What is a right to manage (RTM) company?

The right to manage can only be sought via an RTM company, a private company limited by guarantee that has been incorporated for the purpose of a) achieving the right to manage and b) the ongoing management of the block.

Forming an RTM company and acquiring control of building management from the freeholder is a statutory right.

The main reasons for forming a right to manage company are:

• Financial control. Leaseholders can gain control over service charges and all other expenses. A common complaint of leaseholders is that service charges are not capped and can be unreasonably high and/or change unexpectedly.
• The power to choose when and how services are carried out and which contractors perform them.
• Democracy and fairness. Every leaseholder has an equal vote on company matters.
• Focus. An RTM company exists to manage a single development and is tightly focused on it. This can make it an efficient way to manage a block in terms of timings and costs.

Exercising the right to manage does not need to be a hostile takeover by disgruntled leaseholders (although it certainly can be). When forming an RTM company it is worth being aware that the freeholder also has the right to be a member of it.

RTM company structure

A right to manage company must be limited by guarantee, with each leaseholder typically contributing a nominal £1 as the extent of their liability. There are no shares, shareholders or capitalisation; the company exists on a not-for-profit basis.

A right to manage company’s articles of association must contain certain provisions prescribed by law. Chief among these is a statement that the company’s principal object is to achieve and exercise the right to manage for its members (the leaseholders).

A right to manage company must be limited by guarantee.

RTM vs RMC

RTM companies may seem similar to residents’ management companies (RMCs), and they do have similar purposes, but there are differences.

Residents’ management companies (RMCs) are set up by the leaseholders or the original developers of a property. They are often set up as part of the lease. Their purpose is to allow the leaseholders to collectively manage the communal areas of the property such as staircases, hallways, and gardens. RMCs are responsible for ensuring that communal areas are well-maintained and for arranging services such as cleaning and gardening. However, unlike an RTM company, an RMC does not have the power to take over the management of the property from the freeholder. An RMC does not need to be a company limited by guarantee – it can be limited by guarantee or shares.

In contrast, RTM is a statutory right and a legal process provided for by the Commonhold and Leasehold Reform Act (CLRA) 2002. RTM companies are set up with the sole purpose of exercising the right to manage and seeing it through to completion. Once the right to manage has been acquired, the RTM company then manages the development via its members – the leaseholders. RTM companies take over responsibility for the management of the property, including tasks such as maintenance and repairs, insurance, and service charge collection.

RTM companies are a government-sanctioned vehicle with strict rules for their formation and governance, such as having to adopt specific articles of association. RMCs are not so restricted in their constitution and governance.

Do I qualify for RTM?

This depends on the property and leaseholders. To qualify for RTM they must satisfy these conditions:

• At least 75% of the floor space must be residential. A large shop on the ground floor with a couple of flats above it might not satisfy this condition
• At least two thirds of the leases must be longer than 21 years
• There must be at least two leasehold flats in the ‘block’
• At least half the leaseholders in the block must participate in the RTM company. If there are only two flats then both must be members of the RTM company.

What does an RTM company manage?

A right to manage company can only deal with matters concerning the whole property, not one unit or any other subdivision of the property. The landlord may not carry out work to the property without the agreement of the RTM company. But when major changes such as structural alterations are envisaged the consent of all parties must be obtained.

The directors of an RTM company are nearly always unpaid volunteers but will have responsibilities as company directors. In addition to these they are responsible for the day-to-day management of the block. Block management includes:

• Collection of service charges from leaseholders
• Enforcing terms and covenants of leases
• Resolving disputes with and between leaseholders
• Repairs and maintenance
• Services and utilities
• Improvements
• Buildings Insurance
• Fire and health & safety compliance
• Cleaning and waste collection
• Employing and managing security/concierge people
• Compliance with housing law
• Asbestos management plan, if applicable

The board may vote to employ the services of a professional property managing agent to take on these responsibilities and roll the costs into the service charges. Like any other limited company, there should be an AGM at which such issues are voted on.

RTM company filing requirements at Companies House

Every UK limited company must stay up to date with registry requirements like confirmation statements, accounts and changes of key company officers. RTM companies also have to update their register of members whenever one leaseholder leaves or another joins the company.

Inform Direct manages all this as part of its across-the-board coverage of company secretarial tasks. A useful feature of Inform Direct for property management companies is the ability to bulk import members from a spreadsheet. This saves time and with the necessary information in the system, membership certificates can be generated and distributed to members quickly and easily.

How long does it take to get the right to manage?

Right to manage is a legal process and acquiring it can take time. A series of steps must be followed including Land Registry searches and the serving of various notices. Principal among these is the notice to the freeholder of claim to acquire right to manage under section 79 of the Commonhold and Leasehold Reform Act 2002.

It can take about six months to acquire RTM if things go smoothly and no steps are contested. If the freeholder does contest the RTM application, the RTM company is liable for his legal costs as well as the legal costs of fighting the challenge. The leaseholders should have funds in reserve for this eventuality.

Commonhold: the property management idea that never caught on

Another option was introduced in 2002 by the same Act that introduced the right to manage. A ‘commonhold association’ is a new type of property management entity that manages the common parts of a property while each flat owner has the freehold of their own ‘unit’. Commonhold is similar to the condominium concept popular in the USA. But in the UK it has been a complete flop. Virtually nobody has taken up this option and the old freehold/leasehold arrangements have continued as before.

RTM vs. collective enfranchisement

Leaseholders can go one step further and gain more control by collectively acquiring the freehold. This is known as collective enfranchisement and it effectively turns leaseholders into their own landlords. Collectively owning the freehold gives them control over ground rents and the leases themselves, for example extending them or changing their terms.

Collective enfranchisement usually also entails setting up a company, but it will generally be a private company limited by shares rather than by guarantee. Such companies are not required to have specific objects in their articles of association or to be companies limited by guarantee, as is the case for RTM companies.

Collective enfranchisement is also a statutory right, in this case under the Leasehold Reform Housing and Urban Development Act 1993. It involves more legal steps than RTM and hence will be more costly. It is also likely to take longer – typically twelve months as opposed to roughly six for RTM. RTM can be a cheaper and faster option for gaining control of the management of a residential development.