Residents’ Management Companies: “To incorporate or not? That is the question”

If you are a flat owner and want to consider taking control of your own destiny then you may have thought about buying the freehold or exercising the right to manage.

Right to Manage

If you are going to do either of these things then you will need a company incorporated for this purpose. The Right to Manage Company is a creature of statute and is what is known as a company limited by guarantee. It has no shares and follows a ‘not for profit’ model.

Freehold Company

If you are thinking about buying your freehold then you will need a similar company, but it will make more sense if the company has shares. This is because if not everyone takes part the company can then sell a share to the flat owner that joins in. There are also some other good reasons to use a shares company in a freehold situation, particularly if there are other areas in the building that can be ‘sold’ (like the roof space, or a cupboard or basement area). In these cases the ‘for profit’ model generally makes sense.

Even if you are not thinking of buying the freehold or taking on the right to manage then you may well have or be thinking about a residents association. These can be of two types – incorporated (using a company) or unincorporated – using a written constitution.

There are some real advantages to having a residents’ association. Particularly the right to be consulted in relation to service charges (provided that the association is ‘recognised’ by the landlord) There is a process in which an association can be formally ‘recognised’ and then has to be consulted on the service charge if more than 60% of the flats take part.

If you are thinking of either of these options then you may want to consider some of the pros and cons of an incorporated versus an incorporated structure. A brief outline of each appears below:

Unincorporated – no company structure

The easiest to implement this structure is like a club or an association, wholly owned by its members who then have total shared liability as individuals for anything done in its name. Unincorporated associations are governed by a constitution or structure which normally sets out the details of the membership rules and provisions for admission and removal of members. Typically a lot of social clubs historically and even some golf clubs have been unincorporated associations.

Whilst the formalities are few and the rules can be circulated and updated easily, the drawback is that the association does not have ‘legal personality’ and cannot enter into a contract or legal relations. Instead one or more of the members must take this obligation on personally and be reimbursed or indemnified by the other members for things done in the association’s name. This may place an undue burden on the committee members.

The other significant disadvantage is that the liability of the members is unlimited as they are all equally personally liable for things done in the name of the association.

Incorporated – using a company structure

Unlike an association a company has a separate and distinct legal personality. It can enter into contracts in its own name. It also has limited liability. The full extent of the liability of the members (shareholders) is normally limited to the value of their shares. These are normally a notional £1 although they may represent more value depending on the assets then held by the company.

Companies have a fairly standard constitution which can be adapted to suit the circumstances of any particular case. However the basic rules do not need to be drafted ‘from scratch.’

The disadvantage of a company is that it has to have officers (one or more directors) and these individuals have certain obligations (to make sure documents are filed, and to act in the best interests of the company as a whole). There are also an array of other legal requirements that would come into play if the company were to go insolvent or they were to abuse their position as directors, although there are good reasons for these as they are protection of the members of the company and the public at large.

The other small disadvantage is that a company has to keep filing official documents to stay ‘alive’ (otherwise it will be struck off by the registrar of companies). This generally means that someone must act as company secretary in order to ensure these obligations are fulfilled. In addition a company has to file accounts on an annual basis (even if these are very simple) and accordingly there is likely to be another layer of expense with a company as a company secretarial service and an accountant will be required, although these services can usually be obtained at a fairly modest cost.

Which is best?

This is a question of choice that depends on the circumstances of the particular case and the objectives of the group. If you are looking simply to be consulted on the service charges and to have a forum for basic discussion then an unincorporated model may work best. If you are thinking of moving on, or that things may move into the purchase of the freehold or if a limited liability model is attractive as you anticipate a more lively level of debate with your freeholder then an incorporated model may suit you better.

Ultimately, whichever route you choose to go down it is important to get the right advice at the outset so as to avoid costly mistakes or ongoing exposure to risks later on.  

If you would like to know more about the options for incorporating or forming a residents association then email company@bishopandsewell.co.uk

Mark Chick is a head of Landlord and Tenant at Bishop & Sewell LLP and a director of ALEP (the Association of Leasehold Enfranchisement Practitioners).