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. Just like their commercial counterparts, all residential management companies are governed by the Companies Act 2006. This is the most significant company legislation since 1948, and contains 1,300 sections and 16 schedules! It was also brought into effect in stages, starting in January 2007 with the final, (and main), provisions becoming operative on 1st October 2009.
As leasehold management companies are treated in exactly the same way as commercial companies, they have to abide by the Act and all its secondary legislation!
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 and fiduciary duties under common law, which have legal force, the latter of which involve 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.
There are three types of Director which can be found here.
Employing Managing Agents
Unless they self manage, RMC’s will invariably use the services of a managing agent. They will however need to resist the temptation to sit back and let them get on with it because they actually employ them. They must also be prepared to act as any other commercial employer would which includes questioning any action taken on their behalf by the agent that they do not understand.
So, in order to instruct effectively Directors will be required to be familiar with the legislation specific to block management, and the leases (hopefully they should be uniform throughout the block), and abide by the RICS Service Charge Residential Management Code and Additional Advice to Landlords, Leaseholders and Agents (3rd Edition). This Code was initially approved by the Secretary of State under s87(7) of the Leasehold Reform, Housing and Urban Development Act 1993 with the 3rd edition of the Code coming into effect as of 1st June 2016 under The Approval of Code of Management Practice (Residential Management) (Service Charges) (England) Order 2016.
The Code is however not legally binding and so breaching it is not a criminal offence, nor does it create any civil liability. There are also no routine checks made on agents to ensure they are abiding by the Code so unless their contents can be used in evidence in court and tribunal proceedings, where freeholders or managers have failed to comply with them, they are in reality ‘best practice’ guides.
RMC Directors will also be required to abide by the best practice guide of the ICAEW Tech 03/11 Residential Service Charge Accounts as they will be responsible for both the service charge accounts (monies paid by leaseholders and held in trust) and the statutory accounts of the company which is money generated from share capital or membership subscriptions. If it owns the freehold it can also expect income from ground rent or premiums from lease extensions. These funds are taxable at the rate for corporation tax.
Note: Service charge contributions are not assets of the company.
There are mixed opinions as to whether both accounts should be combined but Tech 03/11 states that they should be prepared separately. The key reason is that service charge accounts are required to follow the terms of the lease making them incompatible with the statutory requirements laid down by Companies House.
It is clear that 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 keep overall responsibility for the health and safety of their block, regardless of whether they delegate to others or not.
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, even if they use a company secretary. 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 here in the excellent overview of the subject by Laura Severn, of award-winning Brady Solicitors