Lees Solicitors - Resident Management Companies - Mark Broughton

Commercial Property News

Resident Management Companies - Mark Broughton


Resident Management Companies - Mark Broughton

In the Business & Property Services Department at Lees Solicitors LLP we often hear from disgruntled leasehold flat owners (Lessees) about the management (or mismanagement) of their building. In most cases, the Lessees live in a block or development owned or run by a company in which they are a shareholder or member.

Common complaints are that their annual payments made towards the costs of running the communal areas of the development are either too high, or that they do not believe that the quality of service they are receiving is sufficient. It has also been reported to us that some individuals within developments are seemingly ignoring requests to pay such management charges to the company whilst still receiving the benefits of the services provided.

This can cause particular difficulties between residents, the companies that serve them and indeed may even have a detrimental effect on the salability of units within the development.

This situation will occur on a much more regular basis given the steadily rising number of properties that are constructed where communal areas are owned and/or managed by companies made up of the residents.

These companies are referred to as Resident Management Companies (also known as RMC's for short).

Few Lessees seem to realise that a Resident Management Company is a properly constituted company that has to be run in compliance with the Companies Act. By virtue of being a Lessee at the block they will often have a share or membership of the Resident Management Company and democratic rights in the way that the management company is run.

Many Resident Management Company own the freehold title to the estate in which their members live, but it is not always the Resident Management Company that manages the development. They can contract these obligations out to a third party or a professional managing agent. Nevertheless, it is often the case that the members of the Resident Management Company wish to bring the administration and management of the development in-house, so the residents themselves have much more say as to which contractors and personnel are used for cleaning, maintenance and repair of the communal areas.

In such situations where management responsibilities lie with the Resident Management Company, then they have ongoing obligations to keep the building and communal areas in good repair and condition. They also have to insure these areas for the benefit of the Lessees. The fact that Lessees are also shareholders or members provides the Resident Management Company with no excuse for failing to perform its obligations and hence the company is ultimately accountable to the residents.

Usually, a committee is formed by the directors of the Resident Management Company who participate in regular meetings to discuss financial, legal and general management issues concerning the estate. The directors appointments are voluntary and it is essential that there is enough interest generated by the residents of the development to ensure that these positions are filled. A Resident Management Company can suffer badly from resident apathy. In extreme situations the company many not be able to continue to fulfill its obligations where no resident wishes to take part in the continued management of the estate.

However, the position of director is often difficult and not as glamorous as some perceive. Although, they do receive benefits through the good management of the Resident Management Company, the positions do not command a salary and their duties are often secondary to normal day to day work. Directors may be personally liable for any breaches of the Trustee Acts or the Companies Acts in relation to accounting for funds. Where directors employ a variety of contractors to carry out the services required by the Resident Management Company, some personal liability may be attached to them in relation to crimes committed by their employees or injuries suffered by them. This is a very complicated area in its own right and directors must consider their full personal responsibilities before accepting such a role.

The Resident Management Company will have control over two funds: the service charge, and the company's own money. It is essential to keep the funds separate, or at the very least, separately accounted for.

The Company's funds derive from its share capital and subscriptions or levies from members. A Resident Management Company may have very limited requirements for cash, but some will be needed.

The service charge fund is made up of contributions from Lessees in accordance with the terms of their leases. The Resident Management Company is a statutory trustee for these contributions (S.42, Landlord & Tenant Act 1987), and the beneficiaries under the trust are the Lessees. One of the trustees' fundamental duties is to account for all funds received and disbursed. Annual accounts should be issued to all members. The leases should provide clearly how service charge funds may be spent. Both contractually and by statute, funds can only be spent on items authorised under the leases, and all further expenditure must be reasonable.

The legal aspects of running a successful Resident Management Company are often overlooked. Some of the main issues to be considered are:

  1. Resident awareness - many residents do not know of their personal obligations when they take over the formal responsibilities for one of the flats within the estate. It is essential that they are informed of this as quickly as possible so that all flat owners live harmoniously together abiding by the terms of their individual leases.
  2. Deed of Covenant - as the original names on a lease never change, each prospective owner must sign a Deed of Covenant to agree take on all rights, responsibilities and reservations with the lease itself. This is a direct contract with the freeholder and/or Resident Management Company and needs to be put into place before occupation of the flat.
  3. Notice of Assignment - every new owner (and if applicable their mortgage provider) should be officially notified to the Resident Management Company so that records can be updated accordingly (and the service charge and notices regarding the management of the company are correctly addressed).
  4. Resident Management Company Meetings - every meeting, whether Annual General Meetings, Extraordinary General Meetings or Committee Meetings should comply with all necessary procedures and requirements to ensure that the discussions and decisions of the Directors and the members are correctly detailed and actioned.
  5. Service Charge Payments - regrettably, not all residents pay their service charges on time. This can cause problems as the Directors may be faced with challenging owners of neighbouring properties for such monies. A legal advisor will be well placed to make all necessary contacts with the Lessee to establish why no payment has been made and when it will be forthcoming. If needs be, the solicitor can advise the Resident Management Company the best course of action to recover the debt.

In conclusion, it is fair to say that Resident Management Companies are unique in their operation. Membership of the companies can be transient; their directors are often temporary and undertake the position secondary to other work commitment, without reward.

Yet it is essential for the well being of each individual property owner that such companies are successful and effective in their role. If the administrative functions of Resident Management Companies are carried out by a professional, this reduces the risk to the company and the individuals they represent. Such a service is one that few companies can afford to refuse.

Here at Lees Solicitors LLP it is our aim to assist any Resident Management Company in need of guidance and help.

Through Mark Broughton, Principal of our Residential Property Team, we offer a professional, friendly and personal service. Mark has gained a wealth of experience by dealing with Resident Management Companies and their members since qualification. Many of our existing client companies have received the benefit of Mark's advice through the successful management of their estates.

Any instruction received from a Resident Management Company can be discussed and considered with Mark or a member of his team. Thereafter a framework for our professional fees can be tailored to suit your needs.

If you would like to discuss the needs of your Resident Management Company or indeed wish to gain further information as to how Lees Solicitors LLP can be of service please do not hesitate to contact Mark on 0151 342 6273 or mwb@lees.co.uk.

Mark Broughton

 

This article provides a summary of a recent case/change in law/news item. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.


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