The rewarding yet responsible role of a resident management company director: Christine Dubignon and Samantha Tomczyk write for EG

• 22 June 2022
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Corporate Partner, Christine Dubignon, and Residential Property Senior Associate, Samantha Tomczyk, have authored an article for Estates Gazette entitled ‘The rewarding yet responsible role of a resident management company director’.

The article was first published in EG on 10 May 2022, and can be read in full below.

Some apartment buildings will have resident management companies that deal with the management and maintenance of the building. RMCs may be established by the original developer of the building, or may be set up by leaseholders themselves, either as part of a right-to-manage claim whereby the leaseholders take over the landlord’s management obligations in the leases using a right-to-manage company or following enfranchisement by the leaseholders, whereby they collectively purchase the freehold of the building from the landlord.

RMCs may themselves be party to leases of the apartments, with specific obligations in respect of managing and maintaining the building, or they may instead be responsible for performing all or some of the obligations of the landlord. Managing the building will require keeping the communal areas, structure and exterior of the building properly maintained and in good repair and condition. This will involve entering into service agreements with contractors and other suppliers, as well as employing staff (for example, concierge, security, cleaners and gardeners, etc) and insuring the building in its full reinstatement value. The costs of these services will be charged to leaseholders through their service charge, in accordance with the terms of their leases.

RMCs will usually be responsible for demanding, collecting and recovering service charges from leaseholders, as well as dealing with all accounting matters, such as preparing budgets at the start of each service charge year and final accounts at the end of each year. Where a leaseholder is in breach of their obligations under their lease, the RMC may be responsible for enforcing these obligations (particularly if it has received a complaint from another leaseholder), which could include taking legal action against the leaseholder.

Setting up an RMC

RMCs are English limited companies, and the usual incorporation requirements will apply. Directors will need to be appointed, shares will need to be issued (unless it is a company limited by guarantee) and articles of association (the key constitutional document detailing how the company is to be run) need to be adopted.

Where the RMC is limited by shares, typically each leaseholder will be given a share in the RMC which will be “stapled” to their apartment. This means that on a sale of an apartment, the share automatically transfers to the new owner and prevents a third party without any interest in the property from acquiring an interest in the RMC.

Where a company is limited by guarantee, leaseholders will become members of the company and their details will be noted on the register of members (no share certificates will be issued). On the sale of an apartment, membership automatically transfers and the membership register should be updated accordingly.

Directors’ duties – as established by the Companies Act 2006:

• To act within their powers (ie in accordance with the constitution of the RMC)
• Promote the success of the company for the benefit of its members as a whole
• Exercise independent judgment
• Act with reasonable care, skill and diligence
• Avoid conflicts of interest
• Not to accept benefits from third parties
• Declare interests in any proposed transactions or arrangements with the company

While shareholders/members have certain rights as a matter of law and under the articles of the RMC, if leaseholders really want visibility and input into the management of the RMC (and therefore management and maintenance of the building) they need to be appointed as a director.

Individuals may be invited to act as a director (often by reference to a specific set of skills they possess) or, more frequently, they tend to put themselves forward for appointment because they regard it as their contribution to the community of the building.

However, directors of RMCs are not generally paid (although there may be scope for reimbursement of out-of-pocket expenses), and the role can carry some risk.

The role of a director

Directors must ensure that the RMC complies with any legal obligations it is subject to. These will include not only lease terms, but also broader legal obligations under landlord and tenant law.

For example, ensuring that service charges are reasonable and where the RMC intends to carry out works costing more than £250 per leaseholder or they intend to enter into an agreement with a contractor for more than 12 months costing more than £100 per leaseholder in any 12-month period, then they must follow the section 20 consultation procedure prescribed by the Landlord and Tenant Act 1985, including consulting with all leaseholders and obtaining tenders. RMCs will also need to comply with relevant health and safety legislation, including obtaining a fire safety risk assessment for any communal areas, implementing its recommendations and ensuring it is regularly reviewed. Where the RMC is also the landlord, it will need to enforce leaseholder covenants and consider carefully any applications for consent, particularly where granting consent would be a breach of an absolute covenant.

Directors of RMCs, like all directors, are subject to the specific duties set out in the Companies Act 2006 (see above).

Directors can be made personally liable for a breach of these duties, so it is imperative that they have proper regard to them when making decisions. In particular, the obligation to “promote the success of the company for the benefit of its members as a whole” can be very complicated in practice as it requires directors to consider the impact of decisions they make and actions of the RMC on other leaseholders and their tenants.

Directors need to ensure they are able to objectively justify any decision that may appear to benefit some leaseholders (especially themselves) over others – for example, when prioritising maintenance work which might benefit some apartments more than others.

Individuals also need to be aware of the inherent conflict that may exist by virtue of them being a leaseholder, shareholder/member of the RMC and director of the RMC too.

Practical considerations

Acting as a director of an RMC can take up significant time and an individual will need to be comfortable that they can balance the role with any other commitments they have. They will need to be available to attend board meetings, consider papers and issues relating to specific matters and liaise with other leaseholders and third parties. Directors should consider whether it is appropriate to seek external advice or support, such as passing day-to-day responsibility for management to third-party managing agents or seeking input from professional legal advisers.

Directors need to be prepared to be able to make difficult decisions, for example, if the RMC is required to enforce provisions of leases against leaseholders or if there is a dispute between leaseholders. These decisions may mean that directors find themselves in direct conflict with other shareholders/members of the RMC, who are also their neighbours.

Directors will need to be fully up to speed with the articles of association governing how the RMC is to be run (and, most importantly, how decisions of the board of directors are to be made), the leases and any obligations which the RMC is specifically responsible for, and any other legal obligations of the RMC.

If appropriate, advice and support should be sought from lawyers or managing agents. Consideration should be given to any relevant processes and policies if not already clear. These could cover matters such as the protocol to be followed should a leaseholder require consent under their lease for alterations, assignments, underlettings, pets, etc, how to deal with leaseholders who are in breach of their leases or if a dispute has arisen (either between leaseholders or where leaseholders disagree with directors’ decisions), or the establishment of committees for larger projects.

Directors should ensure that any money of the RMC (for example, in respect of its share capital and subscriptions or any income received, for example, from ground rents or lease extensions if the RMC is also the landlord of the building) is held separately from any service charges received, ideally in separate bank accounts. The RMC is required to hold any service charges received on trust for the benefit of leaseholders and to only use such funds as provided for in the leases, so having separate bank accounts should ensure the funds of the company are not mixed with service charges.

Given that directors can be held personally liable for a breach of their duties, RMCs should consider taking out a directors and officers’ insurance policy, which will protect directors from any claim brought against them in respect of actions they may take as a director.

The role of a RMC director can be demanding and stressful but it can also be very rewarding and give those who embrace the responsibility more control and influence on the running of their building.

Shareholders speaking up – Aaron Morris writes for CGI

• 7 June 2022
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Corporate Senior Associate, Aaron Morris, writes for CGI’s G and C Digital Magazine, discussing if supply chain challenges and ESG concerns will drive an increase in shareholder activism.

The article, entitled ‘Shareholders speaking up’ was first published in CGI’s G and C Digital Magazine on 19 May 2022.

Will supply chain challenges and ESG concerns drive an increase in shareholder activism?

As the 2022 AGM season kicks-off, the ever-changing global situation means that shareholders are, more than ever, taking a keen interest in the way in which their companies are being run. In turn, businesses are increasingly facing the challenge of balancing the need to increase profits – especially after a tumultuous couple of years for many – while acting in a way that demonstrates that their business is morally and ethically attuned to the world in which we live.

These factors, along with the government opening up the economy after two years of restrictions, mean that we are likely to see a rise in shareholder activism this year; a continuation of a trend seen over recent years, as reported by IR Magazine. At its core, this relates to shareholders exercising the rights attached to their shares or using their position as a key shareholder of a company to influence changes in how the business is run and the policies it pursues. They may do so by, for example, privately exerting pressure on the board, or putting resolutions to or raising other matters at general meetings.

ESG and sustainability issues are becoming more pressing in the minds of shareholders and are increasingly being used by them as a way to hold businesses to account. The number of environment related issues raised at AGMs is likely to go up following the COP26 summit at the end of last year, as investors will want to start seeing clear objectives for implementing longer term environmental strategies. Greater diversity – particularly ethnic diversity – on boards of directors also continues to be an important topic and, while some progress has been made, there is still a long way to go. Other issues, such as employee wages, are also likely to feature, with Legal & General Investment Management joining other shareholders of Sainsbury’s in pursuing wage increases for staff. This will be particularly pertinent in light of the cost of living crisis.

Impact of the war in Ukraine

Investors would have watched on in disbelief as events unfolded around the Russian invasion of Ukraine, and it seems certain that these actions will lead to an increase in shareholder activism – to the extent they have not already done so. Shareholders are likely to be concerned with any activity a company has in Russia and with Russian owned companies, especially following government-imposed sanctions. The impact of failing to cease business in Russia has already been felt by companies such as Coca-Cola who, due to their slow actions, faced calls on social media for a boycott.

Investors will be conscious of the operational implications that ceasing business in a particular country can have, but also the severe reputational damage that can result from not acting quickly enough. This is particularly true in light of the atrocities in Ukraine. However, as Andrew Edgecliffe-Johnson, the US Business Editor for the Financial Times reports, ‘With the exception of the oil and
gas giants with multibillion-dollar ventures in Russia, most companies’ principled statements have so far come at a pretty low cost.’ While a minority have withdrawn from Russia completely, he said ‘most have just suspended operations, halted new investments or curtailed the range of products and services they offer,’ and due to the facts that have come to light, ‘the prospect of a quick resolution that lets western brands feel fine about returning to the shopping malls of Moscow now look increasingly remote.’ It will therefore be interesting to see the extent to which shareholders push for a complete withdrawal from Russia and how this process will be managed.

The conflict in Ukraine, the COVID-19 pandemic and the after-effects of Brexit are affecting supply chains in a number of industries because of problems such as staff absences through illness and a lack of resources. The renewed lockdowns in China have further exacerbated the issue as the country pursues its zero-COVID policy, resulting in non-essential factories having to suspend production and cargo ships having no option but to wait outside ports. In an article published by Reuters, Foxconn – which makes iPhones for Apple – recently reported that its revenue could reduce by up to 3% this year, which it has put down to the cost of resources. Additionally, Russia and Ukraine produce
the majority of the world’s supply of sunflower oil of which we are starting to see a lack; this is having a knock-on effect on the manufacture of products requiring this ingredient.

Supply chains and deglobalisation

During supply chain disruption, the idea of deglobalisation reappears as companies and countries realise how dependent they are on certain suppliers.

In respect of both the supply chain issue and a possible move towards deglobalisation, activist shareholders are likely to be vocal about the increase in costs as a direct result of demand exceeding supply and delays in the worldwide transportation of goods and resources. Deglobalisation is arguably another determinant of the rise in costs and prices as it leads to a decrease in competition. Shareholders will therefore be keen to see directors adopting policies to counteract this to protect distributions and the value of their shares. There may be a push for raw materials to be supplied from different locations where possible, for manufacturing to be moved to regions deemed more stable and dependable, for funding to be invested in research and development in an attempt to find alternatives and for companies to stockpile goods as part of a contingency plan. As an example, the BBC has reported that Edible Oils has started to increase its production of other oils as a replacement for sunflower oil. Where expenses cannot be kept down, we may also see a move towards cost-saving measures which could include redundancies. Management teams who are unable to meet the challenge of offsetting rising operating rates may also find that shareholders refrain from approving directors’ remuneration packages as a result of poor performance; they may even seek to replace them with a new executive team.

Twitter purchase

Finally, in the United States, we have seen a different kind of shareholder activism through Elon Musk’s purchase of Twitter. Musk initially bought a 9.2% stake in the company to become its second largest shareholder. After his first launch of a takeover was met with Twitter passing a ‘poison pill’ provision, he has since had a $44 billion bid accepted. Such shareholder activism is seemingly being undertaken so that Musk can start to effect changes in the way Twitter operates, particularly with regard to free speech. Takeovers of this size are unlikely to be discussed at AGMs in the UK, but there are some examples of investors pushing for the sale of a company following poor performance. For example, the Financial Times reported that Phase 2 Partners, the US-based hedge fund, is applying pressure to the board of TP ICAP to sell, following a drop of 45% in the company share price over the past year and concerns about the existing governance and ownership structure.

This article has highlighted just a few of the areas in which shareholders are likely to apply pressure, but the current global political and economic position is unlike many seen before, it will be interesting to see what issues arise from shareholder activism at this year’s AGMs.