"While some may welcome the reduction in direct management responsibilities, the shift is likely to introduce new challenges in negotiating building insurance, handling long-term maintenance, and navigating service charge disputes"
- Mark Chick - ALEP
From 3 March, further provisions within the Leasehold and Freehold Reform Act 2024 came into force, including Section 49, which concerns the change of non-residential limit on Right to Manage (RTM) claims.
This secondary legislation will mean that residential leaseholders within a mixed-use scheme will qualify for RTM when the commercial element of a building is as much as 50% - an increase on the previous cap of 25%. Additionally, leaseholders will no longer be required to cover the freeholder’s legal fees when making an RTM claim.
Announcing the reforms on 9 February, the Planning Minister Matthew Pennycook said that they would, “Improve the lives of leasehold homeowners across the country, allowing them to more easily and cheaply take control of the buildings they live in and clamp down on unreasonable or extortionate charges”.
It is interesting to consider how the change will impact the various stakeholders: leaseholders, freeholders and professional advisors.
Turning first to the impact on leaseholders, the expansion of RTM will offer more leaseholders the opportunity to take control of building management and potentially improve transparency and accountability. However, it also brings new responsibilities, including more financial duties, compliance with building safety legislation, procurement of insurance and long-term maintenance.
As the extended qualifying criteria take effect, I anticipate that a largely overlooked challenge, from the leaseholders’ point of view, will be the financial risk. Currently, many management costs exist to protect leaseholders, but removing these safeguards could expose them to increased liabilities.
Leaseholders seeking RTM should be aware of the potential complexities involved in ensuring the long-term sustainability of their property’s management. Leaseholders must be aware that the removal of professional management costs does not necessarily translate to savings and that if they opt for RTM, they must assume responsibility for reserve funds, insurance and emergency repairs.
For the building owners, the newly enacted legislation could mean a loss of control over the management of qualifying buildings. While some may welcome the reduction in direct management responsibilities, the shift is likely to introduce new challenges in negotiating building insurance, handling long-term maintenance, and navigating service charge disputes. Freeholders may also need to redefine their engagement strategies with leaseholders to ensure compliance with the evolving legal framework.
Critical issues include the fragmentation of ownership. Specifically, many areas of historic value and importance have been successfully managed in single ownership for as long as they have existed. But as a result of the change, the ownership of mixed-use buildings could be fractured and diversified, leading to poorly managed buildings and reduced future investment.
To avoid the risks associated with RTM, developers of new schemes may seek to ensure that the residential parts of new developments are reduced. Despite the government’s urgent need to significantly increase residential development, the unintended consequence of this would be fewer new homes.
So what are the considerations that must be addressed? As a starting point, leaseholders should engage property lawyers to assess the financial viability of RTM and ensure compliance with leasehold and building safety regulations. They will need to work with insurance brokers to secure appropriate coverage, consider appointing a professional managing agent post-RTM to provide oversight and reduce administrative burdens and, importantly, engage with freeholders throughout the process.
For freeholders, receiving the correct advice will be key to understanding their rights and obligations and in managing the process. The shift away from the landlord’s ability to recover costs may deter some from seeking advice. This may have some negative impact on the ease with which handovers occur.
As a package of leasehold reform is implemented over the course of this Parliament, it will be important for both building owners and leaseholders to keep abreast of the significant changes that are to come – not least commonhold, which will change this specific aspect of property ownership and management further.
