Self Management / Right to Manage

Leasehold Property - FAQ

What is a residents association

Management Company


Management Company controlled by Tenants


Dealing with Insurance Obligations


Who will deal with repairs and decorations


What will I need to know about Statutory Controls on Service Charges?


What do I need to know about Companies Acts?


Meetings


Companies House


Company Secretary


Directors

 


What is a Residents Association

This is usually an informal tenants grouping, which acts as a pressure group monitoring and checking the performance of the Landlord and any managing agents.

Unless the association is registered, it has no legal standing, but it can be effective in making representations to the Landlord and in local affairs, e.g. road proposals/planning applications. Membership of such associations is usually a matter of choice. A nominal charge may be made for membership to cover running costs and administration expenses, but the committee is normally unpaid.

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Management Company

The Landlord may delegate all or some functions to a Management Company. This maybe connected to the landlord and is likely to be limited by shares or by guarantee. This is distinct from an agent appointed as a Managing Agents or a Residents Association. Please see below the note on Management Companies.

The landlord /tenants may be the shareholders and officers of the company, but not always. Where the tenants are shareholders, the lease will normally provide that on the sale of a flat, the incoming tenant must become a shareholder.

Although a non-profit making concern, a management company is still subject to all the provisions of Companies Act legislation, including filing annual returns, AGM’s and electing and notifying appointment/retirement of directors etc. In some cases, the freehold may been purchased by the management company and so the freeholder and the company will be the same.

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Management Company controlled by Tenants

Under the Leasehold Reform Act 1967 and the LRA, it is possible to acquire the right to purchase the freehold of your house after the tenant has owned the property for a period of 2 years.

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Dealing with insurance obligations

Insurance requirements will be set out in the leases and the risks covered by the block policy must include all the risks mentioned.

Through its directors, the company should annually review the amount of the insurance cover and increase it in line with the cost of the rebuilding index - this is not the same as the rate of inflation referred to by the media. This information can be obtained from a surveyor, or insurance broker. Please note that if the leases do not allow for the cost of a professional insurance valuation, it will be necessary to obtain the consent of all the tenants before incurring the cost.

It may be appropriate to pay an increased premium to delete the “excesses” which normally apply to damage caused by certain risks, to try and avoid disputes about who bears the excess in certain cases e.g. if a pipe bursts in one flat and causes damage in another.

It is vital to pay renewal premiums as and when they fall due, before cover expires. If a tenant’s contribution is delayed, cover must not be allowed to lapse, and it may be necessary for other tenants to cover the extent of the delayed premium.

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Who will deal with repairs and decorations?

The company should aim to maintain the whole building in a way that not only supports and enhances the value of each flat, but keeps them readily marketable as well.  In deciding what work to carry out and how much to spend, two points should be borne in mind:-

  •  if any costs are incurred which fall outside the service charge provisions of the leases then the agreement of all the tenants will be needed, and
     
  • compliance with Landlord and Tenant legislation (see later) is necessary.


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What do I need to know about Statutory Controls on Service Charges?

Landlords and management companies are required to observe some formalities in collecting service charges; otherwise a tenant’s contribution may be impossible to recover legally under the Housing Acts 1985 onwards.  

Even if work is carried out with the unanimous approval of all the tenants, the formalities should be followed in every case to avoid subsequent disputes and protect the company and other tenants from the difficulty that might arise if a flat changed hands before payment.

 

  •  “Reasonableness” - Reasonable costs may only be recovered if they are reasonably incurred, advance
     payments must be reasonable and the work must be carried out to a reasonable standard.
  •  “Estimates and notices” - Where the cost of proposed work exceeds a certain prescribed amount,
     then:-
     

 (a) at least two estimates must be obtained, one of which must be from a completely independent contractor, and

 (b) a notice referring to the estimates, describing the proposed work and “inviting observations” (with a name, address and final response date at least one month hence) must be given to each tenant, either personally or by display in the building where all tenants will see it, and

 (c) the company must “have regard to” the observations and unless the works are urgent, they must not be started until after the specified date referred to above.

  •  “Information” - There are detailed provisions enabling a tenant to require the Landlord to supply a
     written summary of costs - where there are 4 or more flats the summary must be certified by an
     accountant.
     
  •  “Effect of failing to comply” – Non-compliance with these formalities not only makes members and
     directors liable to a fine, it also makes some or all the costs incurred impossible to recover from the
     tenant.
  •  Service charges are not legally enforceable unless the costs to which they relate were incurred in the
     last 18 months.   However, this does not apply if within that 18 months period the tenant was warned
     that the costs had been incurred and that he would be required to contribute.
     

So a management company should:-

(a) send out service charge demands before 18 months have elapsed from the date of the work, and

(b) if this is not possible, ensure that each tenant has been notified that the costs have been incurred and of  the requirement for their contribution.  This is especially important when advance payments have been made, but additional monies are needed at the end of the year in a balancing statement.  If the final statement with demand is not made within 18 months of the expenditure, the warning needs to be given within that 18-month period.

NB This is a brief summary only and in the case of a dispute, legal advice should be taken.

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What do I need to know about Companies Acts?

Although company law is complex, the parts that apply to a well-run management company should be reasonably straightforward. There is set out below an incomplete summary and if problems arise, legal advice should be taken on the specific issue.

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Meetings

(a) Directors meetings should be held regularly to make decisions especially about insurance and maintenance.  Such meetings may be combined with shareholders’ general meetings.  Directors meetings can be relatively informal but enough notice should be given to all directors to give them a reasonable chance to attend.

(b) An annual general meeting (AGM) (21 days notice required to all shareholders) must be held each year.  If every shareholder signs a consent form, this period of notice can be shortened.   Functions of the meeting should include approval of the accounts and (re)appointment of the company’s auditors.

(c) General meetings may be called at other times, e.g. to pass special resolutions.

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Accounts

Formal audited accounts and a directors’ report must be prepared each year not only for each tenant/shareholder but also for filing at Companies House. The requirements are complicated and the accounts will require auditing by an independent accountant who is appointed at each AGM.

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Companies House

Each year it is necessary to file a form of annual return within 42 days of the annual general meeting together with the accounts.  Delays can result in the company being struck off the Register.  If this happens, legal help may be required to put things right and it is likely to take time and be expensive.  In the meantime, the flats may become unsaleable and the management system cannot operate because the company has ceased to exist.  So even if you are not personally involved in submitting returns, it is worth making sure that whoever is responsible is up to date. 

Changes in directors and the company secretary should also be registered when they happen and forms for this can be obtained from Companies House.

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Company Secretary

Often, but not necessarily, one of the tenants who: -

(a) attends all company meetings and keeps minutes,

(b) issues notices,

(c) deals with correspondence,

(d) makes Companies House returns,

(e) issues share certificates and registers transfers, where the company has a share capital,

(f) keeps company records,

(g) sends out copies of balance sheets and auditors and directors reports,

(h) may keep the company’s cheque book, bank statements and accounting records, and

(i) may keep copies available of the companies deeds, including the counterpart leases, the insurance policy, the memorandum and articles of association and any guarantees which relate to the common parts, e.g. rising damp or timber treatment guarantees and reports.

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Directors

Generally Directors must use reasonable care (with qualified advice where necessary) to run the company in its best interests.  They should ensure there is no conflict between their personal interests and that of the company and must disclose any interest they have in any proposed arrangement with the company.

It may be convenient to delegate certain management functions, e.g. responsibility for day-to-day maintenance or cleaning, to a smaller group, an individual or even a managing agent.   It is however normally sensible to require at least two signatures on company cheques.

Directors are responsible to see the company's accounts present a "true and fair" view.  Directors will be personally liable for the company's debts where they allow the company to incur obligations when it is not able to pay its debts when they fall due - even though the assets may exceed liabilities.  Director’s and Officer’s insurance is advisable.

It is also the company secretary's duty to notify the directors on becoming aware of impending or probable insolvency, and of the consequences of continuing to operate.

Company directors and the Secretary may become personally liable and/or liable to fines for compliance failure.   Major omissions or delays imperil the working of the management scheme and company and hence the marketability of the flats.

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