Enfranchisement and RTM Update – November 7th, 2023 – the King’s Speech confirmed the UK government’s intention to extend both the right to enfranchise and the right to manage to more buildings by increasing the current limit on non-residential floor from 25% up to 50%. If enacted (and the government does have a very busy timetable to fit in before the general election in January 2025 at the latest), this will enable more leaseholders to buy their freehold or take over management of their block.
Leasehold enfranchisement ( often referred to as ‘freehold purchase’ or ‘collective enfranchisement’) refers to a group of tenants [technically leaseholders], who own flats in the same building, collectively purchasing the freehold interest from the landlord. Leaseholders’ Right To Buy Your Freehold is a legal entitlement under the Leasehold Reform Act (1993).
The right to enfranchise lets the tenants become their own landlord – and it also allows those leaseholders who now own the shared freehold to grant themselves long leases of up to 999 years with no ground rent.
In contrast, the Right to Manage (RTM) is a legal right that allows leaseholders in a a multi-unit property to take over the management of their building from their freeholder. This includes the responsibility for repairs, maintenance, and other services related to the building.
But in deciding which of these 2 ways forward suit your particular circumstances, you need to consider both the pros and cons of right to manage and enfranchisement
Want to know more about Leasehold Enfranchisement or the Right to Manage? Call our specialist solicitors on FREEPHONE 0800 1404544 for FREE initial phone advice – with no strings attached.
Whether you want to buy the freehold of your block or exercise your right to manage of your block, there are complex areas of law and procedure involved. Very few law firms deal with these kind of property issues on a regular basis.
But don’t just take our word for it. Our expertise is why;
1. We are the sole partners of The HomeOwners Alliance – we are the only solicitors recommended for enfranchisement and right to manage advice by the only organisation championing and supporting Britain’s 17 million homeowners.
2. We are Progressive Approved Solicitors– we are one of only three law firms recommended and formally approved by Progressive Property – the UK’s largest property investment education company
How do I qualify for enfranchisement?
For a group of leaseholders to exercise their Right to Enfranchise, the following conditions must be satisfied:
- There must be at least 2 flats held within the freehold of the property
- No more than 25% of the freehold building must be used for non-residential purposes
- At least 2/3 of the flats must be let to qualifying leaseholders
- As a minimum, 50% of the flat owners must want to participate in the enfranchisement
- A qualifying leaseholder is one whom holds a lease granted for 21 years or more.
If any of these criteria apply to you, then your freeholder can refuse to sell the freehold.
Unlike a lease extension however, there is no need for a tenant to have at least 2 years ownership of the flat. Equally, you never need to have actually lived in the flat – so it’s often quite popular with buy to let investors who are particularly keen to keep the cost of block maintenance down.
Enfranchisement may also involve some additional costs for leaseholders – as it’s usually more complicated to keep a group of people continually involved in this kind of legal action – and of course the costs in the eventual management of the block.
Leasehold enfranchisement – the advantages
In most cases, leaseholders in a block of flats can benefit hugely from collective enfranchisement. Buying a share of your freehold gives you the greatest control and is probably the best option, if you can afford it. In particular you and your fellow leaseholders are likely to benefit from the following:
• You gain full ownership of your flat and take over the running of the common areas – instead of just having the legal right to live there until the lease expires.
• If you own the freehold of the property you will no longer have to pay ground rent
• You can choose new service providers who offer better value for money than the service providers chosen by the previous freeholder.
• Buying the freehold can add value to your property. It is often difficult for buyers to secure mortgages on flats, especially if the lease is running down, so a very long lease flat (up to 999 years) plus a share of the freehold is likely to be more attractive.
• As a leaseholder you can be subject to conditions restricting letting and keeping animals in the property for example. Freeholders are generally not subject to such restrictions.
NB although the process is quite different, leaseholders buying the freehold after is it has been offered to them by the freeholder under what is known as the freehold right of 1st refusal,or ROFR, produces the same result – leaseholders owning the freehold. And as a result the advantages and disadvantages are the same as with collective enfranchisement. exactly the same advantages.
Click here to read more about the Right of 1st Refusal
Leasehold enfranchisement – the big disadvantage?
The biggest problem you are likely to come across when exercising your right to enfranchise is probably not the law, the procedure or your freeholder – but getting the initial agreement and then keeping the involvement of your fellow leaseholders.
This is not so much of a problem with small blocks, but the larger blocks get, the more of a real obstacle this issue becomes.
That’s where a participation agreement can help.
Click here to read more about Enfranchisement Participation Agreements
It is, of course, true that the right to manage also involves working together with your fellow leaseholders. And that’s exactly why lease extension itself is far more common than enfranchisement or exercising the leaseholders’ right to manage.
Leasehold Enfranchisement vs Right to Manage – the difference in costs
But another of the biggest differences between RTM and property enfranchisement is the cost.
The cost for exercising the right to manage is broadly legal fees and other professional and administrative costs. But when purchasing your freehold, you have to add own and your freeholder’s surveyor’s costs to value the price of the premium – and most importantly the premium for buying the freehold itself .
Getting and maintaining the agreement of a sufficient number of your fellow leaseholders to come up with enough cash can be a real problem. And that’s exactly why the right to manage is generally more popular than freehold purchase.
Click here to find out more about Lease Enfranchisement.
Right to manage
One alternative to leasehold enfranchisement, if you want to gain more control of your block, is the right to manage (or RTM) – a statutory right awarded to tenants under the Commonhold & Leasehold Reform Act (2002).
The right to manage does not involve buying the freehold of your block. Instead it merely gives tenants the legal capacity to manage the landlord’s building in which their flat is situated. Normally the tenants will form a Right to Manage Company ( also referred to as Residents’ Management companies), to deal with management of the property.
The right to manage gives responsible tenants the opportunity to manage their own living environment – and you don’t need an incompetent landlord to exercise your right.
When exercising your right, you and the other participating leaseholders will also have to pay the costs associated with your RTM company formation – and in registering the new company with Companies House. You will also need to bear in mind the annual costs that will be associated with the right to manage company (if you choose to get an accountant to take care of your returns, for instance).
Right to manage – the disadvantages
The Right to Manage Process isn’t likely to be the complete answer to all your block management problems. In particular, it does have some disadvantages:
• Firstly remember that RTM is very limited. The RTM company can only protect funds for leaseholders and will only generate such funds through service charges. And remember that your service charges will only be lower if you find a more efficient or cheaper way of getting maintenance work done – or you cut down on maintenance work, which is probably the last thing you want to do!
• The freeholder still remains in ownership of the building. That means that the RTM company may have a difficult relationship with the freeholder whose permission will still be required for alterations and lease extensions, for example,along with any other non-management duties set out in the lease. And it’s possible that they may become more awkward if you have removed their ability to manage the block they own. You should also be aware that the freeholder can also become a member of the company if they wish.
• Do be aware, that like the company set up to buy the freehold in the enfranchisement process, the Right to Manage company may become vulnerable to the criticism from individual Leaseholders – including those who did not take part in buying the freehold
• Enforcement of paying service charges can also be a problem – because leaseholders who perhaps have not paid a service charge or have breached their lease may not respect the authority of other leaseholders. It can sometimes be particularly awkward for leaseholders to take action against a neighbour
• Running a Residents’ Management company can be very time consuming. Their success relies on members spending their spend time on administration and organising the maintenance of the block. This can be reasonably straightforward where just two or three flats are involved but in the case of large blocks of flats, it is not unusual to find that many members simply don’t pull their weight.
• Furthermore the landlord’s legal costs when you exercise the right to manage must be paid for by the RTM company .
Although there are certain short term advantages to RTM, we advise clients who are thinking about it to consider the collective enfranchisement process instead because of its long term plus points.
Exercising your right to enfranchise offers by far the greater freedom and it therefore the best way of gaining greater control over block management.
However, leaseholders are often priced out of the costly enfranchisement process or they cannot get at least half of the leaseholders in the building to agree to join the collective enfranchisement effort.
RTM – the advantages?
One clear advantage of RTM is that it allows a fair service charge to be set and prevents the landlord being able to charge extortionate amounts for property maintenance.
For whatever reason, RTM is viewed by many as an easy option but this is a dangerous viewpoint. the process of exercising the right is generally easier than leasehold enfranchisement – not least because it doesn’t involve the expense of a number of people coming together to jointly buy the freehold.
However,RTM doesn’t automatically correct what has gone on before in terms of poor management or automatically avoid hefty service charges. It will simply pass all responsibility for management from the freeholder to the new RTM company. The company may often be short of funds and could struggle to generate sufficient revenue from service charges. If this is the case, an application to the First Tier Property Tribunal for Reasonableness of Service Charge action or a Court Appointed Manager may be required.
RTM can appear to be the perfect solution to the problem of a landlord not taking their management responsibilities seriously. But leaseholders should bear in mind that taking these responsibilities on themselves is not necessarily the answer
How do I qualify for the right to manage?
The legal requirements for a tenant to issue a right to manage notice are the same as being entitled to leasehold enfranchisement.
Although UK RTM allows tenants flexibility in making day-to-day decisions, it will not facilitate lazy tenants wishing to save money on maintenance costs through allowing the flats to deteriorate.
As a landlord you are entitled to become a member of the RTM company, which will enable you to vote on issues concerning your freehold interest. Not only this but the Right to Manage company will reimburse you for any costs incurred in passing over this right.
In order for the Right to Manage company to run the building successfully the landlord becomes under a duty to provide the company with all necessary information and records. Not only this, but any funds collected via service charges, for example those held within a leasehold sinking fund, will consequently be transferred across to the company.
Click here to read more about the Right to Manage.
The alternative to RTM and enfranchisement? Lease extension
In trying to increase your control over your leasehold flat, there is, of course, a third alternative – extending your lease. While this doesn’t solve the problem of control of your block, it does give you much greater security and will often significant add to the value of your property. one particular advantage is that lease extensions are available to individual leaseholders – they don’t depend on having the support of other owners in the block. And there are broadly 2 ways to extend your lease – the formal or statutory lease extension route or the voluntary or informal route. Leasehold extension is often used alongside exercising the right to manage.
Our team are lease extension, RTM and enfranchisement specialists, handling up to 500 lease extensions every year.
Click here to find out more about Lease Extension and how we can help you.
There is also another alternative to the Right to Manage – click here to read more about the Court Appointed Property Manager
Exercising your right to Enfranchise or RTM – the need for a specialist solicitor
Whether you decide to exercise your right to manage leasehold property or exercise your right to buy the freehold of your block, don’t forget that the legal procedure is highly technical.
So, make sure you instruct specialist freehold solicitors with plenty of experience in these fields to help you with the legal side of freehold purchase or right to manage company formation.
Click here to find out more about the process of collective enfranchisement