The Comprehensive Right to Manage Qualifying Criteria

When the count falls short, a claim fails. That is not a hypothetical.

Consider a 20-flat Victorian conversion going through an RTM claim. To qualify, the group needs participation from at least 10 leaseholders: exactly half of the qualifying flats. Nine have signed their participation letters within the first two weeks. The tenth flat is owned by a buy-to-let investor who has relocated overseas. The name on the Land Registry entry is a UK registered address that is no longer current.

A specialist traces the leaseholder through the Land Registry, cross-references the flat title, and makes direct contact within 8 days. The tenth leaseholder signs electronically. The Notice of Claim is served with all 10 confirmed participants.

Had the notice gone out with 9 participants, the freeholder would have had clear grounds to issue a counter-notice disputing validity. Re-serving would have meant a minimum 14-day delay on top of fresh legal costs, with the freeholder now on notice of the group’s intent. The qualifying count is the foundation on which the entire claim rests. The rest of this guide explains exactly what that count requires.

What is the Right to Manage?

As mentioned in our first guide, the Right to Manage describes the right of the leaseholders of a building of flats to take over management of the building from the freeholder through an RTM company, as outlined in the Commonhold and Leasehold Reform Act 2002.

This right is exercised by serving an RTM claim (also known as a Notice of Claim) on the landlord and any other relevant parties, following the procedure in the legislation.

Right to Manage companies allows leaseholders to take back control of the decisions and management of their building, have direct say in and accountability for the running of their property, and manage costs effectively.

A professional managing agent can (and should) still be used if an RTM company is formed, who can act on behalf of the RTM company and assist with day to day property management. This is a responsible practice, as leaseholders that want to form a tenant management organisation and take back some control of their property generally have no experience in managing a property, but can still tell the managing agent what to prioritise and spend their money on.

Right to Manage Qualification Criteria

In order to form an RTM company, the building and tenants must meet specific qualifying criteria. Building qualification criteria for forming an RTM company include:

• The right applies to leaseholders of a building or part of a building containing at least two flats.
• At least half of the flats in the building that are held by long leaseholders must take part.
• At least two thirds of the flats in the building must be qualifying tenants. A qualifying tenant means that they are held on leases that were originally longer than 21 years when they were granted.
• No more than 25% of the building floor area can be classified as commercial.
• The landlord cannot be a local housing authority.

It is also important to be aware of Residents Landlord Exemption, which is when a house is converted into four or fewer flats, and the freeholder or an adult member of their family has lived in one of the properties as their principal residence for the last 12 months. If this is the case, the Right to Manage may not apply. For these purposes, an adult family member follows the statutory definition in the RTM guidance for landlords and typically includes a spouse, civil partner, children, step-children and parents.

The Count That Cannot Be Rushed

The 50% threshold applies to qualifying leaseholders, not to all flat owners. A flat held through a company vehicle, a flat where the lease has been recently assigned but the assignment is not yet registered at the Land Registry, or a flat where the original lease term cannot be confirmed from the title register: each of these can reduce the effective participant count on the day of service.

The correct approach: verify each flat’s qualifying status against current Land Registry data before any notice is issued. If a leaseholder cannot be confirmed as qualifying, they are not included in the participant count until verification is complete. That verification step is what the scenario above illustrates.

Right to Manage Company Formation Process

If your building and leaseholders fit the qualifying criteria to form an RTM company, the participating leaseholders must set up an RTM company using prescribed Articles of Association.

The Right to Manage company formation process is similar to normal company formation, but key differences are:

• An RTM cannot be a company limited by shares, it must be a company limited by guarantee.
• An RTM therefore cannot have Shareholders, instead has Members.
• An RTM must have prescribed Articles of Association as laid down in the statutory instrument. These prescribed articles and the way the company is structured are what give an RTM company its specific statutory definition under the Commonhold and Leasehold Reform Act 2002.

When forming a Right to Manage company, it is important to ensure that all the qualifying leaseholders and freeholders of your building are given the chance to become members of the company. The RTM company can then go on to serve the required notices as outlined below.

Right to Manage Notice and Timetable

Firstly in the Right to Manage process, a Notice Inviting Participation must be served on all leaseholders, management companies and the freeholder. (If you want to get rid of the freeholder completely, you will need to buy the freehold.) This is an important notice that involves a large number of requirements.

At least 14 days after the Notice Inviting Participation, and once the RTM company has a number of members equal to half the number of qualifying leaseholders in the block, the Notice of Claim may be served. Again, this is served on the freeholder, any intermediate landlords, and any management company named in the lease (if any). This formal Notice of Claim is the step that actually starts the RTM claim process and can lead to costs incurred by both the landlord and the RTM company in dealing with the claim.

By understanding the timeline and serving the appropriate notices, leaseholders can take back management functions and overall control of their property through forming an RTM company.

Acquiring the Freehold

Once an RTM company has acquired the management of a building, the same leaseholders can go on to purchase their freehold, but this process has to be done via collective enfranchisement, not RTM. In short, your RTM Company cannot acquire the freehold, but the same people can form a collective enfranchisement to acquire it if they want even more control of their building.

As a freeholder, you will be responsible for managing and maintaining the building, collecting ground rent and making any necessary major works. You may benefit by owning a share of your building’s freehold, as it provides you with a higher level of control over what happens in your building.

Overall, forming an RTM company can be a great way for leaseholders in a qualifying building to take control and manage their property as they see fit. Make sure you understand the eligibility criteria, how to go through the Right to Manage company formation process, serve the required notices, and potentially go on to acquire the freehold ownership of your building through collective enfranchisement.

Right to Manage vs Buying the Freehold

RTM gives management control without ownership. Buying the freehold gives full ownership of the land and building. The right choice depends on the building’s circumstances, the participating group’s budget, and the relationship with the freeholder.

RTM: no premium payable; main outlay is legal and professional fees. Freehold purchase: premium payable to the freeholder plus legal, valuation, and professional fees. RTM leaves the freeholder in place with ground rent and forfeiture rights intact. Freehold purchase removes the freeholder entirely and allows the new freehold company to grant 999-year lease extensions at peppercorn ground rent.

Court Cases

When a building is part of a bigger estate with community amenities, the question arises as to whether the RTM company has control over management in areas that are used in common with other buildings.

Previously, the Court of Appeal’s decision in Gala Unity Limited v Ariadne Road RTM Co Limited (2012) stood as a solid authority that the RTM company would acquire control of such areas. That has now been overturned by the decision in Firstport Property Services Limited v Settlers Court RTM Company Limited and Others.

In Settlers Court, the court did not allow the RTM company to take control of management of services provided to the estate (i.e. the part beyond the building), overturning Gala Unity which was a previous case that gave these rights.

With these court cases in mind, it is important to consider the potential limitations of RTM companies when forming one and in their future decision-making as a management body. It may also be worth seeking legal advice on any specific concerns or queries before proceeding with the formation process.

To wrap up

In conclusion, Right to Manage is a complex and in depth process with a number of qualifying criteria. It does not require payment of a premium, but it does require in-depth professional work, and even when you are finished the freeholder still has a say. As with any formal RTM claim, there will usually be professional and legal costs incurred, and the lease and legislation will dictate which of those can be recovered and by whom.

To remove the freeholder entirely, and improve the values of your properties whilst you are there, you may want to consider buying the freehold.

By purchasing your freehold, you have complete control over the management and maintenance of your building, as well as any potential increases in value. However, it is important to carefully consider all options available before making any decisions.

As always, seek professional advice before proceeding with any steps towards forming a Right to Manage company or purchasing the freehold of your building. Contact us today for a free assessment of whether Right to Manage or Freehold Purchase is the right route for you.

You can also check out our Freehold Purchase Calculator now for an instant estimation of the value of your freehold.

Book a free consultation

Right to Manage Criteria FAQs

Do I need to register my RTM company with Companies House?

Yes, an RTM company needs to be registered with Companies House. Although RTM companies are limited by guarantee, not shares, so they have members, not shareholders, they are still required to register with Companies House in order to maintain their legal status as a limited company.

Does my RTM company meet the criteria to purchase our freehold?

No, your RTM company cannot purchase the freehold. However, the same members of an RTM company can purchase the freehold through collective enfranchisement. If you want to find out more about buying your freehold, contact us today.