Property management companies (MCs) are set up to manage the shared or common areas of a building or development, in which there are a number of separate property owners (most commonly, but not exclusively, residential properties).
Often the separate property owners will own the individual flats and to manage the shared areas (such as the lifts, stairs, roof, exterior, corridors, landscaped areas, car parks and so on) a MC will be set up. The common areas may be owned by a separate landlord or by the management company itself. On sale of the last flat or commercial unit in the development, the developers will usually ‘handover’ the MC to the property owners as it is unusual for the developer to have a say in the running of the MC, once all properties have been sold.
Who can become the directors of the MC?
The articles of association of MCs normally state only shareholders of the MC (i.e. the property owners) can become directors once the developer-appointed directors resign. This is to ensure only those with a direct interest in the MC have a say in its running and the final decisions made. It is recommended that there be multiple directors appointed to share the responsibility and ‘spread the power’. Once the developer-appointed directors resign, if no property owners are appointed as directors, Companies House will, after a certain length of time, strike off the MC. This is because a company cannot exist without directors to guide and manage it. This will make properties connected to the MC through their property title documents very difficult to sell as incoming buyers and mortgage companies will want to ensure there is an MC in place to manage the common parts and protect their investment.
What are the directors’ duties?
The directors should always act in the best interest of the MC and all the shareholders and not just for their own benefit as property owners. The directors will be tasked with the day to day management of the MC. This will include, for example:
- ensuring that adequate insurance as required under the terms of the property documents is in place (this is separate to the homeowners household and contents insurance);
- putting contracts in place for the management of the common areas (i.e. cleaning, gardening or maintenance contracts);
- organising the accounts of the MC;
- deciding the level of service charge required to meet the obligations of the MC;
- chasing late payment of the service charge from flat owners;
- setting up the sinking/reserve fund for prospective large expenditure items (e.g. the internal common parts decoration or lift repair and maintenance) and deciding on the required contributions.
What is a managing agent and what do they do?
To ease the burden on directors, a number of these duties can be outsourced to a managing agent for an annual fee. However, the directors will be responsible for any of the actions of the managing agent and the liabilities of the company and should therefore ensure they are aware of the managing agent’s actions.
A managing agent is appointed to “manage” the common areas and typically this will include putting in place contracts for ground maintenance, insurance, and collection of service charge etc. The exact responsibilities will be negotiated between the directors and the managing agent. The advantage of this is that the directors have a lesser administrative burden. The directors would have to ask for quotes and choose a managing agent, or serve notice on the existing managing agent, if there is one, should they wish to appoint a new managing agent.
Sometimes for very small developments a managing agent may not be necessary due to the minimal level of maintenance required at the development. In this instance, the directors will need to deal with these issues and Herrington Carmichael can assist with some of the administrative burden.
For specific legal advice on property management companies, please do not hesitate to contact us.
