Richard when the Bill was brought to the House of Lords in 2001. He acknowledged that the basic problem of leaseholders owning most of the equity in the building but having little or no say in how it was run or repaired was dealt with by providing the statutory right of RTM. Having said that then surely it should only be necessary to grant the freeholder membership of the company if he was a good one? Especially if the right had simply been established to give leaseholders more say on how things were done?

It should also be born in mind that because of the relatively low cost of RTM (managing agent fees for going through the process) leaseholders will be liable for costs if the claim is withdrawn or the right not recognised by the LVT.

SUMMARY

Whether RTM is a success or a failure will depend on two key elements: the ability of the Directors to instruct effectively and how professional the new agent is, because they continue to be sourced from an unlicenced and unregulated pool.

You must be certain that it is the right move for your particular development and circumstances. There are a number of other options available to leaseholders i.e. collective enfranchisement (buying the freehold), alternative dispute resolutions, setting up a residents association, compulsory acquisition of the freehold and appointing management via the LVT and they should all be given due consideration.