The Right to Manage (RTM) provisions set out in the Commonhold and Leasehold Reform Act 2002, allowing leaseholders of a building containing flats to form a RTM company and take over the management of the building from the freeholder, are undoubtedly a useful tool for residential leaseholders, particularly those in buildings where the management provided by the freeholder is unsatisfactory.
But the costs involved in making an RTM claim are such that in many cases leaseholders will prefer to opt to acquire a share of the freehold and / or a lease extension.
However, this might be set to change, at least in the short term.
With effect from today, further provisions within the Leasehold and Freehold Reform Act 2024 come into force, including Section 49 which concerns the change of non-residential limit on Right to Manage (RTM) claims.
This secondary legislation will mean that residential leaseholders within a mixed-use scheme will qualify for RTM when the commercial element of a building is as much as 50% – an increase on the previous cap of 25%. Additionally, leaseholders will no longer be required to cover the freeholder’s legal fees when making a RTM claim.
Announcing the reforms on 9 February, housing and planning minister Matthew Pennycook said: [The reforms will] Improve the lives of leasehold homeowners across the country, allowing them to more easily and cheaply take control of the buildings they live in and clamp down on unreasonable or extortionate charges”.
Leaseholders in buildings where there is a mix of residential and commercial uses (such as shops and offices) will be able to exercise the RTM provided that the non-residential floor-space does not exceed 50% of the building. This marks a significant increase from the current threshold of 25% and will undoubtedly increase the number of properties where RTM may be utilised (section 49).
Leaseholders making a RTM claim set out the terms on which leaseholders of a building containing flats may form an RTM company and take over the management of the building from the freeholder.
RTM claim will no longer be required to cover the freeholder’s legal costs when making an RTM claim (unless a RTM claim notice is withdrawn or ceases to have effect and subject to additional conditions set out in the 2024 Act) (section 50).
The RTM reforms are coming into force a little earlier than initially forecast, and, perhaps surprisingly, without any reference to the collective enfranchisement reforms set out in the 2024 Act (which include a similar increase in the non-residential element for claims from 25% to 50% and changes to the cost regime).
Members of ALEP (the Association of Leasehold Enfranchisement Practitioners) have considered how the change will impact on the various stakeholders: leaseholders, freeholders and professional advisors.
Shabnam Ali-Khan, a partner at Russell-Cooke, said: “The expansion of RTM will offer more leaseholders the opportunity to take control of building management and potentially improve transparency and accountability. However, it also brings new responsibilities, including more financial duties, compliance with building safety legislation, procurement of insurance and long-term maintenance.
“I regularly provide training and advice on Right to Manage and associated issues and I have seen both successes and failures. As the extended qualifying criteria takes effect, I anticipate that a largely overlooked challenge, from the leaseholders’ point of view, will be the financial risk.
“Currently, many management costs exist to protect leaseholders but removing these safeguards could expose them to increased liabilities. Leaseholders seeking RTM should be aware of the potential complexities involved in ensuring the long-term sustainability of their property’s management. Leaseholders must be aware that the removal of professional management costs does not necessarily translate to savings and that if they opt for RTM they must assume responsibility for reserve funds, insurance and emergency repairs.”
Considering the changes from the freeholders’ point of view, Katherine Simpson, partner at Edwin Coe LLP, commented: “For the building owners, the newly enacted legislation means a loss of control over the management of qualifying buildings. While some may welcome the reduction in direct management responsibilities, the shift is likely to introduce new challenges in negotiating building insurance, handling long-term maintenance, and navigating service charge disputes. Freeholders may also need to redefine their engagement strategies with leaseholders to ensure compliance with the evolving legal framework.
“Critical issues include the fragmentation of ownership. Specifically, many areas of historic value and importance have been successfully managed in single ownership for as long as they have existed. But as a result of the change, the ownership of mixed-use buildings could be fractured and diversified, leading to poorly managed buildings and reduced future investment. To avoid the risks associated with RTM, developers of new schemes may seek to ensure that the residential parts of new developments are reduced. Despite the government’s urgent need to significantly increase residential development, the unintended consequence of this would be fewer new homes.”
Mark Chick, director of ALEP and a Partner at Bishop & Sewell LLP, remarked: “Property lawyers, valuers, managing agents and surveyors each have an important role in guiding leaseholders through the RTM process and avoiding the unintended consequences. As RTM becomes more widely accessible, the knowledge of our members and other professionals will be invaluable in navigating new regulatory requirements, ensuring compliance with safety legislation and advising on best practices for effective management.”
He added: “As a starting point, leaseholders should engage property lawyers to assess the financial viability of RTM and ensure compliance with leasehold and building safety regulations. They will need to work with insurance brokers to secure appropriate coverage, consider appointing a professional managing agent post-RTM to provide oversight and reduce administrative burdens and, importantly, engage with freeholders throughout the process.
“For freeholders receiving the correct advice will be key to understanding their rights and obligations and in managing the process. The shift away from the landlord’s ability to recover costs may deter some from seeking advice. This may have some negative impact on the ease with which handovers occur.”
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