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

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.