RTM: Recovery of Management Costs Through the Service Charge
Asiimwe Balinda
Property Management Solicitor - I help property managers, agents and landlords reduce service charge debt and improve their cash flow quickly.
Under section 97 (4) of the Commonhold and Leasehold Reform Act 2002, any obligations of the leaseholder to pay service charges to a landlord in relation to exercising management functions under the terms of the lease are owed to the RTM company. This includes any obligation to make a payment in respect of the costs of management.
Management costs are recoverable only if the expenditure is explicitly provided for in the lease. ?If the lease does not provide for management costs to be recovered from the leaseholder, tenants can apply to the First-tier Tribunal to have these items disallowed.
In the case of Wilson v Lesley Place (RTM) Co Ltd), the Upper Tribunal held that:
“The liability of the tenant to the landlord in respect of service charges is to be ascertained purely by reference to the terms of the lease, and the fact that the management functions are exercisable by an RTM company does not affect the construction of the lease under these provisions.”
In that case, the RTM company was unable to recover the “costs of establishing and running the RTM company” (such as secretarial fees, companies house and hall hire, and directors’ and officers’ liability insurance (“D&O insurance”) from leaseholders because it was held that these were not costs of “dealing with the general management of the blocks” (which the lease specified were recoverable).
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RTM companies are therefore unable to recover their general management costs from leaseholders unless the lease permits them to do so.
Recommendation
If the lease does not provide for general management costs, seek voluntary contribution from the leaseholders.
Alternatively, if you cannot reach a unanimous agreement, section 35 of the Landlord and Tenant Act 1987 allows any party to a long lease to apply to the First Tier Tribunal to seek a variation where the lease fails to make satisfactory provision on certain grounds including the recovery of expenditure incurred or to be incurred by one party to the lease from another party for the benefit of that other party or of a number of persons. This powerful right requires evidence to support the application.