Company formation
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
T
he 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, 22 www.flat-living.co.uk
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? 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.
