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Leaseholders and Resident Management Companies (RMCs)
Resident Management Companies or RMCs are companies often comprised of leaseholders. They may live in the flat in the apartment block for which the company has been formed but not always. They are sometimes called FMCs or Flat Management Companies. There can also be scenarios where the RMC is a third party to the arrangement between the freeholder and the leaseholder
Some key facts about RMCs
- Did you know the fatal injury rate in the construction industry is 1.62 per 100,000 workers, over three times the rate of death compared to all other industries in the UK? Common causes of death include falls from height, entrapment and being struck by a slow-moving vehicle. In 2005, the construction industry was also responsible for the largest number of occupational cancer deaths – a total of 3,700 – out of 8,000 work-related cancer deaths with the main cause being asbestos exposure.
- Most RMCs are private limited companies with the leaseholders as the shareholders
- The relevant statute is the Commonhold & Leasehold Reform Act 2002 which defines the ‘Right to Manage’ or RTM
- As the RMC is not a conventional trading company the formalities required by Companies House will be different but it will still need Articles of Association which contain the objects of the company and also define the qualifying members who are usually owners of the units within the development
- The qualifying members elect a Board of Directors
- Any person or body nominated by the Directors can carry out secretarial duties as it ceased to be a requirement in April 2008 to have a nominated Company Secretary. This role is often performed by the Managing Agents and does require an understanding of the relevant legislation and policies and procedures
What is the role of the Managing Agent?
The Managing Agent will be required to carry out the wishes and directions of the directors of the RMC whether or not the Managing Agent also shares the role of the company secretary.
The Managing Agent is usually the main point of contact with the leaseholders and often finds themselves in the front line even though it is the RMC which is contractually bound to provide services to the leaseholders. The Managing Agents have no contract with leaseholders collectively or individually but are required to carry out the wishes and instructions of the board of directors of the RMC. They have no remit beyond that to individual leaseholders or particular properties. Complaints about management issues by the leaseholders should be directed to the board although, in reality, they often land at the door of the Managing Agents.
What are the duties owed to the leaseholders?
The duties to the leaseholders will be detailed in the lease and either the RMC will be a party to the lease or it will be responsible for performing the lease covenants on behalf of the landlord. In reality, as the leaseholders are also the shareholders of the company, the RMC has little option but to perform its obligations. These obligations will include:-
- Contractual duties such as maintenance and repair, the implementation and management of insurance
- Statutory duties such as maintaining the service charge at a fair and reasonable level
It is essential therefore that the directors of RMCs are up to date with their obligations under current Landlord and Tenant legislation or have professional advisers who can help them with this.
What sets apart a shareholder member and a leaseholder?
Think of one person with two hats, a popular legal tool to distinguish an individual with two roles. However, the position of a leaseholder and a shareholder can be diametrically opposed. A shareholder member can:-
- Participate in decision-making in company meetings
- Has the legal right to challenge the company in Court under the Companies Act if they believe the board has exceeded its powers
A leaseholder who can be one in the same person will:
- Be bound under the terms of the lease to abide by the covenants
- A breach of covenant such as non-payment of the service charge can expose the leaseholder to the potential of court action
- A leaseholder can take the RMC to court or tribunal under Landlord and Tenant legislation if he considers that the RMC has acted unreasonably or in breach of its covenants irrespective of whether he is also a shareholder member and this does not limit his leaseholder rights
The RMC cannot legally take and implement a decision which is against the terms of the lease even if there is complete unanimity on that occasion. The terms of the lease are paramount and successful tribunal cases uphold this premise where leaseholders have successfully overturned totally democratic decisions made by RMCs because they conflict with the lease. So the terms of the lease can hold sway over documented decisions moreover, compliance with the lease follows the letter of Landlord and Tenant law and carries all before it.
How to distinguish between Service Charges and RMC expenditure
The RMC will have two pots of money, the Service Charge and the company’s own fund. These two sums should be kept separate and accounted for separately. Because an RMC is not like a normal company, there may be a relatively limited requirement for funds but cash can be needed on occasion. The recommended route is to run two totally distinct bank accounts, one for the service charge fund and the other for the company fund each with its own set of accounts.
Key information about the Service Charge
- The service charge fund is comprised of contributions made by the leaseholders under the terms of their lease
- The RMC holds this money as a statutory trustee in line with the provisions of s.42 of the 1987 Landlord & Tenant Act, they do not ‘own’ the money
- The lease sets out provisions as to how this money can be spent
- The terms of the lease and legislation state that the service charge funds can only be spent on items authorised under the lease and this expenditure must be reasonable
- The beneficiaries under the trust are all the leaseholders
- Administration costs for the RMC are not usually recoverable against the service charge fund under the terms of the lease
- Accounting for the money is one of the duties of the trustees and there should always be a separate set of accounts
- Administration errors or incorrect use of the service charge fund could mean the board of directors fall foul of the Trustee Ace and the Companies Acts
- Rent received by the RMC is distinct to the service charge and should be held separately from the service charge fund
Do RMC directors have any personal liabilities?
RMC Directors can be held personally liable if they breach any of the Trustee Acts or the Companies Act if they don’t account properly for the service charge fund for instance.
It is important when a new director is appointed to include in the documentation a clear statement of the role and responsibilities of the Directorship which should be read and signed by the appointee to evidence that they understand their legal duties. Many people who take up this role which is usually unpaid have little prior experience of what is involved and so guidance and training can be very helpful.
Directors are advised that it is prudent to take out Directors and Officers Insurance to protect them as officers of the RMC from exposure to liability in a variety of situations.
Does Insolvency affect Resident Management Companies?
An RMC commonly has no other income or funds other than the service charge monies which are protected by the provisions of both the lease and Landlord and Tenant legislation. If there is a large shortfall in the service charge funds and no clause in the lease which allows this to made up by raising levies from members, then the RMC can, in this situation, become insolvent.
How can a service charge shortfall occur?
There are a surprising number of reasons for this including:-
- Large expenditure which may not be recoverable, for instance, because of lack of consultation with the leaseholders
- The service charge contributions are too low
- Expenditure has occurred which is not authorised under the terms of the lease
- The RMC has a Court or Tribunal decision against it
- Costs have been incurred endeavouring to enforce the leaseholder covenants which costs are not recoverable
Most of these risks are uninsurable so there can be considerable exposure to insolvency which in turn means there could be no funds available to manage, repair and maintain or insure the block. In this situation, the management of the building can revert to the freeholder. If the RMC owns the freehold then the property may be passed to a receiver pending sale and this can have a huge impact on the individual leaseholders’ ability to sell or mortgage their flats. It is crucial that if there are financial difficulties that the directors take professional advice at an early stage to protect both the leaseholders and their own personal assets.
If it can be shown that the financial status of the company was known or ought reasonably to have been known by the directors then they could face a claim for ‘wrongful trading’. Receivers can then seek reimbursement from the personal assets of the directors.
Consultation on major works
The RMC has an overriding duty to comply with the provisions of legislation when undertaking major works irrespective of unanimity of agreement by the company members at the AGM or other meetings. Such agreement by the shareholder members does also not negate the right of any leaseholder to exercise his rights under the Landlord and Tenant Acts despite the way he may have voted at a consultation. It is crucial that the RMC directors are aware of the different legislative requirements in this situation. An RMC should never waive consultation as the financial and legal implications of this can be very serious.
Recovery and forfeiture
Powers of recovery depend on the specific terms in the lease and whether or not the RMC owns the freehold. The provisions of the 2002 statute also need to be taken into consideration. The option of forfeiture will be tempered by the fact that many of the company members will also be leaseholders. This status plus the huge legal costs which can be associated with forfeiture can make this route untenable even if there are significant service charge arrears. Recovery of arrears will be time-consuming and expensive due to legislative restrictions so the importance of avoiding this situation in the first place cannot be over emphasised.
Despite the unremunerated and voluntary nature of the role, the position of director on the board of an RMC is not without its complexities and challenges. It is crucial that directors understand this and employ competent Managing Agents to assist them and also put in place all the appropriate insurance to protect their position. Relevant training and professional third party advice, when needed, can also help ensure the smooth running of the RMC.