Right to Manage Companies: Criteria and Setting up the Company
Right to Manage was introduced in s71 (Part 2 Chapter 1) of the Commonhold and Leasehold Reform Act 2002 in September 2003 and hailed as a great right for leaseholders. Why? Because it is a process that allows leaseholders to replace current managing agents with one of their own choosing, with no premium payable and without needing to go to court to prove ‘fault’ on the part of the freeholder. Smaller developments can choose to self manage.
There are certain criteria that both the building and the leaseholders have to meet in order to exercise the right which are as follows:
Not all buildings are capable of being subject to the right to manage. Whilst they must include at least two flats and can be part commercial (which must not exceed 25% of the total floor area) they must come within the definition of ‘premises’ contained within s72 of the Commonhold and Leasehold Reform Act 2002 so they must:
- Consist of a self-contained building or part of a building, with or without appurtenant property;
- Contain two or more flats held by qualifying tenants and;
- The total number of flats held by such tenants is not less than two-thirds of the total number of flats contained on the premises.
A building is a self-contained building if it is structurally detached but according to Justin Bates, Barrister at Arden Chambers, whilst determining whether a building is detached should be an easy test to apply, because it requires nothing more than good eyesight to see if one building touches another, LVT’s appear reluctant to adopt such a simple test. Instead they are developing a line of cases where the focus is not on whether there is any touching at all but what is the nature and extent of that touching. If the touching is not ‘structural’ then the building is self-contained.
Unfortunately for leaseholders this increases the costs of Right to Manage because the professional input of a surveyor is likely to be necessary in order to determine whether the building is actually self-contained as per s72(3) of the 2002 Act which is defined as requiring:
- The part of the building to constitute a vertical division of the building;
- The structure of the building is such that the allegedly self-contained part could be developed independently of the rest of the building and;
- Either s72(3)(c) where the relevant services (by means of pipes, cables or other fixed installations) provided for the occupiers of the part are provided independently of the relevant services provided for the rest of the building or s72(4)(a) the relevant services could be so provided without involving the carrying out of works likely to result in a significant interruption in the provision of relevant services for occupiers of the rest of the building under s72(4)(b).
- At least two-thirds of the flats must be let to ‘qualifying tenants’ which means leaseholders whose leases were originally granted for an original term of more than 21 years. The required minimum number of qualifying tenants must be equal to at least half the total number of flats in the building.
- There is no limit on the number of flats that can be owned by individual leaseholders and there is no requirement for any past or current residence in the flats;
- A lease is a long lease if it is granted for a term of over 21 years and whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenants, by forfeiture, re-entry or otherwise;
- It is a term fixed by law under a grant with a covenant or obligation for perpetual renewal (but is not a sub-lease created from a long lease);
- It takes effect under s149 (6) of the Law of Property Act 1925 (leases terminable after a death or marriage);
- It was granted in pursuance of the Right to Buy conferred by Part 5 of the Housing Act 1985 or in pursuance of the Right to Acquire on rent to mortgage terms by that part of the Act;
- It is a shared ownership lease, whether granted in pursuance of Part 5 of the Housing Act 1985 or otherwise, where the tenants total share is 100% or;
- It was granted in pursuance of that part of the Act and effected by s17 of the Housing Act 1996 (the right to acquire).
FORMING THE COMPANY
At this stage of the process not all of the qualifying leasehold members are required – just enough to provide a minimum of 2 directors and a company secretary. So, from our block, five qualifying leaseholders attended a meeting with three of those five agreeing to act in the capacity of Directors (2) and Secretary (1). The Directors were formally appointed by Board resolution and their details entered onto application form for registering a new company (a Form IN01 which replaced the Form 10 on 1st October 2009), signed and filed with the Registrar of Company at Companies House where the company was also then registered.
Unlike other RMC’s, that of a right to manage company is limited by guarantee as that was considered the most appropriate vehicle when the right was created. Companies who use it do not trade and it can’t be formed by share capital under s5 of the Companies Act 2006, rendering it unsuitable for commercial enterprise and therefore less likely to become insolvent. The incentive for members to become involved is commitment to the company’s objectives rather than profit as with shareholder companies.
The company can give each member a non-transferable certificate of membership which makes them guarantors and the company must have one or more members who will be entitled to attend general meetings and vote (subject to any special provisions in the company’s articles). This is unlike a company limited by shares, because a guarantee company is only controlled as there are no shares or other security in the company that can be sold to someone else. The certificate of membership will automatically lapse on the sale of a flat.
Like a company limited by shares, a guarantee company has a clear legal identity that allows it to:
- Purchase and own property in its own name;
- Undertake contracts such as employment contracts and contracts for the purchase of goods. It is the company that is responsible for its debts, not the people who run it because they are protected from personal liability. This is limited to the amount of the guarantee set out in the company’s Articles, which is typically just £1.
Therefore the statement of liability of each member of the company should it be wound up whilst they are still members (or within one year of their ceasing to be a member) is guaranteed to that specific amount.
There are however exceptions:
- If the memorandum states their liabilities to be unlimited;
- If they have been guilty of acting in wrongful manner;
- If directors exceed the powers conferred on them they can be liable to recompense from the company for any loss incurred;
- If a director gives a personal guarantee;
- If any director enters into a contract in their own name rather than “for and on behalf of”;
- If a director misleads a supplier as to whom the true customer is to be;
- Issues a cheque, upon which the company name is not clearly stated, and which the bank refuses to honour;
- If found guilty of fraudulent or wrongful trading, the court may instruct a director or shadow director to contribute to the assets;
- A person who has been disqualified from acting as a director under the Directors Disqualification Act 1986, or another person who knowingly acts under instruction from that person.
Whilst the company is not prohibited from distributing its profits (should it make any) by the Companies Act (or any other law), or it chooses to retain them for use elsewhere, it is commonplace for restrictions to be put on profit distribution in the company’s Articles. These will not only apply to any profits while the company is running but also to the distribution of assets (after paying creditors) should the company be wound up. Sometimes the restrictions are also reinforced by the prevention of payment of salaries or fees to the directors but not all the time.
The next stage of the process is the other qualifying leaseholders to become part of the company, via the Notice of Participation.