RTM companies: can’t pay, won’t pay

The trouble with right to manage companies is that they don’t have any money.  Nicola Muir explains the position in this article first published in the Estates Gazette.

An RTM company is responsible for the upkeep of the building and has a right to enforce tenant covenants. But how does it do this if the lease doesn’t provide for the payment of service charges in advance or allow for the recovery of the costs of taking enforcement action? One solution is to seek a variation of the lease terms under the Landlord and Tenant Act 1987. This happened in two recent cases.

The first case

The right to manage was introduced by the Commonhold and Leasehold Reform Act 2002. It allows leaseholders to take over management of a building without needing to prove any fault of the landlord. From acquisition, the RTM company is responsible for performing “management functions”, which are defined as functions in respect of services, repairs, maintenance, improvements and management. Its only income is the service charges which it collects. It has no proprietary interest in the building so cannot raise a mortgage and has no right to forfeit.

Most leases were not drafted with the RTM legislation in mind, so many leave an RTM company in an impossible position, as happened in 56 Westbourne Terrace RTM Co Ltd v Polturak and another [2025] UKUT 88 (LC). Polturak and Davies were in dispute with the RTM and refused to pay their service charges. The only clause in the lease which allowed the landlord to recover the costs of the resulting litigation was a fairly standard provision requiring the tenant to pay “all expenses including solicitors’ costs and surveyors’ fees incurred by the Lessor of and incidental to the preparation and service of a notice under Section 146… of the Law of Property Act 1925… notwithstanding that forfeiture be avoided otherwise than by relief granted by the Court”. The trouble was that an RTM company has no right to forfeit, so this clause would never bite. The other leaseholders would not fund the litigation so they applied to vary the leases.

Section 35 of the 1987 Act allows the appropriate tribunal to vary residential leases if they fail to make satisfactory provision with respect to one or more of the matters set out in section 35(2). The grounds are fairly limited, but include:

“(e) the recovery by one party to the lease from another party to it of the expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party or of a number of persons who include that other party.”

Once the “gateway” ground is met, the tribunal has a discretion as to whether to make the proposed variation or some other variation which it considers more suitable (section 38). However, the tribunal may not make the variation order if it appears that the variation would be likely substantially to prejudice the respondent or anyone else who is not a party to the application, unless a payment of compensation would afford them adequate compensation. The 2002 Act entitles an RTM company to apply for a variation under the 1987 Act.

The tribunal has traditionally been reluctant to vary leases and limits variations to those strictly necessary to remedy the unsatisfactory provision; section 35 does not give the tribunal carte blanche to produce a fairer lease. In 56 Westbourne Terrace, the deputy president of the Upper Tribunal, Martin Rodger KC, helpfully set out six-stage test:

(1) Are there any grounds under section 35 for making the variation?

(2) Would the variation substantially prejudice any person?

(3) If so, would money be adequate compensation for that prejudice?

(4) Is there any other reason why it would not be reasonable in the circumstances for the variation to be effected?

(5) Should the variation take effect retrospectively?

(6) Should compensation be paid in respect of any loss or disadvantage likely to be suffered as a result of the variation?

The Upper Tribunal said the question is whether, in the circumstances, the provision is “satisfactory”. The test is not whether the lease is “clear and workable”, and there is no requirement for a defect. The RTM company was clearly unable to fund the litigation without external funds. In granting the variation, the deputy president said:

“In all of those circumstances it is not difficult to describe a structure under which the expense of enforcement falls on the members of the company or the whole body of leaseholders as one which fails to make satisfactory provision for the recovery of the costs of services.”

The second case

In Spire House RTM Co Ltd v Primavista Properties Corporation (SA LON/00BK/ LVL/0004) the building included a church spire in urgent need of repair at an estimated cost of over £1.5m. The leases capped the amount which could be demanded towards the reserve fund and by way of interim charges in a way that meant it would take years to collect sufficient funds.

The tribunal accepted there was ample evidence the provisions of the leases were not working in practice and, as a consequence, the spire had become dangerous. A variation removing the cap on the interim charge was made. An appeal against that decision was heard on 8 July 2025. The appellants argued that the means of the person with management functions should be irrelevant to the question of whether the lease makes “satisfactory provision” for the recovery of service charges and the inability to recover costs in advance is not a defect.

The outcome is awaited.