Resident Landlord Exemption and Right to Manage

dericS

Hello everyone,

I have a question on Right to Manage (RTM).

I'd like to enquire whether I qualify.

Under the terms on the LEASE website, the stipulations are:

• the building must be self-contained (or if part of another building, be capable of being redeveloped independently);
  
• it must include at least two flats;
• at least two-thirds of the flats must be let to 'qualifying tenants';
• it can be part-commercial but the non-residential part must not exceed 25% of the total floor area.

I have highlighted the relevant bits in red.

I live in a dwelling which has been converted into two flats. The second flat has a long lease on it, but is owned by the freeholder. Therefore the second qualifying leaseholder is also the freeholder.

Given this scenario I would have said that I cannot apply for the RTM because I do not have enough qualifying tenants, but then I checked the Resident Landlord Exemption criteria. According to the LEASE website, here are the exemptions:

RTM does not apply where the premises fall within the resident landlord exemption. To fulfil this exemption -

• The premises must not be a purpose-built block of flats AND
• There must be no more than four flats AND
• One of the flats must have been occupied by the landlord or an adult member of their family as their only or principal home for the last twelve months.

I have highlighted the relevant bit in red again. It clearly states that the freeholder must be in residence.

In my situation, my freeholder is renting her flat out to tenants, and she lives elsewhere.

Do I therefore qualify for RTM?

Thanks for any advice in helping me decipher this.

G_M

1) I believe your building would qualify.

2) I believe the resident landlord exemption would not apply.

You could therefore set up a RTM Company and invite the other leaseholder to join.

However, although the RTM company should comprise the qualifying tenants of at least half of the flats in the building (ie you),I have a vague recollection that in a case where there are only two qualifying flats, both must sign up to the RTM Company.

If I'm right (I may not be), then the freeholder (who owns the other lease) would have to join in order for you to be successful.

The other problem you may encounter, is that once a RTM Company is set up by those leaseholders who choose to join, the landlord is also eligible to join.

Your landlord would potentially in that case have 2 qualifying votes: one as leaseholder of the 2nd flat + one as freeholder. You would therefore be outvoted, and effectively the current freeholder would be in control of the RTM Company.

Would it really be worth the time, money and effort to end up with management effectively in the control of the same person as currently controls management.....?

However I'm no expert in this area, so hopefully someone else will correct/confirm my suspicions.

dericS

G_M wrote: »

1) I believe your building would qualify.

2) I believe the resident landlord exemption would not apply.

You could therefore set up a RTM Company and invite the other leaseholder to join.

However, although the RTM company should comprise the qualifying tenants of at least half of the flats in the building (ie you),I have a vague recollection that in a case where there are only two qualifying flats, both must sign up to the RTM Company.

If I'm right (I may not be), then the freeholder (who owns the other lease) would have to join in order for you to be successful.

The other problem you may encounter, is that once a RTM Company is set up by those leaseholders who choose to join, the landlord is also eligible to join.

Your landlord would potentially in that case have 2 qualifying votes: one as leaseholder of the 2nd flat + one as freeholder. You would therefore be outvoted, and effectively the current freeholder would be in control of the RTM Company.

Would it really be worth the time, money and effort to end up with management effectively in the control of the same person as currently controls management.....?

However I'm no expert in this area, so hopefully someone else will correct/confirm my suspicions.

G_M, once again thank you so much for your response to my question. I shall have to further investigate the issue you mention regarding the two flat scenario (i.e: that both leaseholders have to join), however regarding your second suspicion, I was just reading something on the LEASE website which offers further insight:

Landlord's membership of the RTM company

Immediately upon the RTM company taking over on the acquisition date, the landlord becomes entitled to membership of the company, with full voting rights as a company member (if he wishes to take it up). The landlord's votes are, in the first instance, determined according to the units he holds in the building, flats or non-residential parts. In cases where he holds no units, and therefore would have no votes, he is allocated one vote as the landlord.

As the right to manage is not default-based, there is no reason why the landlord, who retains an interest in the building, should not have some input to the practicalities of its management. It is different where the manager has been appointed by a Tribunal to replace a poor or incompetent manager - there the landlord is removed entirely as a consequence of his mismanagement. With the right to manage, it is assumed that the landlord is not necessarily at fault and so there is no justification for his exclusion from the management process.

The right is not limited to the immediate landlord, but includes any intermediate landlords under the lease. For example, the landlords may comprise the freeholder plus the head lessee, or the freehold may be split in its ownership and the two or more owners of the split freehold will be entitled both to membership of the company and to a vote.

However, there is no danger of multiple landlords being able to out-number the flat-owners' votes. The votes will be allocated pro-rata to the number of landlords. For example, if there are a number of intermediate interests in a building which results in, say, five landlord members, then each flat-owner would be allocated five votes to reflect this. All of this must be set out in the prescribed Articles of Association of the RTM company.

The landlord has voting rights in respect of each unit he holds. The units may be flats let on periodic tenancies, the caretaker's flat or any non-residential units. This is best illustrated by example:

Example 1

A block of 20 flats, 16 of the flats are leasehold, four of the flats are held by the landlord and let by him on shorthold tenancies. In this case, the 16 leaseholders may be members of the RTM company with one vote each, the landlord has one vote as the flat-owner for each of his four flats. Thus he has four votes in total.

Given the above example, I do not think that the landlord would be entitled to two votes. LEASE seems to imply the landlord would be only entitled to one vote which represents her interest in the flat.

I am really concerned that you may be right on the first issue (two flat scenario) - I know that in order for leaseholders to forcibly obtain the freehold, in a two flat scenario both leaseholders have to 'collectively enfranchise', i.e,: more than 50% of the leaseholders have to collectively enfranchise to be successful otherwise it is easy for the other party to simply forcibly buy the freehold back. However my view is that the RTM scenario is different because nobody can be excluded from having a share in the company if they wish:

[Citing LEASE again] The Notice Inviting Participation

All qualifying leaseholders are entitled to become members of the RTM company; no-one may be excluded for any reason. This is not a matter of choice - the legislation opens the membership to all qualifying leaseholders.

It is also important to remember that, once the right to manage has been acquired, the landlord is also entitled to membership of the company.

dericS

G_M wrote: »

1)
However, although the RTM company should comprise the qualifying tenants of at least half of the flats in the building (ie you),I have a vague recollection that in a case where there are only two qualifying flats, both must sign up to the RTM Company.

G_M further to our discussion, I found the following text on the LEASE website, which does not stipulate any two-flat rule. The important bit is right at the bottom - it seems to imply that regardless of how many flats, at least half of the qualifying tenants must participate in order to successfully obtain RTM:

Qualification for RTM

The building must meet certain conditions and a minimum number of leaseholders is required to take part.

• at least two-thirds of the flats must be let to 'qualifying tenants'*;
• it can be part-commercial but the non-residential part must not exceed 25% of the total floor area.
• RTM does not apply where the immediate landlord of any qualifying tenant is a local housing authority.
• RTM does not apply where the premises fall within the Resident Landlord Exemption. To fulfil this exemption would require the following:
  • The premises must be other than a purpose-built block; AND
  • They must comprise not more than four flats; AND
  • One of the flats must be occupied by the freeholder or an adult member of their family as their only or principal home for the last twelve months.

*A 'qualifying tenant' is a leaseholder whose lease was originally granted for an original term of more than 21 years. There is no requirement for any past or present residence in the flats, nor any limit on the number of flats which can be owned by one person.

The right to manage may only be exercised by a right to manage company and the members of the RTM company must comprise a sufficient number of qualifying tenants. The required minimum number of qualifying tenants must be equal to at least half the total number of flats in the building.


You still may be right so I think this is another question for LEASE (or anyone else on the forum who may be able to help!)

Thanks again for your response!

dericS

G_M,

Okay, I have just found the relevant legislation, which states:

(3)The claim notice must be given by a RTM company which complies with subsection (4) or (5).

(4)If on the relevant date there are only two qualifying tenants of flats contained in the premises, both must be members of the RTM company.

(5)In any other case, the membership of the RTM company must on the relevant date include a number of qualifying tenants of flats contained in the premises which is not less than one-half of the total number of flats so contained.

So you are right, both qualifying leaseholders MUST participate. This is very disappointing. What I have failed to find though, is whether the landlord can reasonably refuse to participate in the RTM? This is what I am thinking:
a) If I serve notice to claim RTM, is the freeholder obliged to give consent AND also obliged to become one of the members of the board of the RTM (thereby meeting criteria 4 above)
OR
b) Is the landlord simply able to refuse consent and say that because only 1 leaseholder is bringing the claim that she (the freeholder) does NOT HAVE TO participate - even though (4) above says both leaseholders MUST participate?

I fear the answer to my question is (b), but again that makes no sense because it leaves the leaseholder sidelined once again by the freeholder. There is a real discriminatory hole in the law I believe, when it comes to a two-flat scenario where one flat is also owned by the freeholder. There seems no way that the second leaseholder is ever able to have a fair say in the running of the building (bar going to the LVT which I am told is useless and costly).