Sharon Crossland: RTM Directors: The Buck Stops with You!

Most leaseholders will by now be aware of the Right to Manage, but what they won't be so aware of is the level of responsibility the Directors of these RTM Companies take on and the amount of knowledge they will be required to possess.

This is because RTM companies are treated as any other commercial company and therefore it's Directors are required to work within a legal framework consisting of the following:

1. The Lease: The Lease 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: This 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) and be expected to operate within that code themselves;
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.

Note: A risk-based assessment can be taken free of charge by the local authority under the 2004 Housing Act - Housing Health And Safety Ratings System (HHSRS).

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 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 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 not only take steps take to remedy any breaches but they must also report to the freeholder (unless the freeholder has stipulated that no such report is required).

SUCCESS OR FAILURE

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.

Additionally, because of the relatively low cost of RTM (managing agent fees for going through the process and any costs if it is withdrawn or the right not recognised by the LVT) the no fault element allows the freeholder to be part of the management company and if the freeholder is the reason for RTM being sought then having him as a company member will undoubtedly not help.

This curious anomaly 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. Havng 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?

SUMMARY

You must be certain that not only is RTM 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.

As a final thought, I find it interesting that investor freeholders often sell because they don't want to bother with the unprofitable and time consuming necessities of collecting service charges, chasing arrears, and enforcing covenants. If these are not for them, then why are they considered of 'benefit' to leaseholders in the shape of RTM, especially when you consider the level of responsibility and risk that Directors take on as a direct result of this particular right being exercised?