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.
In this situation, 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 make 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 another party is carrying out maintenance duties than they are merely the agent of the landlord. If the tri-party lease says that the freeholder must also appoint a managing agent, then that must also 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). The RMC on the other hand 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 they have been put on a more level footing with the freeholder!
Today, due to the rights that have been granted to leaseholders since the 1980’s, Resident Management Companies take some additional forms such as those established by collective enfranchisement (leaseholder group action to purchase the freehold, becoming the freeholders themselves), compulsory acquisition of the freehold (where the freeholder has been in breach of its obligations over a period of time) and share of the freehold.
Another type of RMC is where the leaseholders have used legislation is that of Right to Manage replacing the current managing agent with one of their own choosing. Although it has has the acronym of RTM Co rather than RMC, it still comes under the RMC umbrella.
BEFORE REGISTERING AN RMC
Before registering an RMC a name must be chosen and the following form completed:
1: Application To Register A Company (Form IN01)
This requires the proposed company name, where in the UK the registered office of the company will be located and general details including a list of names of the proposed officers, the director(s) and the Company Secretary if one is used. It must be stated as to whether the company is a private or a public one. The registered address doesn’t have to be within the block of flats but it must not be a fictitious one. Some RMC’s use their accountants or Company Secretary address but regardless of what is chosen, all notices, letters and reminders sent by Companies House or any one else will be dealt with at the registered address.
2: Memorandum of Association
The Memorandum will state 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). Since the mid 1980s the objects clauses have been simplified and expressed to be for flat management or commercial objectives;
- Shareholder names;
- Where the registered office is situated.
- A statement of limited liability to warn anybody dealing with the company that the liability of its shareholders is capped, normally to the value of the authorised capital;
3: Articles of Association
- 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 provide a series of checks and balances between shareholders and directors such as:
- The issuing and transferring of shares;
- The calling of general meetings, procedures and members voting rights;
- The calling of Directors’ meetings, voting at board meetings, the disclosure of personal interests and the process for appointing and removing Directors;
- An indemnity which means that directors and other officers will be indemnified if, through their actions, the company makes mistakes.
Note: Companies registered from 1st October 2009 (or adopting new articles from that date), will not have a traditional memorandum of association but new Model Articles that simplify the way a company is run and which is a replacement of Table A. Provisions that were in the memorandum are now to be treated as if they were provisions of the articles. Companies registered before this date can continue to operate under their old memorandum and articles, but need to be aware that these do not reflect current legislation under the Companies Act 2006.
Whilst the company can set up 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 and not draw up their own.
4: A Statement Of Capital And Initial Shareholdings
A company ‘limited by shares’ is the most common choice of company formation and in English law this is a type of limited company whose capital is divided into shares that cannot be offered to the general public. This is a major distinction between a private limited company and a public limited company with shares traded on an exchange. This type of company works on the principl that the liability of shareholders to pay any debts incurred by the company are limited by the balance outstanding (if any) which remains unpaid on the nominal value of their shares, so their personal assets are not liable.
When a property management company is limited by shares the share capital should be limited to one share for each unit in the property. So, if a property is divided into four flats the company should have a share capital of just four shares, one for the owner of each flat. Where a unit is held in joint names, so will the share in the company. The company’s articles provide that shares may be held only by someone who owns a unit in the property and that anyone selling their unit must transfer their share to the person buying it. No other shares may be issued.
A Statement Of Guarantee
Like a company limited by shares, a guarantee company has a clear legal identity that allows it to purchase and own property in its own name and undertake contracts such as employment contracts and contracts for the purchase of goods. When the company is established by guarantee, it is again responsible for its debts as its members are also protected from personal liability. This is typically just £1 so should the company be wound up whilst people are still members (or within one year of their ceasing to be a member) their personal liability is guaranteed to that specific amount.
There are however exceptions:
- If the memorandum states their liabilities to be unlimited;
- If they have been guilty of acting in wrongful manner;
- If directors exceed the powers conferred on them they can be liable to recompense from the company for any loss incurred;
- If a director gives a personal guarantee;
- If any director enters into a contract in their own name rather than “for and on behalf of”;
- If a director misleads a supplier as to whom the true customer is to be;
- Issues a cheque, upon which the company name is not clearly stated, and which the bank refuses to honour;
- If found guilty of fraudulent or wrongful trading, the court may instruct a director or shadow director to contribute to the assets;
- A person who has been disqualified from acting as a director under the Directors Disqualification Act 1986, or another person who knowingly acts under instruction from that person.
Each company member can be issued a non-transferable certificate of membership which makes them guarantors and the company must have one or more members who will be entitled to attend general meetings and vote (subject to any special provisions in the company’s articles). This is unlike a company limited by shares, because a guarantee company is only controlled as there are no shares or other security in the company that can be sold to someone else. The certificate of membership will automatically lapse on the sale of a flat.
Whilst the company is not prohibited from profit distribution (should it make any) by the Companies Act (or any other law), or it chooses to retain them for use elsewhere, it is commonplace for restrictions to be put on profit distribution in the company’s Articles. These will not only apply to any profits while the company is running but also to the distribution of assets (after paying creditors) should the company be wound up. Sometimes the restrictions are also reinforced by the prevention of payment of salaries or fees to the directors but not all the time.