Resident Management Companies
Before the 1980’s there were only two parties to a lease: the freeholder (lessor) and the leaseholder (lessee) but when leaseholders got ever-increasing rights, freehold ownership was not nearly so attractive as it had previously been. So developer landlords introduced the tri-party lease, a lease with three parties to it: the freeholder, the leaseholder and the management company. Historically the company is limited by shares.
The RMC will act as a maintenance trustee and if it is party to the original lease then it’s obligations will be set out according to the lease terms. This will render a contract between itself and the landlord unnecessary as its contractual rights lie directly with the leaseholders. On the other hand, if there is simply a landlord/lessor and a leaseholder/lessee in the lease but someone else is carrying out maintenance duties than that ‘someone’ is merely the agent of the landlord. If the tri-party lease says that the freeholder must also appoint a managing agent, then that must too be complied with.
The sting in the tail for leaseholders however is a big one. The developer/freeholders keep the freehold and carry out a minimal amount of work such as collecting ground rent (their investment income) and placing buildings insurance (where they make money on commissions). It is the RMC that is required to carry out the more complex and time-consuming elements such as service charge collection, under which the demands have to comply with statutory requirements, suing leaseholders for non-payment, dealing with nuisance leaseholder issues such as keeping pets against the lease terms, erecting satellite dishes, subletting breaches, car parking issues, unauthorised alterations, noise created by DIY work at unreasonable hours, etc and all under the guise that this gives leaseholders similar powers to that of the freeholders!
Some major Acts of Parliament have given today’s RMC’s the right to own their freeholds under collective enfranchisement, under compulsory acquisition) or share of the freehold but whatever form an RMC takes it is a legal entity which act as a person in its own right. The company itself is governed by its Memorandum and Articles of Association with the Memorandum stating the following:
- The company name;
- The company type;
- If the company has shares, its share capital and the value of each share (unless the company is limited by guarantee);
- It’s objectives (what it will do);
- Where the registered office is situated.
The Articles set out the rules for running the company’s internal affairs and every company formed under the Companies Act 2006 will have them. They are designed to ensure the smooth and efficient operation of the company and whilst the company can establish its own rules, because they are legally binding on the company and its shareholders/members they cannot include rules that are against the law. Having said that, the majority of companies, especially small ones, tend to rely on model articles rather than draw up their own.
It is the RMC Director(s) who exercise all powers on behalf of the company but the most significant difference between Directors of commercial companies and those of an RMC is that Directors of the latter are not usually paid! They will nevertheless be required to be familiar with the lease(s) and abide by the RICS Service Charge Residential Management Code and Additional Advice to Landlords, Leaseholders and Agents (3rd Edition) as well as be familiar with block management legislation, an overview of which can be found here and the health and safety legislative requirements of the common areas, an overview of which can be found here.
RMC Directors will be responsible for both the company statutory accounts and those of the service charge accounts and will be required to abide by the best practice guide of the ICAEW Tech 03/11 Residential Service Charge Accounts.
Who can be an RMC Director?
Anyone can be a Director unless they have been disqualified under the Company Directors Disqualification Act 1986, or by being an undischarged bankrupt. There are no maximum age limit but s157 of the Companies Act 2006 (minimum age for appointment of director) imposes a 16 year minimum and s159 of the same Act (existing under age-directors) states that directorship ceases where a company has an under-age director on the implementation date (1st October 2008). Also there are no statutory limitations as to nationality or residence so it is possible to incorporate these into the company Articles but this rarely happens. It is unusual for modern company articles to impose a share qualification but if they do then the shares must be acquired within two months of the Directorship appointment.
Volunteering to become an RMC Director is a role that should be given careful consideration due to the responsibilities that will be taken on.
For example, under the Corporate Manslaughter Act of 2007, not only can Resident Management Companies be prosecuted under criminal law for serious breaches of health and safety law but the Health & Safety Offences Act 2008 raised the maximum fine for offences in the lower courts from £5,000 to £20,000. It also increased the number of offences for which an individual can be imprisoned. It is therefore vitally important for RMC Directors to be aware that it is they who retain overall responsibility for the health and safety of their block, regardless of whether they delegate to others or not.
Another factor to consider is that most RMC’s use the services of managing agents which makes the Directors their employers! They must therefore be prepared to act as any other commercial employer would which includes questioning any action taken on their behalf that they do not understand.
Failure to prepare and keep records, maintain the company registers or file the accounts can result in the Directors being held liable for penalties, criminal prosecution and possible disqualification. But how can RMC Directors protect themselves against someone making a claim against them? The answer is that of Directors and Officers Liability Insurance and more on this can be read about in an excellent overview of the subject by Laura Severn, of award-winning Brady Solicitors.