The Act was designed to reflect the fact that the freehold of a block of flats can be acquired for a few thousand pounds whereas the value of the properties situated within it would be substantially higher.

The basic concept is that if half or more of the qualifying tenants want to take over the management of the property they can to do so through a Right to Manage company ("RTM Company").

Who qualifies?

A person will be deemed to be a qualifying tenant of a flat if he or she is the tenant under a long lease. This is a lease for a term exceeding 21 years whether or not it is (or may become) terminable before the end of that term (whether by way of notice given by or to the tenant, by re-entry or forfeiture or otherwise). It is not possible for a flat to have more than one qualifying tenant at any one time (joint tenants count as a single qualifying tenant).

In terms of the membership of the RTM company if there are only two qualifying tenants both must be willing to take part and be admitted to membership. If there are more than two the number of qualifying tenants who would also be members of the RTM company must be not less than one half of the total number of flats.

The property must consist of a self-contained building or a self-contained part of a building. There must be two or more flats held by qualifying tenants. In addition to this, the number of flats held by qualifying tenants must not be less than two-thirds of the units within the property. A part of a building will be deemed to be self-contained if there is a vertical division, the structure is such that it could be developed independently and the services to it (e.g. those provided by pipes) are provided independently or could be without significant interruption to the other parts of the property.

The residents of certain buildings are excluded from exercising the right to manage. These include: -

1. Buildings where the internal floor area of any non-residential part(s) exceeds 25% of the whole floor area;

2. Buildings with self-contained parts in different ownership;

3. Premises, which are owned by local housing authorities, if they are the immediate landlords of any of the qualifying tenants of flats, contained within the premises.

The Formation process

Although there is no need to make an application to a tribunal or court to exercise these rights, tenants will need to be aware that a set process will need to be followed. The likelihood is that most tenants will choose to seek professional advice at each step of the way. Although there is no need to pay the landlord compensation the tenants will have to be prepared to meet the costs of incorporating the company, their legal costs and also the reasonable costs of the landlord.

An RTM company must be limited by guarantee, as opposed to shares. A company limited by guarantee does not have a share capital. Each of its members undertakes to pay a fixed amount of money in the event of the company being wound up and not having sufficient assets to cover its liabilities.

Every company must have memorandum and articles of association. These set out the company's objectives and powers and also regulate the conduct between the company and its members and officers. In the case of an RTM company the memorandum and articles of association must match that prescribed by the Act. The prescribed memorandum and articles of association take the form of a single document. This makes life easier for tenants who will need to refer to only one source when it comes to the constitution of the RTM company. The only information that can be inserted into the memorandum and articles of association is the name of the company, which must end with “…RTM Company Limited” and the address of the property in question.

An RTM company is formed by submitting the memorandum and articles of association signed by the first members (also known as subscribers), a completed form 10 to appoint first directors and secretary and a form 12 statutory declaration of compliance to Companies House together with the incorporation fee.

Assuming that all the documents have been completed correctly, Companies House will usually issue the certificate of incorporation containing the company number within five to seven working days. It is important to note that the company does not legally exist until the company number has been issued and therefore the name should not be used before this time. 

Practical issues

Any tenants considering forming an RTM company must first establish that both they and the building in question are eligible to exercise the Right to Manage. When setting up the RTM company it is not necessary to have half the qualifying tenants involved at incorporation. The company can be formed with two qualifying tenants as the members and two directors and a company secretary. The directors need not be qualifying tenants although in most circumstances the directors and the members will be the same people.

The Right to Manage procedure dictates that any qualifying tenants not involved at incorporation will be given the opportunity to participate at a later date. This is particularly useful to bear in mind in situations where a large block of flats is concerned and getting half the qualifying tenants to sign up in advance of incorporation could prove extremely difficult.

An RTM company is subject to the same annual requirements as any other private limited company. For example, the company must file accounts and annual returns with Companies House each year. The consequences of the company not doing so can be severe and are detailed below. In addition each company must maintain certain registers which detail information relating to the internal structure of the company. Both the filing of returns and the maintenance of the registers will typically be handled by the company secretary. Given the importance of these tasks some companies may elect to employ the services of professional company secretary. 

An RTM company must use the prescribed memorandum and articles of association. The Act states that the prescribed memorandum and articles of association will apply whether adopted or not, also any changes made to the prescribed draft will have no effect. It is clearly very important that tenants are aware of this and should not attempt to make any amendments to the prescribed document or use any other version of memorandum and articles of association.

As previously stated, an RTM company must submit a set of accounts to Companies House each year. In the event that the RTM company does not file these documents by the required deadlines Companies House will impose financial late filing penalties when they are filed. If the company continually fails to file returns, Companies House may decide to strike the company from the register. In this situation, the management rights will revert to the landlord.

So, providing tenants have ensured that all the relevant procedures have been followed correctly and are aware of the responsibilities that incorporation brings with it, a Right to Manage company can provide a invaluable method of securing management rights and long-term peace of mind for tenants where this otherwise may not be possible.

Joe Cressy is Manager of the Specialist Companies Unit of Jordans Limited, based at their Head Office in Bristol.

As the UK’s market leading company formations provider, Jordans can advise on all aspects of incorporation and ongoing administration for RTM companies as well as a whole range of corporate vehicles appropriate to the property sector.

Contact Joe on 0117 918 1336 or email joe_cressy@jordans.co.uk

Jordans Limited Website www.jordans.co.uk