In this Legal Update, we look at an issue that is commonly faced by right to manage companies in circumstances where:

• The RTM Company has acquired the right to manage a building;

• Upon acquisition, the outgoing landlord/management company has handed over service charge funds in the form of “cash in hand”; and

• That “cash in hand” is made up of monies paid by only some of the leaseholders but there are leaseholders who were in arrears as at the date of the RTM Company acquiring management.

The question then is, can the RTM Company seek to collect those arrears that pre-date their management?

In short, absent an agreement with the old landlord/management company, the RTM Company cannot lawfully collect those arrears.

In reaching the above conclusion, it is important to consider the applicable statute and case law surrounding the point in question.

The Management Functions

Under Section 96(2) and (3) of the Commonhold and Leasehold Reform Act 2002 (“the Act”), upon the RTM Company acquiring management, the “management functions” imposed by the lease upon either the landlord or management company become functions of the RTM Company (Section 96(4) of the Act). The “management functions” are, in general terms, the service charge functions.

Having acquired the obligation to provide the services by the RTM Company, common sense says that the obligation to pay must also be transferred, so that leaseholders no longer pay the landlord/management company, but they now pay the RTM Company. 

Uncommitted Service Charges

In addition to the management functions, the RTM Company might also receive some money from the outgoing landlord/management company. By Section 94 of the Act, a duty is imposed on the outgoing landlord/management company to hand over “uncommitted service charges” to the RTM Company.

“Uncommitted service charges” are any accrued monies held by the outgoing landlord/management company less any amount that is required to meet the costs incurred before the RTM Company acquires the management functions under the lease.

There are two important points that emerge from Section 94 of the Act:

1. It is entirely possible that nothing will be handed over, since the service charge may be in arrears or simply have broken even; and

2. If something is handed over, it seems clear that it must be actual money and not simply the possibility of receiving (ie debts owed to the service charge fund are not transferred over). The obligation is to make a payment equal to the uncommitted funds, not to assign a right to receive (as yet uncollected) funds.

The provisions of Section 94 of the Act was considered in OM Limited v New River Head RTM Co Limited [2010] UKUT 394(LC) and it seemed to be made clear within that decision that debts cannot be passed to the RTM Company.

The Acquisition Date

The conclusion that debts are not acquired by the RTM Company, is further supported by Section 90 of the Act. In summary, the Acquisition Date is the date upon which the RTM Company’s management becomes “live”.

Section 90 of the Act, raises a number of important points:

1. Prior to the Acquisition Date, the RTM Company has no functions in respect of the building;

2. On the Acquisition Date, the RTM Company acquires the management functions set out in Section 96 of the Act and from the same date, the leaseholders become liable to pay their service charges to the RTM Company; and

3. The implication of the above is that anything done prior to the Acquisition Date falls to be dealt with under the lease as it operated at the time and therefore the RTM Company can have no right to any money which fell due prior to the Acquisition Date.

The Act does not require (or permit) the leaseholder to pay service charges to the RTM Company that fell due prior to the Acquisition Date (see section 97(5) CLRA2002). Accordingly, the RTM Company cannot then take action to recover such old arrears.  

Status of the arrears at handover

Any arrears are for the old landlord/management company to collect. This analysis is supported by the Act and further, the comments made by the Upper Tribunal in OM Limited at paragraph 27:

“If the former management company or landlord does not hold enough money to pay bills incurred before the acquisition date, it or he may sue the tenant for the relevant unpaid service charge. The RTM company may not do so”  

One consequence here is that it is possible that any leaseholders who owe money as at the Acquisition Date might avoid having to pay the debt if the landlord is unwilling to pursue them. Whist the RTM Company certainly cannot pursue the debt, the original landlord/management company may do so. However, they are unlikely to have, in most circumstances, any motivation to do so because it is likely that all or some of those monies being pursued would be “uncommitted service charges” and would be payable to the RTM Company upon receipt under Section 94 of the Act.

Conclusion

Nothing in the Act permits the RTM Company to pursue service charges that fell due prior to the Acquisition Date. Further, the case law is against any conclusion and accords with common sense. The RTM Company can have no expectation of recovering any money demanded by the previous landlord/management company but unpaid by a leaseholder.

The only way it would be possible for an RTM Company to pursue debts that arose prior to the Acquisition Date would be for the old landlord/management company to assign the arrears to the RTM Company. That could be done in the same way as any other debt. However, whether it makes economic sense to do so will depend on the specific circumstances of any particular case and is therefore another matter entirely!

The advice therefore has to be that prior to serving notices for the commencement of the RTM process the collective leaseholders should:-

• Have an understanding of the position in relation to any non payers in the development and how much is unpaid;

• In relation to those non payers, have an understanding as to their motivation for withholding demanded service charges (they may be anti the landlord but pro the RTM and thus may agree to make payment once the RTM takes over - a common scenario);   

• Insofar as the nonpayers are not in agreement to pay the withheld sums to the RTM upon the Acquisition Date, investigate reaching an agreement with the landlord for the assignment of the debt such that the RTM might pursue the non payers post Acquisition Date.

Of course the above presumes that the landlord is responsive which, with RTM applications, is sometimes not the case.  However, it is wise to take all steps to clarify and understand what the collective leaseholders instigating the RTM process are walking into.

Please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com should you have any queries whatsoever.

Disclaimer

This 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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