A Right to Manage Guide for
How Right to Manage Works
In order to be eligible for the Right to Manage (RTM) both the premises and the applicant leaseholders must meet a statutory criteria. RTM only applies to leaseholder owners of flats and not to leasehold houses or bungalows.
The premises will qualify if they consist of a structurally detached building or part of a building that can be served independently, they contain two or more flats held by qualifying tenants, and at least two-thirds of the flats are leased to qualifying tenants.
The premises will not qualify if more than 25% of the floor area is non-residential, if there are self-contained parts owned by different landlords, if it is a property owned by the local authority, or it is a building of four or less flats with one flat being occupied by the landlord as his principle home.
A qualifying tenant is a leaseholder whose lease was originally granted for a period exceeding 21 years. Where a flat is being let under two or more long leases, a tenant that holds the superior lease is not the qualifying tenant.
RTM is only exercisable through a RTM company set up according to statutory regulations. A RTM company must be a private company limited by guarantee and its articles of association states that its object, or one of its objects, is the acquisition and exercise of the right to manage the premises.
All qualifying tenants are entitled to become members of the RTM company, with individual liability limited to £1. The landlord also has the right to become a member of the RTM company after the Acquisition Date as he retains an interest in the property and his membership is usually limited to a single vote.
Since November 2009 RTM companies only require a single director, but larger blocks will typically be comprised of a board of three or more. There is no requirement for directors to be leaseholders, however in this event it is usually recommended that a majority of directors are leaseholders and preferably resident leaseholders, so as to avoid disproportionate influence from persons not experiencing day to day living at the property.
The freeholder has no legal right to be a director but is entitled to a single membership of the RTM company.
Legally, you do not need a majority to proceed. As long as at least half the leaseholders in the block are in support of RTM the process can proceed. However, it is generally advisable to aim for at least two-thirds to become members of the RTM company. This also avoids any criticism that the procedure is undemocratic.
The exercising of RTM is started by the formation of the RTM company with leaseholders as founding members and at least one leaseholder as a director. Once the RTM company is established it must serve the required legal notices, including a notice on your landlord/freeholder advising that leaseholders will be exercising their statutory right to manage. So long as the statutory conditions are met the landlord has no legal grounds to object and the right to manage is determined a month later with the RTM company taking over the management a further three months later.
Note: The RTMF does not manage properties or recommend specific management companies. We have no agreements with management companies and we do not receive commission from management companies. However we will provide impartial guidance and on occasions we may advise against management companies that are financially unsound or have a poor track record and previously proved unsatisfactory
Do You Qualify for RTM
In order to qualify for Right to Manage the following must apply:-
- The premises must be a structurally detached building or self-contained part of a building.
- The premises must have at least two flats.
- At least two-thirds of the flats must be owned by “qualifying tenants”.
- If part commercial the non-residential part must not exceed 25% of the total floor area.
- At least 50% of the leaseholders in the premises must be in agreement to proceed.
- If your building is a converted property of four or fewer flats, the premises will not qualify if either the landlord or an adult member of the landlord´s family occupies one of the flats as their principal residence.
- The local authority is not the landlord of any qualifying tenant.
The RTM Process
Leasehold is almost unique to the UK. Most other countries in the world have adopted a form of common hold whereby apartment leaseholders own the freehold between them and collectively manage the building. In America and other countries of Western Europe these are called condominiums.
Under the UK leasehold system purchasers do not actually own their flats or apartments but rent them for a long period typically 99 years, 125 years or sometimes 999 years. Instead of paying monthly rent leaseholders pay a larger sum up front, which guarantees their exclusive use of the property for the whole period of the lease.
The landlord retains the common parts, such as the lobby, stairs, corridors, office, and house manager's accommodation, lounge, laundry and guest room where applicable. But these have very limited value because they cannot be sold as they have been contracted to leaseholders' use and benefit under the lease. As a consequence the value of the freehold is effectively the discounted value of properties at the end of the lease plus the value of the income stream the freehold can yield by way of rent such as ground rent.
The value of the freehold is determined by a calculation that translates the future property value plus income the lease will yield into a present day sum of money. The income is primarily the monies all lessees are required to pay by way of rent, excluding service charge contributions. In most leases with over 80 years to run the leaseholders' interest far outweighs the freehold interest in the property.
The freeholder and the leaseholder have rights and obligations as set out in the lease. The freeholder's chief obligation is to collect service charges, maintain and insure the structure of the building and ensure individual leaseholders abide by covenants in the lease, such as not creating noise or nuisance to neighbours.
The freeholder may decide to manage these tasks itself or it may appoint a managing agent to look after these matters on its behalf. In return for meeting these obligations the freeholder is entitled to charge a management fee and leaseholders will usually pay this fee and all the other expenses of maintaining the building by way of an annual service charge as set out in the lease. Usually all leases for a block will be substantially the same.
In recent years many profit-seeking freeholders have seized the opportunity to extract more monies from leaseholders, often by unethical means. By managing the building themselves, or via management companies they own, some freeholders are taking generous commissions and handling fees for many of the services provided, such as insurances, lift maintenance, security and fire alarm maintenance etc.
On retirement estates some freeholders have found ways to start charging leaseholders an annual rent for the use of facilities previously provided free of charge, such as the use of the scheme manager's accommodation and office. Some have even started charging a rent for the use of the guest suites; others require lessees to pay the freeholder a transfer fee every time a lease is assigned.
It is against this background and after considerable consultation in the industry that Parliament introduced further legislation to address the imbalance in leaseholder rights. In view of the fact that leaseholders' collective investment in a block of flats far outweighs the freeholder's interest Parliament properly decided that leaseholders should have the absolute right to acquire the right to manage the block or appoint a managing agent of their own choosing.
These measures were introduced in The Commonhold and Leasehold Reform Act 2002 and became effective in 2003. If you are a long leaseholder in a qualifying block of flats it is your statutory right to benefit from this legislation.
By far the most common leasehold issue is the level of service charges. By law service charges must represent the actual expenditure incurred in providing the services stipulated in the lease and the cost must be reasonable.
The lease may also require that leaseholders contribute towards a sinking or reserve fund to provide for the future maintenance of the property. These contributions must be reasonable and would usually be based on a professional survey of the property. Service charge monies and reserve funds are held by the landlord on automatic statutory trusts and must be retained in separate bank accounts designated for the benefit of the relevant leaseholders.
Leaseholders have statutory rights in relation to service charge demands. These include the right to obtain a summary of all the costs and the right to look at the accounts, receipts and other documents on which they are based. Leaseholders have a right to be consulted on all major works that exceed £250 per leaseholder and on any long-term agreements exceeding £100 per leaseholder per year.
A landlord can only recover costs that are notified to leaseholders within 18 months from the time the costs were incurred.
The usual remedy to leaseholders subjected to unreasonable service charges is an application to the local Leasehold Valuation Tribunal (LVT) which has jurisdiction to determine such claims. LVT´s are not unfriendly places and are used to dealing with leaseholders in person. An application to the LVT incurs a flat fee of two or three hundred pounds and unlike the civil courts leaseholders would not generally be liable for the landlord´ legal costs.
Rent for managers accommodation
It is commonplace for landlords and managing agents to charge leaseholders rent for the use of the caretaker´s or house manager´s accommodation and office. Whether or not such a charge is justified depends upon the precise wording of the lease. This issue has already come before the LVT, the Upper Tribunal and the Court of Appeal and the guiding principles are now well defined.
Unless a specific rental charge is spelled out in clear and unambiguous terms in the lease, using words an average man in the street would readily understand, the charge is not justified and cannot be applied.
Some leases allow 'the cost of the warden's accommodation' to be included under service charge expenditure. Although this is intended to refer to the cost of upkeep and maintenance, profit-seeking landlords have argued that this also entitles them to charge a rent. They argue that in providing a flat for the warden or manager they gave up income that would otherwise be derived and they seek to recover this 'income foregone' as a cost. The Court of Appeal has rejected this argument and determined that whereas income foregone may well be a 'cost' it is not 'expenditure' of the type to be included in the service charge.
It is also relevant to point out that in most blocks of retirement flats the developer of the estate would usually have already obtained compensation for the provision of facilities such as house manager´s accommodation, guest suite, lounge and laundry etc. Insofar as the provision of these facilities is usually essential in order to obtain planning consent, the compensation to the developer is the increased value of the land due to planning consent, without which the development could not proceed. These requirements are often incorporated into section 106 planning agreements (previously known as section 52 agreements) otherwise known as planning benefits for that reason.
Some recently drafted leases state clearly and specifically that a rent is payable for some or all of the above facilities. A developer may give up a certain amount of space to provide these facilities but as stated that is usually compensated at the planning stage and in the opinion of this website it is unethical and unfair to make an additional recovery from leaseholders, especially retired pensioners.
Frequently Asked Questions
What is the Right to Manage?
The Commonhold and Leasehold Reform Act 2002 introduced a right enabling leaseholders to take over the management of their building by setting up an RTM company. Leaseholders do not have to prove that the current landlord or property manager is at fault. The Right to Manage company assumes full management responsibility for the building and is free to appoint any property manager of its own choosing. Right to Manage was first exercised by leaseholders in retirement estates in 2006.
What is the purpose of Right to Manage?
It is intended to put power and control back in the hands of leaseholders, thereby driving up the standards of leasehold management and providing leaseholders with the statutory power to resist exploitation by less scrupulous managers and freeholders.
Does the RTMF get commissions from Managing Agents?
The RTMF receives no commission from managing agents. Our advice is independent and unbiased. Leaseholders frequently select a management company that the RTMF has not previously experienced, in which case we assist with tested and proven evaluation procedures and impartial guidance. Occasionally we may advise against an agreement with a company that appears financially unsound or has questionable references.
How does it work?
The first step is usually a no-obligation RTM presentation to leaseholders in your estate lounge or at a nearby location. If RTM has support , the next step is the incorporation of your Right to Manage Company with 50% or more leaseholders as founding members and at least one leaseholder as a director. Once the RTM company is established, the RTMF will set up all the legal procedures and serve the required legal notices including a notice on your landlord/freeholder advising that leaseholders will be exercising their statutory right to manage. So long as the statutory conditions are met the landlord has no grounds to object and the legal right to manage is determined a month later (The Determination Date). Your RTM company will take over the management 3 months later (The Acquisition Date)
The final step is for you to appoint a managing agent of your choice and on your terms to provide the ongoing management service to your estate. In the 3 month interval between the Determination Date and the Acquisition Date the RTMF sets up a Selection Committee comprising the nominated directors and volunteer leaseholders and arranges for short-listed management companies to make presentations at your estate. The RTMF does not recommend specific management companies but does assist you in identifying the key information required to help you vet those selected. The RTMF offers a template Management Agreement which can be modified to suit your specific needs and we help in negotiating your final agreement to ensure you will get the services you require.
How many directors are required and do they have to be residents?
The RTM company is only required to have one director but will typically have 3-5 directors. There is no requirement for directors to be residents and often relatives of residents will volunteer to join the board. In this event it is usually recommended that the majority of directors are resident so as to avoid disproportionate influence from persons not experiencing day to day living at the property. The landlord has no legal right to be a director but would be entitled in the unlikely event it was requested.
What sort of majority do we need to go ahead?
Legally, you do not need a majority to proceed. As long as at least half the leaseholders in your block of flats are in support the Right to Manage process can proceed. However, to continue with only 50% support could be divisive and in practice when the benefits of right to manage are explained to all leaseholders most will support the idea.
What are the responsibilities and liabilities of RTM directors?
All directors have a responsibility to serve the best interests of members of the RTM Company and insofar as the main object of the RTM company is the management of the property; directors’ responsibilities extend to all leaseholders of the estate. (They cannot treat non-members as second-class residents just because they choose not to be RTM members.) RTM Companies that appoint a managing agent do not retain responsibility for the day to day management of the estate as it is delegated to the appointed management company.
If the management company meets all its obligations the RTM directors should have very little work themselves. However the RTM company and its directors do remain legally liable and it is important for the board of directors to insure themselves against claims of negligence or incompetence. This typically costs about £200-£300 per year for all directors. The directors are also liable to keep a register of members, make annual returns and prepare annual accounts although this work is typically delegated to a professional service provider at a minimal annual cost of a few hundred pounds. The role of director may sound daunting but with the responsibilities properly delegated it is easily manageable and there are many RTM directors in their eighties who enjoy this privilege of service and perform the task with exemplary efficiency.
Do we need to hold a secret ballot?
RTM legislation does not require a ballot. Support is usually determined by a show of hands at a meeting of leaseholders called for this purpose. If support is marginal or there is an indication some residents are being intimidated a ballot may be utilised but it is not possible to make it a secret ballot because it is a statutory requirement to disclose to the landlord the names of those leaseholders supporting RTM.
Will we be able to rely on our new managing agent?
All reputable managing agents should undertake to operate to a code of practice. The Association of Residential Managing Agents (ARMA) adopts the code of practice of the Royal Institution of Chartered Surveyors (RICS). The Association of Retirement Housing Managers (ARHM) has its own government approved code. For retirement estates we generally advise against any managing agent that is unwilling to commit to the ARHM Code of Practice. In addition, our standard management agreement includes the obligation not to take undisclosed commissions on any of the services provided, guaranteeing that leaseholders get the best value for money.
Will appointing another managing company solve our problems?
Nothing can be 100% certain. If there has been a history of neglect by the previous management it may take time to turn things around. However your new manager will know that if they do not meet your expectations, you can replace them. This will be a powerful incentive for them to improve standards, control costs and keep all the promises they make to you.
What about our landlord´s costs?
The landlord may seek to charge its costs incurred in the transfer process, for example accounts and audit costs. By law, any costs must be reasonable and in the event of a dispute, can be decided by the FTT. These expenses will be minimal (typically between £500 and £2,000 depending on the size of the block) and will usually be borne by the RTM Company after Acquisition Date.
Can we expect to save any money?
Yes, most probably. Many leaseholders are facing excessively high charges for items such as insurance, alarm monitoring and maintenance contracts purchased at uncompetitive prices. By appointing your own managing agent on your specific terms you can require that the agent spends your money to benefit leaseholders not the landlord. This may result in thousands of pounds in overall savings or alternatively, if leaseholders prefer, it may result in an improvement in services at no extra cost. At the end of the day, you the leaseholders decide. The Competition & Markets Authority Residential Property Management Services (RPMS) market study published in December 2014 advises that “where residents have an RTM company their degree of satisfaction over RPMS is higher”.
Who owns the freehold after Right to Manage?
The ownership of your freehold will not change. Your freeholder will retain all the obligations and responsibilities previously held under the lease apart from the management responsibilities, which will pass to your selected management company. If provided in the lease your freeholder will continue to collect the ground rent. The freeholder also has the right to become a member of the RTM company after the Acquisition Date as it retains an interest in the property. The freeholder’s vote is usually limited to a single share. Otherwise, the freeholder will have no involvement in the day to day running of the property.
Will we still pay rent for the manager´s accommodation?
Whether or not the freeholder can collect rent for the use of the house managers flat (called warden´s flat or caretaker´s flat in earlier leases) will depend on the wording of your lease. If the lease clearly and unambiguously states that a rent is payable then you are probably required to do so, although the rent must be reasonable. If a rent is not clearly specified in your lease in terms an ordinary person would understand, then the rent can probably be successfully challenged. In our experience many leaseholders are paying rents they are not legally required to pay. Some landlords are charging excessive rents and the courts are already beginning to rule against such unreasonable charges.
What happens to leaseholders funds?
All leaseholders' funds which are held on trust by your existing manager or freeholder must be handed over to the new manager on the Acquisition Date. In practice the outgoing manager may withhold a small percentage of funds until the current year´s accounts are audited up to the Acquisition Date. Otherwise all funds in reserve fund accounts, sinking funds and future maintenance funds must be transferred to trust accounts in leaseholders´ names and operated by the new manager. Your new manager will organise the transfer of your service charge payments and advise you of any changes to your standing orders or direct debts.
Are there any disadvantages to Right to Manage?
Managing a block and running a company are important responsibilities which should not be undertaken lightly. It is for this reason that it is generally recommended to appoint a professional managing agent. Right to Manage requires careful thought and planning but the RTMF scheme simplifies the process and looks after all the procedures and executive functions on leaseholders´ behalf, working alongside your nominated directors. With the administrative side handled by the RTMF and the cost controlled and minimised, leaseholders will usually find that the benefits of Right to Manage clearly outweigh any potential risks. If you are considering RTM the best advice is to consult with other estates that have already exercised RTM.