This week’s Legal Update considers what the position would be if a Right to Manage Company (“RTM”) were to fail and be made insolvent.

RTM’s are fragile entities from a financial perspective. They are generally limited by guarantee, do not trade for profit and they have no assets. Accordingly, they have no income or other money of their own - the service charges held by the RTM Company are held on trust and thus are not the property of the RTM Company. 

Should an RTM fail to recover service charges from a leaseholder (or a number of them) or should they be subject to a Court Judgment that requires them to pay money out, the solvency of the RTM immediately becomes at risk, and with it, the management of the building that those involved in acquiring the right to manage fought hard to achieve.

We set out below the impact upon the management of a building should an RTM become insolvent, and we discuss the likely position surrounding the on-going management of the building and, importantly, how any service charges are likely to be dealt with.   

The Statutory Position    

An RTM’s entitlement to manage a building arises solely by statute. This is achieved by Section 96(2) of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) which provides that:

Management functions which a person who is landlord under a lease of the whole or any part of the premises has under the lease are instead functions of the RTM Company

By Section 105(3) of the 2002 Act, it is provided that:

(3)          The right to manage the premises ceases to be exercisable by the RTM Company if-

(a)    a winding up order is made…

Accordingly, if a creditor of the RTM petitioned for their winding-up and such an order was made, the RTM would immediately lose the right to manage their building.

The effect of insolvency

Somewhat surprisingly, the Act does not expressly set out the consequences which follow if the right to manage ceases to be exercisable. However, it is likely that the management obligations will simply revert to the party responsible for them before the right to manage was exercised, such as the Landlord or Management Company, as the case may be.

We should point out here that in the absence of clarity within the 2002 Act, and there appears to be no case law on the point, the above position is not certain but that it is likely to be the case.

Of course, it may well be that the Landlord or Management Company no longer exists and if that is the case, there may be real difficulties.

One solution would be for any leaseholder (or group of them) to apply to the First-Tier Tribunal for the appointment of a manager under Section 24 of the Landlord and Tenant Act 1987 (“the 1987 Act”) or, alternatively, a new RTM could be formed, albeit consideration would need to be given to paragraph 5 of Schedule 6 of the 2002 Act, that excludes any new claims for right to manage where an RTM has previously been in existence.

Whilst there will be certain management consequences in terms of the status of any contracts which the RTM has entered into, the main concern to the leaseholders will be how the service charges held by the RTM are dealt with. Subject to the size of the development, such sums could amount to hundreds of thousands of pounds.

Service charge funds held by the RTM are subject to a statutory trust as required by Section 42 of the 1987 Act. Accordingly, the service charges do not form part of the RTM’s assets and so those funds are not available to the liquidator for distribution to the RTM’s creditors. Since the RTM is not beneficially entitled to the service charges, they are not considered company property.

It would likely be the position that the liquidator of the RTM would be obliged to pay the service charges over to the party now with the management responsibilities to hold on statutory trust but that conclusion is not, however, certain.

The 2002 Act provides that when the RTM is acquired, the landlord must pay over to the RTM, any accrued uncommitted service charges under Section 94 of the Act.  However, there is no corresponding provision which obliges the RTM to transfer these funds when it ceases to have the RTM. Furthermore, Section 42 of the 1987 Act does not create any express obligation requiring the trustee of the service charge fund to pay that money over to a new landlord in the event of a change of the party responsible for management. 

Nevertheless, it seems likely that a Court would conclude that the liquidator is bound to pay the service charge money over to the responsible party for the management of the building and that, once that is done, it will continue to be bound by the statutory trust.

In circumstances where the liquidator failed to transfer the sums to the landlord before the RTM was dissolved, then legal title to the money would probably vest in the Crown as bona vacantia. The leaseholders would retain their beneficial interest in the fund and would be entitled to apply for a vesting order.          

Conclusion

It seems that following the automatic cessation of the right to manage upon an RTM entering into liquidation, the only party which would be entitled to fulfil the role is the party with the original management functions under the lease, namely, the Landlord or Management Company, as described above.

In the circumstances, it appears that there must be an implied obligation imposed on the party which holds the service charge fund, i.e. the liquidator, to pay them over to the Landlord or Management Company as the only party that can fulfil the purpose of the trust. 

For more information, please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com.  

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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