Being a leaseholder and a shareholder or a member of an RMC is not the same thing, although it is possible to be both. RMC Directors need to keep a clear distinction between the two roles when making decisions.
What are the differences between shareholders and leaseholders?
There are both legal and practical reasons why being a shareholder and a leaseholder is completely different. You are more than likely to be both in an RMC though.
A shareholder or member can still take part in decision making. Although there is normally a restriction to voting on a Board of Directors. A meeting normally takes place once a year. In that meeting, you can then either remove the Board of Directors or vote them back in. It depends on whether you think they are doing a good job.
This is totally different from being a leaseholder. A leaseholder is contractually bound under the terms of the lease. This includes paying service charges and adhering to covenants. Most lessees often believe that once you are a shareholder of the RMC the lease doesn’t exist which is not the case. An RMC board have no legal right to take a decision against the terms of the Lease for a block even if agreed by the shareholder. The terms of the lease must still guide the shareholders.
RMC’s duties to Leaseholders
The duties that RMCs have towards leaseholders are set out in the leases and can take two forms. Either the RMC is a party to the leases with its covenants set out expressly. Or the RMC is directly responsible for performing the landlord covenants and managing the building.
The fact that leaseholders are also shareholders or members of the RMC means that the RMC has no excuse for failing to perform its obligations. Contractual duties such as repairs, maintenance, insurance and service charges combine with statutory duties. These include restricting service charges to a reasonable amount and consulting on major works. The leaseholders are allowed a duty of care from the RMC.
It is essential that RMC Directors have reliable advisers. They should be up to date with Landlord and Tenant legislation as well as various Companies Acts. We would suggest in this instance that you take out Directors and Officers insurance to cover the directors’ liability against errors. The RMC has a Board of Directors who then either employ managing agents or carry out the works on behalf of the lessees themselves.
Should we place the maintenance money and the company money in the same account?
No, RMCs need to have two separate funds. One that the service charge is in and the other has the companies own money. The RMC holds service charge funds on trust for the lessees as these are not the companies’ money. We often speak to people who have mixed up their management accounts with the company accounts and end up paying tax for no particular reason. Most management companies are known as “Dormant Companies”. This means that they only have to do a very simple form once a year to maintain the company at Companies House and for Inland Revenue purposes.
Company funds often derive from subscriptions or payments from members. If it owns the freehold they may charge ground rent but if all the lessees are shareholders it is unlikely that they will change this.
Leaseholders all contribute fairly to the service charge fund in accordance with the terms of their lease. The RMC is a statutory trustee for these contributions and the beneficiaries under the trust are the leaseholders.
It is a fundamental duty of a trustee to cover all funds received and spent. Service charge money is not owned by the RMC and so will not count as an asset of the Company. The leases normally set out clear service charge money payments which are contractual.
Preparing annual accounts
If the company receives no income and pays no money out then it is known as a dormant company for tax purposes and accounts are often not required.
Administration costs for running the RMC
Any payments made by the company for the company have to come from the shareholders’ funds or money paid in by shareholders. It is important to understand for instance that the company should pay the Directors and Officer’s liability insurance. Not the maintenance fund.
Can the RMC carry out major work and long term agreements?
Under Section 20 of the Landlord & Tenant Act 1995, the landlords must consult with leaseholders if proposed work to their block is likely to cost any one leaseholder £250.00 or above. The same applies if they intend to enter a long term agreement with a contractor to provide services over one year. RMCs and RTMs have the duty of this requirement to consult lessees even if they own their own freehold.
Don’t fall into the trap thinking that Section 20 doesn’t apply just because everybody who is a member of your block is a member of the RMC. Even if residents reach a unanimous decision at the residents meeting to go ahead with the work a Section 20 Consultation is required by law. It is not acceptable if shareholder committee members or Directors have taken a decision, and ignored the law. For instance, if you don’t consult properly you may be subject to a penalty, or not be able to recover the funds. It is important that you have the right insurance for your block or building. Don’t hesitate to contact us on this or look at our other article on Directors and Officer’s liability insurance.
The BBC recently published an article on how leasehold flat and house owners have become trapped in their own homes. Unable to sell their homes and with no control over the fees charged by the freeholder. Ashleigh Wilson bought her own home four years ago and had not understood what she had entered into. She was being charged £800 per year in ground rent and service fees. The lease even stopped her from changing the floor tiles. This is, unfortunately, a situation that many homeowners find themselves in.
A recent consultation by the law commission looks to address the disparity of leasehold property ownership. The law commission recommended changing to the Scottish system of commonhold. Which is when property owners communally own a building and have more say on how money is spent.
iInsure365 contributed to the law commission proposal. Our input was on how the change would affect the building insurance.
We believe in transparency. We feel that freeholders have overcharged leaseholders and continue to do so.
Freeholders inflate the insurance cost and include it in the service charge. This isn’t transparent and is masking the true cost of the insurance. We feel this is one of the biggest issues in the Leasehold debate.
What options do leaseholders have?
Leaseholders can take hold of their costs by using the Right to Manage process. Leaseholders can alternatively join together to buy the freehold. This is known as collective enfranchisement. They will need a solicitor to handle the legal process and a local valuer to value the freehold. By purchasing the freehold they have the freedom to manage it how they wish. Alternatively, they can apply for the Right to Manage and take over the management duties from the freeholder. This way they can control their costs without purchasing the freehold.
iInsure365 can help leaseholders in either situation. We can provide transparent quotes to save leaseholders money. See our Google reviews from our clients! We have a rebuild cost calculator that will also save leaseholders money. The assessment is only £160 and will recommend the rebuild cost to use. This will stop leaseholders from paying for insurance that they don’t need. Saving leaseholders money and providing peace of mind. If you would like a quote, request a call from us and a member of staff will contact you at a time that suits.
Ashleigh Wilson is not alone in her naivety regarding her lease. Taking the Right to Manage or collective enfranchisement can be can be even more confusing. However, we have a news centre with lots of articles that explain both processes and cover a number of other insurance related subjects.
Do I need Directors and Officers liability insurance?
Do I need to take out additional insurance?
Can I be personally sued?
What does my policy cover?
Your policy will cover the items listed below:-
- Legal costs of a claim or investigation incurred by you or your organization
- Any award or settlement made
- Employment, regulatory pensions, cyber, contractual, pollution and employee dishonesty claims
- Can include contract dispute and debt recovery pursuit
- Negative social media
- Public relation cost
- Circumstances related to investigation costs
Examples of what can happen: –
HM Revenue and Customs prosecuted a property investment company. The reason being that they were alleged to have made false statements in earlier tax investigations. Legal fees in the case came to more than £50,000
The directors of a property management company were called to give evidence following a pollution leak into a local river. The legal fees for the represented company were £10,000.
Breach of duty
Shareholders of a family run property group made a claim against the company and its Directors. They accused the property group of acting unfairly and breaching their duties. The property group seeked an investment which reduced the value of the shares. The legal costs in the case were more than £150,000.00. A minimum settlement was eventually agreed.
What else will I get as part of my cover?
- There will be free access to a comprehensive range of specialist advisors, and advisory services. Offering support to help customers minimize risk and promote growth if required.
- There will be a team of experts working with customers to develop their business sustainability and responsibility for providing design innovation and ethical solutions.
- Knowledgeable and experienced legal teams available when customers need it most. The policy will provide full professional representation to help customers succeed and manage claims successfully.
Other such incidents include:-
- Human resources and employment
- Health and safety
- Waste and environmental regulations
- Money laundering, fraud, bribery and corruption, anti-competitive practices.
The cover with respect to intellectual property covers:
- Data protection and cybercrime
- Legal advice on a range of areas including Directors and shareholders duties, contract disputes, financial crime, motoring and criminal offences.
If you would like to discuss any of the above then request a call back to discuss your options. We can provide a separate policy or include the cover in a building insurance quote.
The Law Commission has unveiled a series of reforms. These are with the view to make it quicker and easier for leaseholders to take control of the day to day management of their flat block.
We at iInsure365 are privileged to have been able to contribute towards the consultation and the Law Commission document.
The Consultation has now been released on how the leaseholders will be able to change the Right To Manage. These proposals will make it easier for people to take the Right To Manage.
What does it cover?
The new proposals include extending the Right To Manage criteria to include leasehold house owners. It will also allow leaseholders to apply to manage multiple blocks and addresses the costs and paperwork of doing so.
Other questions raised in the proposal are as follows:-
1) What are the requirements for the Right To Manage and who can apply for the Right To Manage?
2) Do people have experience of failing the Right To Manage because of definitions of the Act?
3) Would it be helpful for lessees to have one person to have the right of management? Or should there be a reduction for qualifying tenants from at least two thirds of the flats to 50%?
4) Do you agree that there should be a removal of the exemptions for buildings that consist of a non-residential area of more than 25%?
5) Should Right To Manage Companies have to employ a managing agent where there are commercial properties involved?
6) Should there be an extension to the qualifying terms of Right To Manage and if so how?
7) Should the Right To Manage Company be able to obtain ownership of the building?
8) Should the Right To Manage companies by limited by guarantee?
There are various other questions on the Right To Manage and how lessees should govern and use them.
This is the most comprehensive review of the Right To Manage system that has taken place over the last few years. It will dramatically change and help lessees to be able to deal with the Right To Manage for their block of flats in a much easier way in future.
We are pleased to be able to confirm that we have contributed towards the Law Commissions paper on the Right To Manage. We believe it is absolutely critical for lessees to be able to have a much easier way to manage their own buildings and to reduce their costs. It is often so problematical for lessees and owners of flats as they do not understand the process. We are often asked to obtain quotes for lessees. In doing so lessees often find that they have been paying more than they should for their insurance premiums. This may be knowingly done by the freeholder/managing agent or the building may be over insured. This document will be able to bring restrictions that will help the Right To Manage company to control their expenses.
Consultations in relation to the above end on the 30th April. We believe that if you have any involvement in Right To Manage you should read the Law Commission paper. Not only that but also try to give consultation and any comments on it to help lessees in the future.
Even after taking the Right To Manage or Collective Enfranchisement?
Can I get my own insurance quote for the building?
Is iInsure365 affiliated to any managing agent?
Should I complain to the managing agent about my insurance premium?
Can I change an insurance policy halfway through?
What is the Right to Manage?
The Common and Leasehold Reform Act 2002 introduced a right that enables leaseholders to take over the management of their building. This is by setting up a Right to Manage Company. There doesn’t have to be a question of fault by either the landlord or the property manager. The Right to Manage Company assumes full management responsibility for the building. Its members are free to appoint a property manager of their own.
What is the purpose of the right to manage?
The main reason for having a right to manage is to put the power and control back in the leaseholder’s hands. It enables them to set the standards of their block, managing it themselves. Also, they can ensure that they are getting value for money with their outgoings.
Do iInsure365 pay commission to any managing agents?
iInsure365 do not pay any commission to any managing agents for any part of our insurance. We do receive a commission in relation to the insurance we provide which we are happy to disclose. iInsure365 are a completely open and transparent business. We will work hard to ensure that your annual premiums remain competitive on a year to year basis whilst maintaining the standard of cover.
What is the minimum amount of Directors and do they have to be residents?
A right to manage company is only required to have one Director. However, normally there is between three and five depending on the size of the premises/block. There is no requirement for Directors to be residents. The majority of most Directors are normally residents. This is to avoid disproportionate influence from people who are not experienced in the property day to day living. The landlord of the building has no legal right to be a Director.
Can the leaseholders exercise the Right to manage if the landlord lives in the building?
Right to Manage cannot apply where the premises fall within resident landlord exemption. The criteria for this exemption are as follows: –
a) The premises are not a block of flats
b) There are less than four flats
c) One of the flats has been occupied by the landlord or an adult member of their family as their only or principal home for the last 12 months.
Can a leaseholder ask the landlord to provide the names of the other leaseholders to invite them to participate in the Right to Manage process?
It is only the Right to Manage Company that can insist on the landlord providing the names of the leaseholders for this purpose. In the first instance, it would be necessary to speak to the flat owners or check the Land Registry. It may be best to use a solicitor to ensure that it is done correctly.
What sort of majority do we need to go ahead?
What are the responsibilities of the Right to Manage Directors?
All Directors have the responsibility to serve the best interest of the members of the Right to Manage Company. This goes as far as managing the property in the best interests of all leaseholders of the estate. Right to Manage companies can appoint a managing agent to deal with the day to day management of the estate itself. However, we can provide you with Directors insurance to cover any liability.
Will we be able to choose our own managing agent under our Right to Manage?
Yes, all reputable Right to Manage Companies should undertake to operate a code of practice. The Association of Residential Managing Agents (ARMA) adopted a code of practice with the Royal Institute of Chartered Surveyors (RICS). It is therefore important that you take time to choose your own managing agent.
Can we expect to save money?
Yes, most probably. Many leaseholders are facing excessively high charges for items such as buildings insurance, alarm monitoring and maintenance contracts. We would be more than happy to supply you with a like for like quote. We believe it would be substantially less than what you are currently paying not only in the first year but every year thereafter. Don’t hesitate to ask us for a like for like quote.
Who owns the freehold after the Right to Manage?
The freeholder would not change. The freeholder retains his obligations and responsibility previously held under the Lease. This is apart from the management responsibilities of the building. These transfer to the Right to Manage. The collection of ground rent would still be required under the right to manage.
Is the Right to Manage Company bound to carry on with the existing contracts entered into by the landlord?
The Right to Manage process may well frustrate the existing contractors. The takeover of the management responsibility by the Right to Manage Company will bring an automatic end to all the existing contracts. The Right to Manage Company can then choose whether to continue with the contracts or not. For instance such as cleaning and insurance.
The Right to Manage is in force, but the landlord insists that they continue to insure the building, is this correct?
No. The Right to Manage Company has taken over the management function from the landlord (and any management company that might be in place). The management functions include the insurance of the building. We would be more than happy to give you a quote in this regard.
To exercise the Right to Manage, how is the process started?
A Right to Manage Company will need to be formed. Click here to read more on the Right to Manage Company Formation process.
What can leaseholders do if the landlord fails to provide any information requested?
The landlord may decline to give over required information in response to a request under Section 82 or 93 under the Common Leasehold and Reform Act 2002. Leaseholders are then entitled to serve a default notice which will give the landlord 13 days to comply. If he fails to do so they can then bring an application for compliance in the local County Court under Section 107. This may not seem to be a practical solution but the court can make a cost order against the freeholder as well as granting the order requested. It is advised to use the services of a solicitor to do so.
Do you want to form your own Right to Manage Company? Right to Manage is only exercisable through a Right to Manage Companies set up in accordance with the statutory regulations. A Right to Manage (RTM) company must be a Private Limited Company by guarantee. Also, its Articles of Association should state that its object, or one of its objects, is the acquisition and exercise of the Right to Manage premises.
Forming a Right to Manage Company
Starting the Legal Process
What is the Right to Manage Process?
- A land registry search is first entered into to establish who the freeholder is.
- Companies House creates the Company which is quite a simple thing to do.
- Right to Manage serves a Section 78 Notice inviting participants of non-members.
- To achieve the minimum membership of at least 50% of the leaseholders must join. Then, after 14 days the Right to Manage Serves a Section 79 Notice on the landlord.
The above notice starts the process of the Right to Manage.
The landlord may serve a Section 84 counter-notice within one month. The legal ground limits for them to do this are:
- Not following the correct procedure.
- The qualification of the building not being correct.
- The company members are not leaseholders.
- If there is no counter-notice, a Right to Manage is determined after one month, known as the determination date.
- If the landlord serves a counter-notice denying the right to manage. The right to manage can make an application to a Tribunal for the determination within two months of the date of the counter-notice. The determination date is either the date the landlord withdraws the counter-notice or the date of a decision by the Tribunal.
- Following the determination date, the landlord must serve a Section 92. This is issued to any contractors and contract notices to advise about pending right to manage.
- Leaseholders organize the block management. Either by selecting or appointing a new managing agent or by forming their own management service.
Three months after the determination date the company acquires the right to manage (acquisition date). The landlord/manager then hands over management to the Right to Manage or the leaseholders appoint their own managing agent.
Do you need freeholders insurance on a like for like basis? Do you want to purchase your freehold to try and reduce your costs through your insurance? Don’t hesitate to ask for a like for like quote. Your landlord could be charging a substantial amount more than the market rate so why not question what you’re paying for.
RTM Company – this is an abbreviation for a Right To Manage Company.
Managed RTM – again this is an abbreviation for Managed Right To Manage Company.
Leasehold Reform Act 2002 – this is an Act introducing common holds. Which we will deal with under a separate article.
Common and leasehold reform – see the recent paper on this. Which we also contributed towards.
Management of the building – this relates to the management of any building. Which is why a right to manage company is put into place.
Service charge – This relates to the money that lessees pay towards the upkeep of the building. Which is held in trust.
Management functions –Meaning what the Management Company would do. By law under the Royal Institute of Chartered Surveyors.
Estate of Separate blocks – Meaning blocks of flats whilst on the same estate insure separately.
RTM Notice served – again this is a right to manage notice served on the property.
Are you a leaseholder and thinking about managing your own building? Do you have a freeholder that you feel is charging you more than what you believe the building actually costs?
It might not be necessarily a fault of your landlord and Management Company that you wish to manage it yourselves.
There is a criterion that first needs to be met. That a minimum of half the leaseholders in the block need to agree to a legal right to manage process. This comes from the Common and Leasehold Reform Act of 2002 which give you the legal right to choose your own Management Company.
Right to Manage will seem complicated to most people but it does have a stringent statutory procedure that needs to be followed. If the legal requirements aren’t met this can leave the door open to technical objections from the landlord. It can even stop the process entirely.
How Right to manage works
To be eligible for a Right to Manage (often known as RTM) there are some criteria to meet. These are:
- Right to Manage only applies to leaseholders and owners of flats, not houses or bungalows.
- It must be a detached building or part of a building that can be served independently.
- There must be two or more flats held by qualifying tenants and at least two-thirds of the flats must be leased to qualifying tenants.
- If commercial premises make up more than 25% of the overall floor area then it would not qualify. This is also the case if the local authority owns the property and if the landlord occupies one of the flats.
- A leaseholder must have a lease period exceeding 21 years to be a qualifying tenant.
Do you need freeholders insurance on a like for like basis? Do you want to purchase your freehold to try and reduce your costs through your insurance? Don’t hesitate to ask for a like for like quote. Your landlord could be charging a substantial amount more than the market rate so why not question what your paying for
- Over 50% of qualifying tenants want to proceed, meaning leaseholders who have a long lease.
- A self-contained and self-sufficient (or capable of being self-sufficient) building
- At least 75% of the building must be used for residential purposes
- There cannot be an existing right to manage agreement in place
What do the leaseholders now manage?
What happens to existing contractors?
Do the leaseholders have to manage the building themselves?
How long will this take and how much will it cost?
|Stage 1: Assessment||One week||Assessing if a right to manage can be applied.|
|Stage 2: Setting up the company||One week||There needs to be a minimum of one director and one member initially.|
|Stage 3: Notice Inviting Participation||Four weeks||Notice to all remaining leaseholders asking if they would like to join the company.|
|Stage 4: Qualification||One week||At least 50% of the qualifying leaseholders have to have signed up. If not the process cannot go ahead.|
|Stage 5: Claim Notice||One week||Serving notice to the freeholder that a correct right to manage application has been made|
|Stage 6: Counternotice||Six weeks||If the claim is accepted, Stage 8 applies. If the claim is rejected, Stage 7 applies.|
|Stage 7: Tribunal Proceedings||Two months||If the claim is rejected the leaseholders have two months to apply to the Tribunal who decide if the freeholder’s rejection of the application is legitimate.|
|Stage 8: Management handover||Three months||If the claim is accepted, the leaseholders acquire management approximately three months from the date of the counternotice or Tribunal’s decision.|
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