Understanding the Right to Manage and the Financial Responsibilities

Understanding the Right to Manage and the Financial Responsibilities

Leaseholders can exercise their right to form an RTM Company to take over control of building management from the landlord or a resident's freehold or management company according to the provisions of The Commonhold and Leasehold Reform Act 2022. 

Leaseholders looking forward to creating a Right to Manage company should know the legal and financial implications of being in control. RTM affects all leaseholders regardless of whether they are members of the RTM company, it may affect the Managing Agent if the RTM company chooses to self-manage or appoint a different Managing Agent, and will affect the landlord's role.

Significant considerations 

Leaseholders need not prove mismanagement and usually do not need to get a court order to form an RTM company. Despite the relative simplicity of the RTM process the participating leaseholders need to sign a formal notice and serve it to the landlord.   

Running an RTM company is an arduous task.  The RTM directors are responsible under Company Law, the Companies Acts for maintaining the following documents following the registration of a Right to Manage Company:

       Certificate of Incorporation

       Annual Accounts

       Company Tax Return

       Memorandum of Association

       Articles of Association

Leaseholders should define their aims and objectives when forming the RTM company. It could be to gain control over the maintenance of their properties and improve things to enhance the value of their properties, or, to shoulder the full responsibility of funds management and decision-making on the repairs. RTM is not essentially a self-management model, as leaseholders should hire a managing agent to manage the building, albeit answering to them, as leaseholders, not the freeholder.

Compliance and Responsibilities

Complying with RICS and ARMA's published code of practice governing the management of service charges is necessary to avoid grounds for leaseholders to apply to the Property Chamber of the Courts and Tribunal Service.  The most common type of application is to challenge the reasonableness of the service charges levied. Other relevant codes of practice include those published by the Health and Safety Executive, the 'HSE'.   

The Right to Manage brings myriad responsibilities that need serious consideration in the initial phase.  The leaseholder members handling the matters of the RTM company should prepare themselves to be ready for full responsibility.  Firstly they should educate themselves on company procedures, so they are ready to:

       Handle objections and criticism from residents

       Conduct periodic meetings

       Manage accounts and funds

       Comply with company regulations

Managing the financial aspects of the RTM company

Management of the accounts is a challenging task, as most leaseholders have little or no accounting experience. There must be a dedicated director in charge of the RTM company's financial matters. These simple guidelines may improve the functioning of the finance director.  

The director in charge of financial matters must exercise financial controls immediately after the appointment by:

       Reconciling the bank accounts once a month to balance them to the cashbook

       Setting up online banking systems with dual authorisation

       Reviewing service charge debtors at least monthly

       Setting up invoice approval processes 

Managing accounts of an RTM company is straightforward at the beginning, when there are few transactions, but can easily go out of hand as time passes and more transactions occur. Commitment to following timelines and ensuring the accuracy of accounts is crucial for the smooth financial management of the RTM company.

One should explore investing in affordable software for accounting. It will improve the maintenance and recording of transactions effectively. Ringley offers a service called BlockCare 300 to help small blocks self-manage.  It works through the leaseholdersupport.co.uk website which is not unlike online banking.  Once set up, which costs just £60 plus VAT, you can access budgeting tools, and helpsheets and works a little like online banking.  The RTM Directors set the budget, and the BlockCare 300 team send out the demands, chase leaseholders for payment, bank the money, reconcile the bank and arrange the accounts.  The RTM company directors instruct repairs and upload the invoices the BlockCare 300 team pays (once a 2nd director has authorised them).  Call us on 020 7267 2900 or go to www.leaseholdersupport.co.uk to find out more.

With BlockCare 300 nobody needs to be an accounting expert as all the often difficult transactional stuff is taken care of for you, leaving you to run the block.  After all, relying on excel formats is not suitable for monitoring and tracking service charge debtors.

Taking care of tax obligations

The Right to Manage company can collect reserve funds and service charges. The RTM company may be liable to pay taxes if it earns income from sources other than routine service charges, e.g., income from renting parking lots or selling laundry tokens are a few examples of income that mandates declaration while filing corporation tax returns.  Similarly, if the RTM decides to self-manage and hold a bank account in its name (rather than a Client account held by a Managing Agent) as well as paying bank account transaction charges the interest receivable will mean that a trust tax return has to be completed and filed.  This is all avoided when using Ringley's BlockCare 300 product as the Client's bank account incurs no bank transaction charges.

The RTM company may be liable for hefty penalties from HMRC for failing to declare such income.  And fines are levied if tax returns are not submitted on time.  Most likely, you may perceive such income as an incidental income that needs no declaration.