It’s a question we hear regularly from leaseholders: “Can we use our existing RTM company to buy the freehold of our building?”
On the surface, it seems like a logical and cost-effective idea. You already have a company set up with fellow leaseholders who all have a vested interest in the property. However, despite the appeal, we would strongly advise against using a Right to Manage (RTM) company for a freehold purchase.
This guide explains the significant legal and practical risks involved and outlines the correct approach to take.
What is a Right to Manage (RTM) Company?
A Right to Manage company has a very specific job, which is set out in law by the Commonhold and Leasehold Reform Act 2002. It gives leaseholders the power to form a company to take over the day-to-day management of their building from the freeholder.
Its responsibilities are focused entirely on management duties, such as:
- Arranging the building’s insurance
- Collecting service charges
- Hiring contractors for repairs and maintenance
Because of this narrow purpose, the company’s legal structure and its Articles of Association are tightly prescribed.
The Main Risks of Using an RTM Company to Buy the Freehold
Trying to use an RTM company for a collective enfranchisement (the legal process for buying a freehold) can lead to serious complications. Here are the key pitfalls.
- The Company Structure is Incompatible
RTM companies are set up as companies “limited by guarantee.” This structure is fine for management but simply doesn’t work for buying a property. A freehold purchase requires a company “limited by shares,” where ownership is directly linked to the financial stake of each leaseholder involved in the purchase.
- Membership and Voting Rights Cause Conflicts
In an RTM company, any qualifying leaseholder has the legal right to become a member, even if they didn’t participate in setting it up. This gives all members equal voting rights on management issues. This would create a major problem if the company owned the freehold. It would mean leaseholders who hadn’t paid a penny towards the purchase could have an equal say in decisions about the property. A properly structured freehold company ensures only the contributing leaseholders are shareholders, with voting rights reflecting their investment. - There are Strict Legal Restrictions
An RTM Company’s purpose is legally defined and cannot be changed simply by altering its Articles of Association. The law is clear that it must remain solely focused on its management duties. Attempting to use it to acquire the freehold goes against its fundamental legal basis and could lead to challenges down the line.
How to Buy Your Freehold
The safest and most effective way to buy your freehold is to set up a new, separate company specifically for that purpose.
This new company must be limited by shares and will be governed by the Leasehold Reform, Housing and Urban Development Act 1993, which is the specific legislation for collective enfranchisement.
This approach brings clear advantages:
- Fairness: Only the leaseholders who invest financially in the freehold purchase become shareholders.
- Clear Governance: Decision-making is kept to the shareholders, avoiding potential conflicts and ensuring those with a financial stake are in control.
- Legal Certainty: This is the legally correct structure, providing peace of mind and preventing future disputes.
In Conclusion: Use the Right Tool for the Job
Ultimately, an RTM company is an excellent tool for managing your building, but it’s simply not the right one for purchasing the freehold. The risks of trying to make it work far outweigh any apparent convenience.
While setting up a separate company may seem like an extra step, it is the proper and legally robust way to buy your freehold, protecting your investment and ensuring the process runs smoothly.
As leasehold property specialists, Brady Solicitors have vast experience in assisting leaseholders with both the right to manage and enfranchisement processes. We help support leaseholders navigating these complex legal processes, including the formation of the appropriate companies, to ensure the process runs smoothly and reaches a successful outcome.
