Property ownership in the UK can become perplexing when it comes to flats and shared buildings. Generally, the ownership of the building is separate from that of the individual flats within it. Now, this brings us to understanding a relationship between two parties: landlords and leaseholders. Landlords own and manage the property and are called freeholders. In contrast, leaseholders are individuals who hold long leases on property (flats). Notably, there is a significant law between the two: Right to Manage (RTM) legislation. Understanding RTM is essential for both landlords and leaseholders because it shapes how residential properties are maintained and managed in the UK. Therefore, this guide will expound on the basics of right to manage, including setting up a right-to-manage company, claiming the RTM, and RTM qualifying conditions.
What Is The Right To Manage (RTM)?
Principally, the “Right to Manage” (RTM) allows several leaseholder owners of flats to take over the management of the buildings in question without buying the freehold or necessarily getting the landlord’s approval first.
The Right to Manage (RTM) is a legal right for property management which was introduced under the Commonhold and Leasehold Reform Act 2002. It empowers leasehold property owners in blocks of flats to take full control and management of their building without having to prove fault or mismanagement by the landlord.
Notably, as a landlord, you should know that the leaseholders in your building who want to take charge of the management of your building are obligated to send you a notice stating their intention to do this. However, even after they take over management, you will still retain full ownership of your property. The leaseholders will just be responsible for managing it on your behalf.
What Is A Right To Manage (RTM) Company?
When leaseholders intend to assume the managerial control of their residential building without needing the prior agreement of the freeholder (landlord), they must exercise their Right to Manage. It is worth pointing out that the leaseholders are not required to obtain the landlord’s permission to exercise this right. However, they can achieve the purpose by setting up a Right to Manage (RTM) company.
An RTM company is primarily a specific type of limited company by guarantee that leaseholders can form without a landlord’s approval. The right to establish this company has been given under the Commonhold and Leasehold Reform Act 2002. Moreover, it is particularly designed to facilitate leaseholder owners of flats to manage their residential building functions collectively to reduce management costs and improve quality, ensuring better oversight.
Helpfully, you can speak to an expert service charge accountant, for they will have the expertise to set up a company for you to proceed with the RTM process.
Why do leaseholders form a Right to Manage company?
It is generally observed that freeholders opt for property management companies to manage their buildings. It often results in disputes and discord with the leaseholders of properties within those buildings. For instance, leaseholders frequently complain about the quality of property management, or service being deplorable. Moreover, they usually find the service charge to be excessive.
Now, to grapple with such scenarios, leaseholder property owners can use their Right to Manage to resolve the problem and create an RTM company.
How Does A Right-To-Manage Company Work?
An RTM company mostly functions similarly to a limited company. For instance, like any other limited company, the RTM company is also registered with Companies House and is run by one or more directors. Likewise, an RTM company must have Articles of Association, a company’s foundational legal document governing its operations, management, and decision-making. However, the RTM company does not have shareholders or employees like other companies. Instead, it has members.
Notably, the prime responsibilities for the right to manage directors include carrying out the building management functions. Most of the time, these directors are leaseholders themselves who have set up the company to manage the building. While the leasehold property owners take legal responsibility for the building’s management, its directors oversee these duties, including services, repairs, maintenance, and insurance.
Importantly, the RTM process includes specific criteria for eligibility to ensure only qualified buildings can transfer management from the landlord. In addition, both landlords and leaseholders can become members of an RTM company if they fulfil the qualifying criteria, which shall be discussed shortly. Every qualifying leaseholder is allowed to use the Right to Manage (RTM) for whatever reason they find appropriate, meaning that they do not have any obligation to prove that the property is in bad shape due to damage.
How Does The RTM Process Work?
Exercising the Right to Manage is a structured legal process that follows specific steps:
Flowchart
Does an RTM company Have To Perform All The Building’s Management Tasks?
An RTM company doesn’t need to do self-management. Leaseholders and directors have the liberty to manage the building directly or choose to appoint a third-party agent to manage it on their behalf.
For a small building, i.e., with six flats, it is wise to delegate the routine management to the professional agent, as they are skilled and experienced to carry out this task that requires expertise.
Nevertheless, in situations where the work or performance of the current managing agent is unsatisfactory, the RTM company issues directives for these managing agents. Consequently, the company remains assured that it can make decisions on major works and the managing agent delivers a satisfactory service.
What Are The Responsibilities Of An RTM Company?
Once an RTM company is set up, it assumes the charge of all the responsibilities of managing the building functions. It means the members (leaseholders or directors) will perform the following duties, including (where applicable):
- Charging, collecting, and managing the service charge.
- Managing the building’s insurance.
- Conducting assessments of fire risk and carrying out necessary safety measures
- Routine maintenance of communal areas and parts, such as staircases and hallways, elevators, plumbing, electrics, exterior doors and locks, drains, gardens, boundary walls, and fencing.
- The upkeep of the building’s structure, which includes the foundations, floors, roof, walls, ceilings, columns, communal windows, and lights.
- Organising cleaning, maintenance, and refuse garbage collection services.
- Managing repairs and redecorating the building’s structure and communal areas.
- Overseeing concierge and security services.
- Addressing concerns and complaints about the building from the freeholder, other leaseholders, and adjoining buildings.
- Fulfil any responsibilities required by the lease.
Lastly, it is the responsibility of the RTM company to bear any costs linked to exercising the Right to Manage and transition of the building’s above-stated management functions, even when the company has appointed an agent and is not involved in the building’s management directly.
What Are The Qualifying Conditions For Landlords To Become Members Of An RTM Company?
The landlord has the right to become a member of the Right-to-Manage company. Your membership gives you the power to vote on crucial matters affecting the company. Principally, you have at least one vote. However, the number of votes cast in your favour will depend largely on the number of flats or non-residential units you own in a given building. For greater clarity, a non-residential unit could be a shop, an office or any space you own that is not a flat or shared area.
Apart from that, your total number of votes is limited to one-third of the ballots retained by all leaseholders. It includes any votes you hold for non-residential flats you own in the building.
For example, assume there are a total of twenty flats in a particular block. Out of those, leaseholders already own sixteen. Thus, you fully own the remaining four and have rented them out on what is known as assured shorthold tenancies. In this case, you will only get four votes, whereby each vote will represent each of the four flats that you own or rent out.
For added information, landlords have several responsibilities when renting out a property. Plus, they can reduce their tax liabilities. If you want to learn about them, read our following guides:
Qualifying Conditions For Buildings
The following are the qualifying conditions for the buildings whose management is to be transferred to the leaseholders under the RTM company:
- The building or property should contain flats. Keep in mind that houses don’t qualify.
- At least two-thirds of the flats within the building should be leasehold, including those leases initially going beyond 21 years at the time they were granted.
- At least 50% of the property must be residential, meaning that if there is a shop within the building, it cannot make up more than 50% of the total floor area.
- You will have to relocate elsewhere if there are fewer than four flats in that particular block, except where the block was intentionally constructed as flats only, rather than transformed from a different type of building.
- Any number of property owners can easily set up the Right to Manage company, provided that at least half of the total number of flats within the building are members of the company before taking over management.
Right-To-Manage Qualifying Conditions For Leaseholders
To exercise their right to manage, the leaseholders must meet the qualifying factors. Let’s skim through them!
- To begin with, the tenant must be a ‘qualifying tenant’. To clarify, they must be long-term leaseholder who were granted an original lease term of 21 years or more.
- Next, RTM applies to leaseholders of a building or part of a building that contains two or more units.
- Largely, the building must be residential, with commercial areas not making up more than 25% of the building’s floor area.
- RTM is inapplicable in local housing authority properties. Therefore, there are no tenants’ rights to manage for local authority tenants, and they cannot set up an RTM company. Nonetheless, they have a right to manage their buildings through their right to form a Tenant Management Organisation.
- Moving on, at least half of the building’s qualifying tenants must agree to become members of the RTM company. It means if there are only two flats in the building, both must take part in the RTM process.
- The lease must not be used as a business tenancy. It is worth explaining this point here. The lease must be for a residential property instead of a business tenancy to exercise the right to manage the leasehold. Subsequently, if someone rents or leases flats in a building for running a business like a shop, café, or office, they are unqualified to take part in the RTM leasehold process.
- Finally, no flat can have more than one qualifying tenant. If the lease is a shared tenancy, the leaseholders are treated as single qualifying tenants. Hence, in case there are multiple long leases, the leaseholder who holds a superior lease is considered the qualifying tenant.
Notices
After setting up the RTM company, the leaseholders will reach out to you. This way, you receive the right to information notice directly from the company, which asks for the relevant information they may require to claim their RTM.
The Notice of Claim
When setting up the RTM company, participants must send a formal notice to all qualifying leaseholders and the freeholder of the building. It is called the “Notice of claim,” and it states the acquisition date of the building. Furthermore, it must be served at least 14 days after the Notice of Participation. Take note that these two notices are official, technical documents and require expert assistance. Therefore, it is advised to turn to a solicitor or a professional for their preparation.
Now, the moment you receive the notice of claim, it means that the Right to Manage Company has the intention of taking over full management of your property. Therefore, the RTM will tell you this:
- The date by which you are to respond
- The date the Right to Management company intends to start managing your property
After receiving the notice, you can accept the claim or make a dispute.
The notice of the claim will inform you of the exact time of making your claim. However, it is important to remember that the deadline for doing that cannot be less than a month from the time you receive the notice.
How To Dispute The Claim?
You are allowed to dispute the claim of the leaseholders to take over the management. You can do so by serving the counter-notice to the RTM company. While the notice should clearly show the reasons why the company shouldn’t manage the property, you may dispute the claim on the condition that:
- The building/property doesn’t qualify
- The RTM company’s failure to comply with all legal requirements
- The members of the RTM company don’t own half the flats within the building.
The counter-notice must be served by the date provided on the notice of claim. You may not dispute the claim using any other reason other than those highlighted above.
The Role Of The First-tier Tribunal
If the RTM members believe you are incorrect in disputing their claim, the RTM company must submit a right to manage application directly to the First-tier Tribunal (Property Chamber). It must be done within two months after submitting the counter-notice. Afterwards, the Tribunal then determines whether the RTM company is entitled to acquire the right to manage the building or otherwise.
Ultimately, if the Tribunal decides against your wish and determines that the RTM company is entitled to claim the right to manage, in that case, the RTM company acquires the right three months after the Tribunal’s decision.
In this regard, the date on which the RTM company takes control of the building is referred to as the date of acquisition. This date will be:
- The date indicated on the claim notice (i.e., if you decide to accept the claim).
- Three months after the decision made by the First-tier Tribunal becomes final, your disputed claim will not go through.
- Three months of the agreement. For instance, in case you had disputed the claim only to agree with the Right to Manage Company later.
Remember, on the date of acquisition, if there are any service charges that you collected but have not yet spent, you must transfer them to the RTM company.
Ongoing Management
The Right to Manage company should take the task of telling you everything within the 30 days before approving the following:
- The assignment (That is, selling or making the transfer of the flat to someone else’s name).
- A sublet.
- Changes to the leaseholders.
- Structural changes or improvements in the building.
But should the lease need your consent, the RTM company will need to give you a month’s notice before approving the following:
- Changes are happening throughout the building.
- Changes to the use of the property.
Similarly, for additional approvals, the RTM company needs to inform you at least two weeks in advance. Notably, if you do not respond to the notice, consent is treated as given. And if you object to their right to claim, you or the leaseholder can apply to the First-tier Tribunal to decide the matter.
Concluding Remarks:
Understanding the right to manage company formation gives leaseholders the ability to take control of their building’s management without buying the freehold. It allows the residents to oversee service charges, maintenance, and building standards to ensure their interests come first. Similarly, for landlords, it brings a change in their responsibilities rather than ownership, protecting their freehold rights. Nevertheless, everyone might not know how to benefit from the process of RTM leasehold. Likewise, setting up a right-to-manage company and adding members to it can become complicated for leaseholders.
Hence, it is wise to have a reputed and proficient accountant on your side.
In this connection, Clear House Accountants are specialised Service Charge Accountants who take immense pride in having years of experience working with landlords, developers, property management companies, and directors of RTMs. We have all-encompassing accounting outsourcing services, which can considerably help you focus on the effective management of your development. Thus, reach out to us to get effective accounting solutions in one place.
