The Commonhold and Leasehold Reform Act 2002 introduced the Right to Manage (RTM).
Subject to meeting several conditions, leaseholders can set up an RTM company for taking over the management of their property. The RTM is significant because leaseholders are given the right by law without having to litigate for it.
The qualifying conditions stated in the Act are as follows:
- The building must be made up of flats (houses don’t qualify)
- At least two-thirds of the flats in the building must be leasehold - with leases that were for more than 21 years when they were granted
- At least 75% of the building must be residential - for example, if there’s a shop in the building, it can’t take up more than 25% of the total floor area
- The owner of the freehold must live somewhere else if there are less than four flats in the block - unless the block was purpose-built as flats, rather than converted from another type of building
- Any number of owners can set up an RTM company - but at least half of the flats in the building must be members of the company before it can take over management
Choosing the Right to Manage
Leaseholders usually choose to manage their own property so that they have control over costs and standards of maintenance. Management of the property will give leaseholders responsibility for tasks such as the following;
- Collecting and managing the service charge
- Upkeep of communal areas (such as shared hallways and stairs)
- Maintenance of the structure of the building (such as the roof)
- Dealing with complaints about the building from other leaseholders
- Security of property.
It is quite common to appoint agents experienced in property maintenance to manage the building on behalf of the RTM company and leaseholders. Please note that Right to Manage companies cannot acquire or own the building in which you are a tenant.
Procedure for obtaining RTM
The following sets out the procedure for taking over the management of a building, under the Commonhold and Leasehold Reform Act 2002.
- Ensure that membership of the RTM company has reached 50% of the qualifying leaseholders.
- Serve the Claim notice upon the landlord. The notice advises the landlord of the RTMs intention to acquire the right to manage the property. The notice must specify a date of at least three months from the date on which the notice expires from which
- The landlord has one month to reply.
- If the landlord does deny the RTM the right, he has to do so in the correct format. The RTM must then apply to the First-tier Tribunal (FTT) for a determination. Providing the RTM has met its qualifying conditions; they will not be denied. The challenge is more likely to relate to costs.
- If the landlord does not respond with an adequate counter-notice, then the RTM can proceed to take over the management of the building.
- Depending on the response of the landlord, the RTM can be accomplished in as quickly as four months. If the landlord is difficult or has reasonable objections for denying the leaseholders the RTM, the process can take longer to resolve. The landlord is entitled to recover from the RTM, their reasonable costs in dealing with the claim
Forming a Right to Manage (RTM) Company
The following sets out the requirements of an RTM company under the Commonhold and Leasehold Reform Act 2002:
- An RTM company must be Limited by Guarantee and not by shares.
- An RTM company cannot be exempted from using the suffix “LTD” or ‘LIMITED”- Even though the RTM company is limited by guarantee and non-profit making, it does not meet the criteria for exemption.
- Company name-The name of the company usually refers to the address of the premises and states that it is an RTM company, for example, “27 Old Gloucester Street, RTM company LTD”.
- Objects Clause in the Articles of Association- Unlike normal commercial companies, the objects clause in the Articles of Association, must expressly state the RTM company’s objects. When you use our service, the Articles of Association that will be used to form your company comply with the requirements of the Act.
- An RTM company must be a Not For Profit company- Our Articles of Association include a clause stating that any income of the company will be applied to promoting the company’s objects and will not be distributed except in the event of a winding-up.
- SIC code-When forming an RTM company should be 98000 (residents property management) or 99999 (dormant)
The following sets out the tax position of an RTM company.
- You may not have to file more than one corporation tax return or pay tax if the following applies:
- The only money received by the company is the service charges from the owners of the flats on whose behalf the building is being managed. Accordingly, the company cannot earn income from any other trading activities, such as providing car parking to non-residents.
- The company cannot receive investment income such as deposit interest or any other incidental income
- The income is applied to the cost of maintaining the building
- Any surplus is set aside for future building maintenance
- The company cannot appoint a director who is not a resident of the building.
- You do not pay dividends or distribute profits from managing the building
- The company does not own any assets which are likely to be disposed of for gain.
- The company does not make payments that need to be taxed.
- After the first Corporation tax return has been submitted, HMRC may advise the company that it considers it to be dormant and will not have to file future tax returns.
- If the activities of the company change the directors are obliged to inform HMRC who will then issue requests for future tax returns.