There has been some confusion as to whether leasehold “tenant owners” of flats who are acquiring a full interest via the shared ownership route are entitled to use the Right to Manage legislation. That has now been resolved by the recent Court of Appeal decision in Avon Ground Rents Ltd -v- Canary Gateway (Block A) RTM Company Ltd.
The Commonhold and Leasehold Reform Act 2002 gives long leasehold owners of flats (subject to meeting various qualifying criteria) the right to set up a Right to Manage Company and take over the management of the building from the freeholder.
The Act sets out the qualifying criteria at section 76(2) and the first key point is that the flat owners must hold a “long lease” i.e., one exceeding 21 years [s76(2)(a)]. The Act sets out a number of definitions as to what amounts to a long lease and includes [(s76(2)(e)] “a shared ownership lease, whether granted in pursuance of that Part of the Act or otherwise, where the tenant’s total share is 100 percent.
Leasehold “tenant owners” under the shared ownership arrangements are typically people who have bought a share of their flat (often something between 25% – 75%) from the freeholder and will over time be making payments that will boost the % that they will own and reduce the corresponding rental payments; until they own 100% of the flat. This is a process called “staircasing”.
The leases will almost always be longer than 21 years and the “tenant owners” will generally be paying a full service charge from the start, so how well the building is managed is something they will be concerned about. Housing Associations for example will often use the shared ownership model.
In the Avon case, Canary Gateway was trying to acquire the management of a block of flats where Avon was the freehold owner but had let the block to a Housing Association, which in turn had “sold” the 17 flats in the block on shared ownership terms to individuals. Only 5 of the “tenant owners” had acquired 100% ownership in their respective flats.
Avon was arguing that the 12 “tenant owners” who had not acquired 100% ownership could not be said to have leases of more than 21 years and that s76(2)(e) had to be applied to shared leases. As such, the 5 flat owners who did have 100%, were not enough in number to trigger the entitlement to make a Right to Manage application.
Canary Gateway was arguing that the question of whether the flat owners held 100% of their flats was irrelevant. The leases were all in excess of 21 years and so all would qualify under s76(2)(a) of the Act, and if they wished to take over the management of the block, they were entitled to do so. They succeeded in the Tribunal and in the appeal that followed, so Avon took it to the Court of Appeal.
It got to the Court of Appeal precisely because there was a long-standing concern that the legislation for Right to Manage and case law that involved flat “tenant owners” who had not acquired the full 100% ownership, was unclear and in many ways in conflict.
The Court of Appeal Judge (Lord Justice Newey) confirmed that as tenants with long shared ownership leases would still be interested in how the building was managed (because they paid service charges) and as all the leases were more than 21 years, it did not matter whether they owned less than 100%.
He confirmed that the qualifying conditions under s76(2) were separate unrelated conditions and if enough of the “tenant owners” meet the requirements of s76(2)(a) that was enough for them to have a Right to Manage.
Freehold owners of blocks of flats with tenants using the shared ownership model will find it significantly more difficult to run arguments that the Act does not apply. However flat “tenant owners” should still think very carefully before going down the Right to Manage route.
Whilst on the plus side, you get control of the management of the block – on the minus side – you get all of the issues that come with that; such as:
- A Right to Manage company needs to be set up;
- Whilst the company can appoint managing agents to deal with the day-to-day work, there still have to be active Directors of the Right to Manage company which will come from the “tenant owners”.
- Ultimately the managing agents need to be instructed and paid for,
- The larger the block, the less likely it is that everyone will be happy with every decision.
You may not have liked the freeholder’s decisions, but it can be a lot worse to get the Right to Manage and then discover that none of the “tenant owners” really wants the responsibility that goes with it.
If you need help with any issue relating to this article, then please contact our Dispute Resolution Team on 01276 686222 or by email at DRteam@herrington-carmichael.com
