Block Management UK — Freeholder and Managing Agent Obligations

Service Charges — LTA 1985 Obligations

The legal framework for residential service charges is primarily set out in the Landlord and Tenant Act 1985 (LTA 1985) ss.18–30B. These provisions apply to dwellings let on long leases where the tenant is liable for a variable service charge (a charge the amount of which depends wholly or partly on the relevant costs incurred by the landlord or managing agent). Key LTA 1985 obligations: (a) Reasonableness (s.19): service charges are only payable to the extent that costs have been 'reasonably incurred' and works and services are of a 'reasonable standard'; leaseholders can apply to the First-tier Tribunal (FTT) to determine whether service charges are reasonable; (b) Consultation requirement — s.20 and s.20ZA: before entering into a qualifying long-term agreement (exceeding 12 months) or carrying out qualifying works (where the contribution from any one tenant would exceed £250 for qualifying works), the landlord must comply with the statutory consultation procedure in the Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) — failure to consult limits the amount recoverable from any one tenant to £250 for qualifying works and £100 per year for qualifying long-term agreements (unless the FTT dispenses with the requirement); (c) Summary of costs (s.21): on request, a landlord must provide a summary of costs from which the service charge is calculated; (d) Inspection of accounts (s.22): on reasonable notice, leaseholders have the right to inspect and copy accounts, receipts, and documents relating to service charges; (e) Administration charges: the LRHUDA 2024 and the existing Commonhold and Leasehold Reform Act 2002 (CLRA 2002) regulate administration charges (charges for consents, information, notices, or breaches) — administration charges must be reasonable and are challengeable in the FTT; (f) Service charge demands (s.47 and s.48 LTA 1987): demands for service charges must include the landlord's name and address (s.47 LTA 1987) and contain the s.48 notice of the landlord's address for service of proceedings — failure renders the charge technically unenforceable until the information is provided. Reserve funds and sinking funds: most well-managed blocks maintain a reserve fund (or sinking fund) to meet the cost of major cyclical works (external redecoration; roof replacement; lift replacement) — the reserve fund contributions form part of the service charge and are subject to the LTA 1985 framework; reserve funds must be held in a separate designated account (s.42 LTA 1987); on request, leaseholders are entitled to a statement of account.

• Reasonableness test (LTA 1985 s.19): service charges must have been reasonably incurred and works/services of a reasonable standard; leaseholders can challenge in the FTT (Property Chamber); no cap on the FTT's jurisdiction
• S.20 consultation: qualifying works costing more than £250 per tenant, and qualifying long-term agreements (exceeding 12 months), require statutory consultation; failure limits recovery to £250 per tenant per set of works unless the FTT dispenses with the requirement
• S.21 summary of costs: on written request, landlord must provide a summary of costs; tenant can inspect supporting accounts and receipts; refusal is a criminal offence (s.25 LTA 1985)
• Service charge demand formality (s.47 and s.48 LTA 1987): demands must include landlord's name and address; failure to comply with s.48 (address for service) renders the service charge temporarily unenforceable until cured
• Reserve fund (s.42 LTA 1987): must be held in a separate designated account in a recognised institution; balance is held on trust for the tenants; landlord cannot use reserve fund monies for non-reserve purposes

Right to Manage — CLRA 2002 and LRHUDA 2024 Reforms

The right to manage (RTM) is a statutory mechanism under the Commonhold and Leasehold Reform Act 2002 (CLRA 2002) Chapter 1 that allows residential leaseholders in a qualifying building to take over the management of their block from the freeholder — without having to prove any fault on the freeholder's part and without paying any compensation to the freeholder. RTM can be exercised by forming an RTM company under CLRA 2002 and following the statutory procedure. Pre-LRHUDA 2024 RTM qualifying conditions: (a) the premises must be a self-contained building or self-contained part of a building (the 'premises' condition); (b) it must consist of at least two flats held by qualifying tenants; (c) at least two-thirds of the flats must be held by qualifying tenants (i.e. leaseholders with leases originally granted for a term exceeding 21 years); (d) at least 50% of the qualifying tenants must participate in the RTM company; (e) the building must not be excluded (certain types of buildings are excluded — e.g. where the freeholder is resident and the building has no more than 4 units). LRHUDA 2024 RTM reforms (Chapter 5 LRHUDA 2024): the Leasehold and Freehold Reform Act 2024 made significant changes to the RTM regime, including: (i) removal of the requirement for 50% of qualifying tenants to participate — the LRHUDA 2024 reforms aim to reduce the 'voting threshold' making RTM easier to achieve; (ii) extension of RTM to self-contained parts of buildings even where there is no clear physical separation; (iii) new rules on the conduct of RTM companies post-acquisition. RTM procedure under CLRA 2002: (i) form the RTM company (a company limited by guarantee under the prescribed Articles — CLRA 2002 ss.74–78); (ii) give notice of invitation to participate (NIP) to all qualifying tenants who are not already members of the RTM company; (iii) serve the claim notice on the freeholder (and any other relevant landlord) — the claim notice must contain specified information including the names of the participants and the date (at least 3 months ahead) on which RTM is claimed; (iv) the freeholder has 1 month to serve a counter-notice (accepting or rejecting the claim); (v) if the claim is accepted or upheld by the FTT, the RTM company takes over management of the block from the 'acquisition date'. Managing agent's duties after RTM: once RTM is acquired, the RTM company replaces the freeholder as the manager and can appoint any managing agent it chooses — the freeholder retains the freehold but loses day-to-day management responsibility. The freeholder retains the right to enforce positive leasehold obligations (e.g. insurance obligations) even after RTM.

• RTM (CLRA 2002 Ch.1): leaseholders can take over management of their block without paying compensation to the freeholder; requires at least 2 flats; two-thirds qualifying leaseholders; LRHUDA 2024 removed the 50% participation threshold
• RTM company: must be formed as a company limited by guarantee under the prescribed Articles; members are leaseholders and (after acquisition) the freeholder; RTM company takes over all management functions on the acquisition date
• Claim notice procedure: NIP to all non-members; claim notice to freeholder; 1-month counter-notice period; FTT jurisdiction if the claim is disputed; acquisition date at least 3 months after the claim notice
• LRHUDA 2024 reforms: easier RTM (removed participation threshold); expanded qualifying premises; new post-acquisition rules; full implementation dates still being phased in — check current position with specialist leasehold adviser
• Freeholder's position post-RTM: freeholder retains the freehold but loses management responsibility; may retain enforcement rights for certain obligations (building insurance; structural covenants); freeholder remains the 'landlord' for SDLT and tax purposes

Building Safety Act 2022 — Higher-Risk Buildings and Accountable Persons

The Building Safety Act 2022 (BSA 2022) introduced a new regulatory regime for higher-risk buildings — defined as residential buildings of 18 metres or more in height (or 7 or more storeys) that contain at least 2 residential units (s.65 BSA 2022). The BSA 2022 created the Building Safety Regulator (BSR), established within the Health and Safety Executive (HSE), as the national regulator for higher-risk buildings. Key BSA 2022 obligations for block managers and freeholders: (a) Accountable person (AP): for each higher-risk building, there is an 'accountable person' who is the entity (person or company) that holds the legal estate in the common parts or is responsible for their repair and maintenance; this is typically the freeholder or, in a commonhold, the commonhold association; (b) Principal accountable person (PAP): where there are multiple APs for a building, one must be designated as the PAP — the PAP must register the building with the BSR and apply for a Building Assessment Certificate (BAC); (c) Registration: all higher-risk buildings must be registered with the BSR; failure to register is a criminal offence; (d) Building safety case report: the PAP must prepare and maintain a 'building safety case report' demonstrating how the building's structural and fire safety risks are assessed and managed; (e) Resident engagement: the PAP must establish a framework for engaging residents in building safety decisions; (f) Building Assessment Certificate: the BSR can require the PAP to apply for a BAC; the BAC is the building safety equivalent of a planning permission or HMO licence — it confirms the building is being managed safely and in accordance with its building safety case. Service charge recovery of BSA 2022 costs: the costs of BSA 2022 compliance (building safety reports; registration fees; cladding remediation) may be recoverable through the service charge — but the LRHUDA 2024 significantly restricts the ability to recover certain cladding remediation costs from leaseholders of buildings with defective cladding. Cladding remediation and the Building Safety Fund: the BSA 2022 created new legal tools to pursue developers and contractors for cladding defects; the Building Safety Fund (Government-funded) covers some remediation costs for buildings between 11m and 18m that do not meet the BSA 2022 accountable person test.

• Higher-risk buildings: 18m+ or 7+ storeys with 2+ residential units; subject to the Building Safety Regulator (BSR) within the HSE; registration, safety case, and Building Assessment Certificate (BAC) required
• Accountable person (AP): the entity holding the legal estate in the common parts or responsible for their repair; typically the freeholder; in commonhold, the commonhold association
• Principal accountable person (PAP): where multiple APs, one is designated PAP; PAP must register the building with the BSR; failure to register is a criminal offence
• Building safety case report: PAP must prepare and maintain a safety case report demonstrating how structural and fire safety risks are assessed and managed; BSR can inspect and challenge the report
• Cladding remediation costs: significantly restricted by LRHUDA 2024 from being passed through the service charge to leaseholders; freeholders of ACM/HPL-clad buildings must pursue developers and contractors via the BSA 2022 remediation contribution orders

Managing Agents — RICS Code and FCA Regulation

Many freeholders appoint professional managing agents to carry out day-to-day block management. The regulatory and professional framework for managing agents includes: (a) RICS Code of Practice for Residential Property Management — the RICS has published a mandatory Code of Practice (for RICS-regulated firms) and best practice guidance covering: duties of the managing agent to the client; transparency on fees and commissions; handling of client money; complaint procedures; service charge accounts; major works procurement; insurance placement and commissions. RICS Regulation: RICS-regulated property management firms are subject to RICS conduct rules, including the mandatory holding of client money in designated, ring-fenced, insured accounts; RICS member firms must hold a client money protection (CMP) policy. Property Redress Schemes: since 1 October 2014, all letting agents and property managers in England and Wales must belong to an approved property redress scheme under the Enterprise and Regulatory Reform Act 2013 — the main schemes are the Property Ombudsman (TPO) and the Property Redress Scheme (PRS); non-membership is a criminal offence. Client Money Protection (CMP) schemes: since 1 April 2019, all letting agents and property managers in England that hold client money must belong to a government-approved CMP scheme (the CMP for Letting Agents and Property Management Agents Regulations 2019); the approved schemes include the RICS CMP, Propertymark Client Money Protection, and Client Money Protect. FCA (Financial Conduct Authority) regulation — insurance: where a managing agent arranges buildings insurance on behalf of leaseholders and receives commission or remuneration from the insurer, the FCA's 'fair value' requirements under the Consumer Duty (effective 31 July 2023) and insurance distribution rules (IDD — the Insurance Distribution Directive) apply; the LRHUDA 2024 contains new provisions requiring managing agents to disclose commissions received on insurance placements and to act in the best interests of leaseholders when arranging insurance. Freeholder insurer/agent commissions: LRHUDA 2024 requires the freeholder or managing agent to account to leaseholders for any insurance commission received from the insurer; the RICS has published guidance on the disclosure and accounting obligations.

• RICS Code of Practice: mandatory for RICS-regulated firms; covers duties to client; fee transparency; client money handling; service charge accounting; major works procurement; insurance placement
• Property redress scheme (since 2014): all property managers in England and Wales must belong to the Property Ombudsman (TPO) or Property Redress Scheme (PRS); non-membership is a criminal offence under ERRA 2013
• Client Money Protection (CMP) scheme (since 2019): all agents holding client money in England must belong to an approved CMP scheme; Government schemes include Propertymark CMP, RICS CMP, Client Money Protect
• FCA Consumer Duty and IDD: where managing agents arrange buildings insurance and receive commission from insurers, the FCA Consumer Duty (July 2023) and Insurance Distribution Directive apply; fair value and disclosure obligations
• LRHUDA 2024 insurance commission disclosure: freeholders and managing agents must disclose and account to leaseholders for any insurance commissions received; the RICS has published updated guidance on compliance

Frequently asked questions