Resident Management Companies
Up to the 1980’s there used to be only two parties to a lease: the leaseholder and the freeholder, but by then being a freeholder had lost much of its attraction due to the ever-increasing rights of leaseholders. So never ones to slouch when it came to ideas for continuing to make money out of leasehold, developers devised a new way of drafting their leases by creating the tri-partite (tri-party) lease consisting of the freeholder, the leaseholder and a resident management company, a company made up of leaseholders.
The ‘benefits’ of this new lease were that it provided a direct relationship between the leaseholders and management from the ‘build phase’ with the RMC managing and maintaining the common areas of the building on behalf of the freeholder (i.e. any areas that do not belong to each leaseholder).
If the company was party to the original lease then it’s obligations would be expressly set out according to the lease terms, which made a contract between itself and the freeholder unnecessary. This was because its contractual rights lay directly with the leaseholders. On the other hand, if the RMC was directly responsible for performing the landlord’s covenants (promises) but another party carried out the maintenance duties then that other party would merely be the agent of the landlord. If the tri-partite lease said that the freeholder must also appoint a managing agent, then that would also have to be complied with.
It was obviously successful on at least one level because today tri-partite leases are the most common form of lease used by developers of new-build flats. Leaseholders have a share in the management company (historically RMC’s are companies limited by shares) and have more of a say in how their building is run.
But what is the reality? Because the developers/freeholders keep the freehold they are able to to carry out minimal duties such as collecting ground rent (their investment income) and placing buildings insurance (where they make money on commissions). These are two of their covenants but the rest they offload onto the RMC so they can deal with the more complex and time-consuming elements of leasehold tenure such as service charge collection (under which the demands have to comply with statutory requirements), lease breaches (which often lead to legal action), subletting and parking issues.
All that work and the RMC doesn’t even own the freehold and it’s Directors take on the same amount of responsibility as their corporate counterparts!
OTHER TYPES OF RMC’s
Right to Manage Companies
Another type of resident management company that doesn’t own the freehold is one that is established by leaseholders under right to manage.
It was the second major right granted to leaseholders under s71 (Part 2 Chapter 1 of the Commonhold and Leasehold Reform Act 2002 and hailed as a great right as it was the most radical attempt at addressing the problems caused by negligent and incompetent managing agents. It’s a ‘no-fault’ process allowing leaseholders to either replace their own managing agent with one of their own choosing with no premium payable and without needing to go to court to prove ‘fault’ on the part of the freeholder. Smaller developments can choose to self-manage.
There is criteria that has to be met for both the building and the leaseholders, and a company that has to be established to act as the vehicle for using the legislation.
Share of the Freehold/Collective Enfranchisement
When flats are sold as ‘share of the freehold’ it will be because one of two mechanisms have been used:
- The freehold is owned jointly by a number (up to four) of the flat owners in their personal names which will be noted on the title deeds;
- Leaseholders have exercised the right under s1 of the Leasehold Reform, Housing and Urban Development Act 1993 to collectively buy the freehold and become the new freeholders.
Each of the participating leaseholders of collective enfranchisement will hold a nominal share in that company (along with their leases) as company directors, with the Articles of Association needing to be drafted carefully so that when an individual sells their flat they also have to sell their share in the company to the new purchaser. If two people own the property then the share will be owned jointly so as not to give one flat too many voting rights.