Forming a Residents' Management Company - what you should know

Forming a Residents Management Company: what you should know Karen Howell Bowley is Jordans’ foremost expert on the incorporation of RMCs.  Here she shares her extensive knowledge with Flat Living.

The leaseholders and/or freeholders of a Residents Management Company (RMC) will be a diverse group of people with one thing in common.  They share a building that has been separated into individually owned and occupied units.  Each unit depends upon the others for support and protection – quite literally.  So the walls of one flat will depend upon the walls of another in order just to stay up!  Being so interdependent they would be impossible to manage without some form of integrated management structure.  Any potential buyer of a unit should ensure that before he purchases there is a proper structure in place providing rules to enforce the obligations between each unit in relation to the other units.

Most freehold property owners never have to address these problems because they are the absolute owners of every single part of the property. However, with flats, under the terms of the lease the leaseholders will have entered into covenants with the landlord which are necessary for the efficient running of the building or the estate.  These covenants are obligations contractually binding on the leaseholders.  Without a management structure to enable the enforcing of covenants and collecting monies due, management of the property in question could break down. Resident management companies will deal with (among other things):

  • Management and maintenance of common parts like staircases, halls, gardens, drive-ways, roads and other access-ways;
  • Collecting service charges and arranging services – cleaning, decorating, lift maintenance and window cleaning;
  • Payment of insurance, maintenance costs, professional fees, rates, taxes etc; and
  • Purchase or own the freehold i.e. become the landlord, as necessary.

Buying a flat

When buying a flat, a buyer should always consider the management structure.  Flats in well-managed blocks are usually easier to sell and because they are well managed are likely to be more harmonious places in which to live.

The recognised and most common structure is the limited company.  Who owns the company will often govern how well or badly management is controlled.  Structures will vary according to the age of the block, where it is located, and the number of flats and also according to the method by which control of management has been acquired.

Company limited by shares or guarantee?

By Shares

If a share company, the company normally issues one share to each flat owner.  Each share will have a nominal value and upon payment for the share each applicant shall be entitled to and then become a member of the company and can vote as a member.  It will normally be a condition of ownership of the flat that the new tenant becomes a member of the company and the old tenant transfers the share.  If there are two tenants of a single flat (e.g. husband and wife) then they will own the share jointly.  Care must be taken to ensure that they are not issued one share each as then this will give them too many voting rights and upset the balance of power between flat owners. If the company fails, shareholders’ liability is limited by the amount they have paid for the shares. A company limited by shares can distribute any profits to the members.  However the downside of profit distributions to the members of the company is that the company and its members would then become liable to tax.

By Guarantee

This is the simplest form of management company if you live in a relatively small block of flats.  This is because it is much easier to deal with changes of ownership (the outgoing tenant resigns, the incoming tenant is admitted as a member) so there is no need to physically transfer shares.  In addition, it is usually one member one vote.  No share certificates are issued.  Each member is entered on the register of members provided that he fulfils the necessary qualification for membership (i.e. he or she owns one of the flats).  Each member is removed if he no longer qualifies (sells his flat). A company limited by guarantee is usually formed as a not-for-profit organisation and therefore an advantage is that they should not be liable to corporation tax. The members of the company act as guarantors and therefore if for any reason the company should fail, the members have to pay a nominal amount in the event of any shortfall.

As always, professional advice regarding individual tax liability should be sought before establishing the company.

Articles of association

The articles of association will set out the constitution of the company and would typically include the following features.  Care should be taken to ensure that the articles are fit for purpose.

The articles are tailored to give the power for the company to own (freehold or leasehold) and manage the named property/site.  The full address of the property the company will manage is included.  This makes clear that the company is not to be used for other purposes. Power for the company to deal with all usual management activities (e.g. maintenance and insurance) and also specific powers to maintain paths, roads, access-ways, grounds and landscaping and to arrange services and amenities. If required, and it is a new development, a power to allow the developer of the property to retain voting control of the company until all the dwellings or units are sold.  Once all units are sold, the developer ceases to be a member of the company. The articles also provide that only a lessee or freeholder may be a member.  Whenever a unit is sold, the purchaser becomes a member of the company in place of the person who has sold their unit.

Limited company

The limited company is an artificial legal entity in the sense that it has no power to fulfil its functions itself.  Somebody must therefore represent the company and carry out its functions.  It is this function which directors perform, either individually or collectively.

Private companies generally restrict ownership of the company to a limited class of persons and all flat management companies are likely to fall into this category.  Flat management companies are advised that more than one director should be appointed so that a ‘committee decision’ on matters relating to the company may be reached.  It also provides some protection against one director taking risks with the company funds.

The company is managed by the directors who may exercise all powers of the company.  It will clearly fall to the directors of the flat management company to assume responsibility on behalf of all flat-owners to ensure proper management of the property and to carry out the wishes of the majority of members expressed at members’ meetings.

Directors are obliged to exercise their duties to promote the success of the company upon whose behalf they act and to comply with all statutory requirements.  Due to the administrative and non-trading nature of a flat management company, it is not often that the directors will have cause to be overly concerned by the majority of statutory requirements.

No remuneration is usually allowed for management company directors but provisions may be made for expenses to be paid in certain circumstances if the members consider it appropriate.

In allocating directors’ duties, it is possible to delegate specific areas to sub-committees, if you have a larger block of flats, to ease the workload of a particular director.

Common administrative requirements include:-

  • insurance
  • maintenance and repairs
  • banking
  • rent and service charge collection
  • preparation of annual budget estimates
  • maintenance of books of account
  • annual accounts
  • security of property, and
  • keeping flat-owners informed.

Maintenance and repairs

Once the building is owned by the flat management company, the main structure of the property will usually become its responsibility.  This includes the foundations, external walls, joists, roof and other supporting structures and all the common parts, such as staircases, lifts, hall and main access-ways, gardens or yards and driveways.  The director with responsibility for these matters will sometimes find this task onerous since the cost of maintenance and repairs features high in the list of costs which he flat-owners will ultimately have to share.

The directors dealing with maintenance and repairs will need to liaise with the directors involved with insurance and with the person whose job it is to prepare annual expenditure estimates.

Penalties

It is important to remember that as a director, a flat-owner is liable to penalties both financial and otherwise.  Failure to file an annual return or completing it improperly may result in a fine.  Directors may also be disqualified from acting as a director in certain cases where there is persistent default in submitting documents. 

Check list

Here is a check-list of those items which should always be uppermost in a director’s mind:

  • File changes of details of officers
  • Keep the statutory books up to date at all times
  • Ensure statutory accounts are prepared within the time-limits
  • File annual returns on time
  • Diarise critical dates for dealing with important company matters
  • Have good professional advisers to hand
  • Keep all flat-owners informed of any major item of importance
  • Keep legal documents such as leases and the other title documents in a secure place
  • Understand the provisions of the leases
  • Do not permit individual flat-owners to delay payment of monies owing by them for too long
  • There may be a perception that the duties for directors of a residents’ management company are less onerous than if it were a trading company.  The responsibility is great and directors may benefit from taking advice on their position.

Such companies are the foundation to the good management of residential blocks – directors who take their responsibilities seriously are the mortar that holds it together.

Karen Howell Bowley is a company formation executive with Jordans Limited and has more than 20 years’ experience in this field.

For further information please contact Carol Prince, Commercial Manager, Jordans Limited on 0117 918 1284 or email carol_prince@jordans.co.uk or visit www.jordans.co.uk