An Overview of Tri-Party Leases and the RMC
Historically there used to be only two parties to a lease: the leaseholder and the freeholder, but being a freeholder in the 1980’s had lost much of its attraction due to the ever-increasing rights of leaseholders. So, in yet another game of ‘cat and mouse’, freeholders created the tri-partite (tri-party) lease consisting of the freeholder, the leaseholder and the resident management company which is itself comprised of leaseholders. This type of lease is the most commonly used by developers of new builds today and the the main purpose of the company is to manage and maintain the common areas of the building on behalf of the freeholder (in other words, any areas that do not belong to each leaseholder). The idea is to give leaseholders the feeling that they are more in charge of how their buildings are managed. However, the developers/freeholders carry out minimal duties such as collecting ground rent (their investment income) and placing buildings insurance (where they make money on commissions). They leave the RMC to deal with the more complex and time-consuming elements such as service charge collection (under which the demands have to comply with statutory requirements), nuisance leaseholders, those who have breached their lease covenants and takig legal action to rectify those breaches.
If the RMC is party to the original lease then it’s obligations are expressly set out according to the lease terms, which makes a contract between itself and the freeholder unnecessary. This is because its contractual rights lie directly with the leaseholders.
On the other hand, if the RMC is directly responsible for performing the landlord’s covenants but another party is carrying out maintenance duties then that other party is merely the agent of the landlord. If the tri-partite lease says that the freeholder must also appoint a managing agent, then that must also be complied with.
The Resident Management Company is a legal entity which acts as a person in its own right and it is the Company Director(s) who exercise all powers on its behalf. The most significant difference between Directors of commercial companies and those of an RMC is that Directors of the latter are voluntary and not usually paid! They will nevertheless take on a great amount of legal responsibility under the Companies Act 2006. They will also take on a considerable of fiduciary duties under common law which have legal force involving trust.
The precedence created is that directors ‘are bound to use fair and reasonable diligence in the management of their company’s affairs and to act honestly’ implicitly to the benefit of the company’s shareholders, creditors and employees. In other words, the directors will act in the best interest of all concerned parties.
These duties include:
- Prohibiting loans to directors;
- Restricting other credit to directors;
- Disclosing details of loans and other transactions in which a director has an interest in the accounts.
More on the role of the Company Directors and the different types can be read here.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Whilst the legal obligations of the company are governed by company law, (specifically that of the Companies Act 2006) at the heart of any company lies the Memorandum and Articles 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.
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 give 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), do 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 run under their old memorandum and articles, but need to be aware that these do not show current legislation under the Companies Act 2006.
An RMC can also be a company comprised of leaseholders who have collectively purchased their freeholds and become the new freeholders. Due to the logistics of a block larger than half a dozen flats they are likely to use the services of a managing agent.
Before registering an RMC with Companies House, form INO1 must be completed which requires the following;
- The proposed company name;
- The UK address of the registered office (which doesn’t have to be within the block of flats but it must not be fictitious;
- A list of names of the proposed officers, Directors(s) and Company Secretary.
LIMITED BY SHARES OR GUARANTEE
The company is usually established as being limited by shares as this is the most common choice of company formation. The individual share price can be of any value but the usual nominal value (very small and far below the real value or cost) of a single share will be £1 and should be limited to one share for each unit in the property. Where a unit is held in joint names, a single share in the company will be held in those joint names. The company’s articles (see below) 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.
Because of ‘limited liability’ the company exists as a separate legal ‘person’, disconnected from the shareholders and the directors. Just like a real person, the company can own property (such as money, land, intellectual property etc) and undertake contracts such as employment contracts and contracts for buying goods. It will however be the Company Director(s) who exercise all powers on its behalf.
The company is also be responsible for its own debts under ‘limited liability’. So, when debts are incurred in the course of its business, the liability of the Directors and shareholders is ‘limited’ in that a) they are not responsible for company debts and b) their liability extends only to the ‘stake’ that they have in it.
Limited by Guarantee
The RMC could also be a company limited by guarantee and like a company limited by shares, a guarantee company also has a clear and separate legal identity with the Company Directors exrcising all powers on its behalf but the difference is that it can’t be formed by share capital under s5 of the Companies Act 2006 making it unsuitable for commercial enterprise but making it less likely to become insolvent.
Without shares there can be no shareholders. Instead, the company will have ‘members’, each of whom can be issued a non-transferable certificate of membership which makes them guarantors with ‘limited’ liability for the company’s debts, usually up to a fixed sum of £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 a wrongful way;
- If directors exceed the powers conferred on them by the company Articles 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 and not “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.
Another difference is that a guarantee company is only ‘controlled’ because 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 keep 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.