NOTE: Although written in 2012 this article with useful checklists remains relevant as at December 2015
Jennifer Adams reminds members of the different ways by which residents can own and manage their flats, including the RTM - “right to manage” company.
Resident management companies
A property divided into separate residential units has common areas that need to be owned and kept by someone. Unless there is a landlord/owner of the whole property who retains this interest, a property management company needs to be set up that will buy and hence own the freehold (or head lease) of the entire property. Each owner will then have an interest in that company be it via shares or by guarantee. A ground rent is usually charged by the company to the individual flat/unit holder who will also pay a service/management charge for the upkeep of those common areas.
Company limited by shares
One share of nominal value is issued to each unit owner representing their share of the freehold. The articles need to be drafted so that when an individual sells their flat they also have to sell their share in the company to the new purchaser. Two owners of one unit are deemed to own the share jointly so as to not give one unit too many voting rights over the other owners and hence upset the balance of power. A management company needs its articles to be written with care and as such cannot be just the usual model articles.
Company limited by guarantee
Use of a company limited by guarantee (see Companies Limited by Guarantee - Get the Details Right for more detail) enables the changes in membership to be straightforward - the seller of the unit resigns and the purchaser is admitted as a member, so there is no transfer of shares. Members contribute a set amount (usually £10) as the guarantee.
Details of Membership:
- Unit holders apply to become members (membership form needed).
- Directors pass (written) resolution to admit unit holder as member. An entry is made in the register of members of the date of cessation of membership and the name of the new member.
- No share certificates are issued but a certificate of membership could be, which would be surrendered for cancellation on sale of the unit. However, there is no legal requirement for a certificate and as the member’s name would have been removed from the register the certificate has no value.
- Usually one member, one vote. Not all articles are clear on this, so check and amend if necessary. Problems could arise should one member own two units.
- No requirement to submit details of members with annual return to Companies House.
1. Set up or buy company: Formations Direct, for example, offers a specialist service.
2. Ask all leaseholders if they wish to participate, sending RTM1 ‘Notice of Invitation’ for signature. The current landlord can participate, but only after the RTM company has been formed and taken over.
3. Current landlord is sent form RTM2 ‘Claim Notice’ which includes details including a deadline for landlord’s response.
4. Landlord responds with completed RTM3 ‘Counter Notice’. If no response or the landlord agrees, the date of hand over is the date on RTM2.
5. Landlord consent is not required if all relevant criteria are met; they can only challenge notices if the building does not qualify, if an insufficient number of leaseholders participate, or if the notice is invalid, for example with missing details.
6. Landlord needs to advise contractors of new owners via a ‘Contractor Notice’ and settle outstanding charges.
An interesting problem
An old but still relevant Any Answers question about the Accounts for a residents’ freehold-owning company was posted by Euan MacLennan in June 2007. The question shows why care is needed when creating a company for unit shareholder/members. When the property developer sells the freehold of the property a separate company is formed, but not all unit holders might wish to purchase the freehold. Euan’s question concerned the accounting entries where some unit owners contributed to the purchase and some not.
The suggestion was for the owners who did not buy into the freehold to be lent the money by the other owners. A formal loan agreement is needed, possibly secured on the property (depends on whether there are mortgages).
Right to manage companies
The Commonhold & Leasehold Reform Act 2002 created a new form of company which lets leasehold owners force a landlord to transfer the management of the property to a company of their own – a right to manage (RTM) company.
- RTM companies can only be limited by guarantee
- The building must be self contained (or capable of being redeveloped into being so) and must include at least two flats
- At least two third of the flats must be let to ‘qualifying tenants’ ( ie a leaseholder whose lease was originally granted for an original term in excess of 21 years
- Specific RTM Model Articles must be used.
Further reading - interesting Any Answers questions
- Flat Management Companies
- Why do people form flat management companies?
- Dormant accounts for Resident Property Management Company
- Plus comments made under the original 2011 article as given below
Jennifer Adams FCIS TEP ATT (Fellow) is Associate Editor of AccountingWEB. A professional business author specialising in corporate governance and taxation, she has written for many of the leading specialist providers of legal, tax and regulatory publications. Jennifer runs her own accounting and consultancy business with offices based in Surrey and Dorset.