The Residents Management Company and Right To Manage Company compared
Solicitors Specialising in Right To Manage Company formation
If you own a leasehold flat, service charges, like taxes, are unavoidable and generally unpopular. Recent research by Property Management specialists Keller Williams UK shows that most leaseholders are far from happy with the service charges applicable to them, with many considering them unfair. For this reason, leaseholders often set up a Residents Management Company (RMC) or exercise their right to manage by setting up an RTM Company.
This article sets out how each of these 2 models works and the advantages and disadvantages of each, providing you with the information required to decide which option is best for you and your fellow leaseholders.
Considering exercising your Right To Manage? Call our specialist Leasehold Solicitors on FREEPHONE 0800 1404544 for FREE initial phone advice – with no strings attached.
What are service charges?
Although you may have paid six or even seven figures for your flat or apartment, as a leaseholder, you do not own the land or the building, rather you have purchased the right to live in the property for a set number of years. The building is owned by the freeholder (although occasionally the situation is complicated when that freeholder grant a lease of the whole building to a company or individual who then grants ‘under leases’ to the leaseholders).
Leaseholders are required to pay a service charge to cover the upkeep and maintenance of the communal areas of a building as well as services such as security, concierge, heating, grounds keeping, and insurance.
RMCs and RMTs are two examples of legal entities that allow leaseholders to exercise management of the building in which their flats are contained in.
(NB there is one alternative, but rarely used way of leaseholders having some influence over the way their block is managed – click here to read about the Court Appointed Property Manager).
What is a Residents’ Management Company or RMC?
An RMC is a company formed to allow leaseholders to take over the management of their block or building. RMCs are non-profit companies and are normally formed by the developer. Leaseholders become shareholders of the company (one flat normally equals one share) and if one leaseholder sells their flat, their share in the RMC will usually pass to the new owner.
Under an Residents’ Management Company, the shareholders appoint a board of directors, who then hire a managing agent to facilitate maintenance and repairs of the communal areas, gardens, exterior of the building, collecting service charges, organising building insurance, rates, and taxes, and entering into contracts for security or concierge services.
Because an RMC is a company, directors have certain obligations, such as filing company accounts (if the company is dormant, this obligation is minimal), holding an AGM, ensuring shareholders can use their voting rights, and completing company secretarial duties, and any other duties listed under the Companies Act 2006.
The lease agreement will set out the duties and responsibilities of the RMC and its relationship with its shareholders.
Why set up a Residents’ Management Company?
The advantages of residents taking over the management of their block in this way include the following:
· As the shareholders/directors of an RMC are leaseholders, there is every reason for the company to succeed in its duties and manage the service charges responsibly. After all, if you are a shareholder or director of the company running your block, there is a huge personal incentive to both ensure a high level of maintenance and a reasonable price for doing so
· Shareholders have a right to be consulted on major work and Section 20 consultations, which must be held for any proposed work likely to cost over £250 or when a contractor is employed under an agreement that is to last 12 months or more, apply.
· Directors can take out insurance to cover any liability for mistakes they make.
· RMCs must hold two separate accounts; one for the service charge monies and the other for the company’s own funds. The service charge funds are held on trust on behalf of the leaseholders and are therefore not the property of the company.
What is a Right to Manage or RTM Company?
An RTM company is set up to facilitate leaseholders who have exercised their right to manage under the Commonhold and Leasehold Reform Act (CLRA) 2002. Under the CLRA 2002, qualifying leaseholders have the legal right to establish the RTM company and force the landlord to transfer the management of their building to it.
Leaseholders’ right to manage companies must be set up as a company limited by guarantee, with the leaseholders being members as opposed to shareholders (landlords can also be members). Its Articles of Association must follow a specified form set out in the RTM Companies (Model Articles) (England) Regulations 2009.
If a member sells their flat, they will usually need to resign from the RTM company. The new owner will then take their place. This often differs from RMCs, where a purchaser of a flat automatically acquires one share in the RMC once ownership is transferred. RTM companies are usually established because there is no existing Residents’ Management Company.
Once enough leaseholders had joined together to exercise their right to manage, the RTM company can immediately take over ‘management functions’, which include:
- services
- repairs
- maintenance
- improvements
- insurance
- management
Only the management functions that are given to the landlord or freeholder under the lease can be assigned to an RTM company. For example, an RTM company will not have the right to collect ground rent. Furthermore, only the landlord has the right and power to deal with re-entry and forfeiture.
The RTM company is responsible for enforcing the covenants under the leases held by the leaseholders. If a tenant breaches a covenant, then the RTM company must report the breach to the landlord.
Click here to read more about setting up a Right to Manage Company
Service charges are collected by the RTM company. Any accrued reserve or sinking funds set-aside for potential future major works must be responsibly managed.
Click here to read more about the leasehold sinking fund
Why set up a Right To Manage Company?
The advantages of an RTM company include:
· Assurance that the service charge funds are spent well as members have full control over costs and can shop around for the best deal.
· Full control also means that repairs and maintenance will be done to a standard acceptable to the members.
· All members have equal voting power at AGMs.
If you are considering exercising your right to manage, you might also want to look at the alternative of enfranchisement – i.e. joining together with some of your fellow flat owners to buy the freehold of your block together.
Click here to read more about the Pros and Cons of Right To Manage
Click here to read more about Leasehold Enfranchisement vs Right to Manage
RMC vs RTM Company – a summary
Both RMC and RTM companies must abide by strict rules and meet relevant statutory compliance. Directors must be prepared to take on significant responsibilities. It is vital to work with an experienced Leasehold Solicitor to ensure whatever the structure, the company is fulfilling its duties to all the leaseholders, as well as the landlord.
I am in dispute with my freeholder. Are there any alternative options ?
If however you are in dispute with the owner of the building, you do have other options apart from setting up a RMC or RTM company. And that includes exercising your legal right to buy your freehold with your fellow leaseholders.
Click here to read more about Freeholder Leaseholder Disputes
