There are often lots of people involved in managing a block of flats, so it’s probably not surprising that some of us find all the acronyms and titles confusing from time to time. So, we hope you’ll find this whistle stop guide on who’s who in leasehold helpful.
Under our leasehold system, owner of flats are actually leaseholders, also known as tenants, despite the fact they will have probably spent a six-figure sum to acquire their home. They actually only bought the right to occupy the flat for a specified number of years, along with the obligation to share the responsibility to pay for the management, insurance and upkeep of the building. Leaseholders never really own the flat.
The block of flats is owned by a freeholder, often also described known as the landlord. These terms are used interchangeably and can often be the same person or entity anyway. Strictly speaking, the freeholder owns the land on which the building stands. A landlord either owns the building (as freeholder), or has a long lease on it or is a third party within the lease. Increasingly leaseholders are also freeholders by dint of collectively owning or acquiring a share of the freehold.
While there are calls for wholesale reform of the leasehold system, the current status quo is that leaseholders do have progressively more rights to have or acquire control over the standards of building maintenance and the costs they have to bear, and to extend their leases to have more security and make them more valuable to sell. This is not to deny the seemingly insurmountable barriers that some leaseholders come up against and the is much good information and advice to be from the Leasehold Advisory Service. (1)
There are several different types of legal entity that can = influence the management of a block. Here’s a quick round up:
Residents’ Management Company (RMC): This is a company set up to deliver the services on behalf of the landlord under the terms of the lease, and it is usually a party to the lease. The shareholders are usually leaseholders who collectively own the RMC. The RMC is required to manage the building’s communal areas, such as stairs and hallways, a responsibility it may outsource to managing agents.
It has control over service charge expenditure, and when someone sells their flat the share or membership certificate will pass to the new owners
Usually the RMC does not own the freehold – ownership remains with the freeholder or, if some or all residents collectively buy the freehold, with am enfranchisement company or trust (see below).
The Directors of a Residents Management Company are typically volunteer leaseholders, although managing agents or accountants are not infrequently co-opted as secretary. Directorship and stewardship of the service charge money is a big responsibility and it is usual to afford directors the protection of Directors & Officers Liability (2) cover policy specifically written for flat management.
Right to Manage Company (RTM): A Right to Manage (RTM) company is set up when leaseholders want to take over the management of their building from a (possibly reluctant) landlord. RTMs were introduced by the Commonhold and Leasehold Reform Act 2002 to make it easier for unsatisfied leaseholders to wrest management from landlords and to choose their own managing their agents. An RTM has to adopt specific articles of association, by law, and must be a limited by guarantee company (leaseholders become members of the company rather than shareholders). When a member sells the lease of flat they must resign from the company and the incoming flat owner takes their place.
Leaseholders wanting to exercise RTM need not prove any fault on the part of the existing landlord/freeholder, who also has a right to be a member of the company as s/he clearly has an ongoing interest in the good maintenance of the asset. The right to manage is available whether the management has been good, bad or indifferent. It does of course come with all the obligations to manage well!
Enfranchisement/Freehold Company: When all or some leaseholders get together to buy the freehold, they can set up a company or buy the freehold in their individual names as trustees. The process of buying the freehold can be quite complex and expensive so you should take good advice to be sure to get it right.
There is comparatively little administration required with a trust, but land can only be held in up to four names, i.e. four individuals can be registered as trustees with the other leaseholders as beneficiaries. So, if there are more than four individuals participating or in any event, the leaseholders will need to incorporate a company so they are all shareholders or members in the company.
Residents’ Association: This is commonly a group of owners (normally leaseholders or freeholders in the case of houses) who own houses or flats within a collective development comprising multiple buildings and connecting roads.
Recognised Residents’ Association: This is an association that has been recognised (Section 29 of the Landlord and Tenant Act 1985). An association gains recognition either by acquiring notice in writing from a willing landlord to the secretary of the association, or by applying to a First-tier Tribunal (Property Chamber). A recognised Residents’ Association can act on behalf of all tenants to represent their ingests and views and request certain types of information from a landlord such as summary of costs etc. The landlord is also required to consult the Association on matters such as service charges and the appointment of managing agents.
Whichever of these organisations you are a part of or provide services to, it is worth remembering that the people who run them are usually volunteers. Anyone acting as a director of a company takes on a lot of work and faces potential liabilities for errors. It is therefore increasingly common practice for them to have the protection of Directors and Officers Liability Cover.(2)
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.