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Please note that these answers are an introduction and guide only. They cannot cover all of the issues surrounding these questions. Please contact me if you need further information.
Q: Property management companies. Why are they set up? What are the differences between them?
A: Some information on the legal aspects of holding property is useful. This is often referred to as real property which generally means a legal interest in land. This is held in certain ways in England and Wales. Please note that the position in Scotland is different and these notes do not cover Scottish land law.
There are two ways of holding land. You can either
Leasehold interests that are for a term of 7 years or more need to be registered at Her Majesty's Land Registry (HMLR). In addition, some other short leases should be registered such as leases where the right to occupy is discontinuous (timeshares). Any others either appear as third party interests on a title or might be overriding interests (i.e. will affect the property even if they do not appear on the register). Leasehold interests are most often seen with flats but can also be seen with houses on a property development (e.g. the Clarks village development in Street).
The lease is the legal document evidencing the rights, obligations and interests attached to the property in question. If the property is registered (as most of it is in England and Wales) then the title to a property will be shown on the land register held by HMLR. Office copies of this can be obtained - see attached photocopy. Some land is still unregistered e.g. large estates that have not transferred hands since back in the 19th century.
Please note that there can be more than one lease carved out of a freehold - it all depends on the drafting.
In most office copies reference is made to the lease but the detail is not included. This is contained in the document evidencing the lease.
Q: So, what would you find in a lease?
A: Rights for and restrictions on the leaseholder and the person granting the lease to enable the leaseholder to enjoy the property without causing detriment to neighbours/freeholder. For flats it will include rights to be supported by the structure and other flats in a building, rights for utility services to and from the flat - i.e. water, gas, electricity, drainage and sewerage. These services will have to go across property belonging to others to reach the flat. The lease will also cover rent (could be minimal if a long lease) and service charge to be paid to contribute to the upkeep of the freehold. The flat relies on the freehold for its very existence so it is vital that the freehold is maintained and insured.
Parts commonly included in the freehold for a block of flats:
The upkeep of the freehold falls to the freeholder. The freeholder can be an individual or group of individuals or it can also be a company. In many cases the freehold will be owned by the tenants of the flats via a property management company.
Flat management company freeholder - grants leases to flat owners. The lease sets out obligations on both parties e.g. on freeholder to maintain common parts and insurance etc. and on the leaseholder (sometimes called lessee) e.g. not to cause a nuisance, to maintain their property in good repair (so showers don't leak into another's property etc.). This legal structure enables problems with a neighbouring tenant who contravenes his lease to be dealt with via the freeholder. There is a contractual relationship between the tenant and freeholder via the lease but not between the tenants personally.
You can find unusual provisions in leases - e.g. some of the houses in the Clark's village, Street, Somerset were set up for employees of the company. There were restrictions such as front doors could only be painted green, no laundry could be hung out in the front gardens, shrubs in the front of the garden were only allowed to grow to a certain height etc. This was in order to ensure a certain neat village look for those streets associated with the Clark family and their employees.
For more information generally in relation to leases please see the Leasehold Advisory Service link below
The Leasehold Advisory Service (often referred to as LEASE) is a non-departmental public body funded by government to provide free advice on the law relating to residential leasehold property in England and Wales. Please note that there are differences in relation to certain applications made in relation to property between England and Wales.
Sale of a leasehold interest
In England and Wales we often see leases for 999 years for houses or 99/125 years for flats. So, what happens if a person wants to sell his flat? He will be selling the remainder of the lease term. For example, Mr. Hardy bought the right to live in the flat and occupy it for 99 years from a particular date. If he then agrees to sell it to you after 13 years then you are purchasing a right to live in that flat in accordance with the rights and obligations set out in the lease, in effect, for a further term of 86 years.
Mr.Hardy is assigning his interest in the lease to you. It is therefore called an assignment. On a change of owner steps need to be taken if the current flat owner also has a share or interest in any company that owned and/or managed the freehold. In general terms, these are the property management companies that we are familiar with. If he held his interest in that company as a share then Mr. Hardy will need to transfer it to you as part of the sale and purchase. If the company is a guarantee company then Mr. Hardy will cease to be a member upon completion of the sale and you, the new owner will need to be registered as a new member.
For flats holding/managing the freehold via a company this is often seen as an ideal arrangement as each flat owner has a share/ is a member of the company. It is in the flat owners' interests to ensure that the property is adequately maintained in a cost effective manner. Using a company means all the flat owners can then take part in the decision-making as to how the freehold should be run. It makes the paperwork easier to deal with on a change of owner as well. Decisions will cover repairs and maintenance, service charge levels etc.
Jordans property management companies
There are broadly three possible scenarios for these. There are then variations within those scenarios.
Scenario 1 - Right to manage (RTM) companies. Statute prescribes the form of articles and how such companies should be named. You cannot amend the articles. The name must end in "RTM Company Limited" to make it clear what it is. Variations - one set of articles for England and one for Wales.
Scenario 2 - property management (flat management- leasehold) company set up to manage a block of flats or a residential estate. Here, the company is managing the common parts of the building and/or the estate. The company often owns the freehold but does not have to. Variations - share/ guarantee and developer/non-developer.
Scenario 3 - freehold property management (amenities/utilities management) company. Here the company is set up to own the freehold of and manage the upkeep of an amenity/utility. These amenities/utilities can include private un-adopted roadways, a septic tank, a sewerage plant or a village green (with duck pond). The owners of the houses (could be freehold or long leasehold) that adjoin the amenity/utility group together to form a company that owns the freehold. Again, this makes the paperwork less problematic when one of them sells his property. Variations - share/guarantee and developer/non-developer.
For more detail on these different types please see below.
Jordans has 10 different property management company articles in all.
RTM company - England (prescribed- guarantee only) RTM09
RTM company- Wales (prescribed -guarantee only)
Property management company - leasehold/ non- developer/ share
Property management company- freehold/non-developer/share
Property management company- leasehold/non-developer/guarantee
Property management company- freehold/non-developer/guarantee
Property management company- leasehold/developer/share
Property management company- freehold/developer/share
Property management company- leasehold/developer/guarantee
Property management company- freehold/developer/guarantee
RTMs were brought in for the protection and benefit of flat owners in buildings. Some freeholders of large blocks of flats were abusing their position by either charging exorbitant service charges and/or failing to adequately maintain the common parts. It was difficult for tenants to get a suitable remedy for this - proof could be time consuming and expensive to obtain.
The Commonhold and Leasehold Reform Act 2002 brought in a brand new power to allow tenants to acquire the management functions of the common parts of the property in which their flats were situated from their landlord via an RTM company. To make life easier for the tenants there is no need to show that the landlord had done anything wrong and no need to pay compensation. The landlord is entitled to be a member of the RTM company. Please note this is not just the immediate landlord and can include others under a head lease etc. or there may be two or more owners of the freehold who can then be members. Voting in RTMs is calculated in a particular way to ensure that two or more landlords cannot obtain control over voting in the company. This protects the tenant-members.
To be an RTM company there are conditions. Key amongst these are:
Please note that there are some other conditions as well e.g. if part of the building is to be commercial what percentage of the whole that commercial part can be, what counts as a qualifying building etc. - we do not advise on those matters and refer clients to the Leasehold Advisory Service on those questions.
The RTM company can take over the management functions of the landlord. It cannot take over the freehold. Management and collection of service charge for maintenance requirements and also for insurance falls to the RTM if it is successful in taking over these functions. The collection of ground rent which is payable to the freeholder remains with the freeholder landlord.
How does the RTM company (RTMco) take over the management functions?
The setting up of RTMco is the first stage of the process. It is vital to set it up correctly as failure to do so may prevent a successful application - see below. Once incorporated the RTMco makes legal application to take over the management functions. RTMco will invite others to participate in the company and serve notice of claim. The landlord may serve a counter-notice disputing this claim.
There are only three grounds on which a landlord may dispute the claim:
Where the landlord disputes the claim RTMco may apply to the Leasehold Valuation Tribunal within two months of the counter-notice. If the claim is eventually successful then there is an acquisition date set for when the RTM company takes over the management functions.
For further information see
RTM articles and the Companies Act 2006
New articles for RTMs came in from 9 November 2009 in England (not 1 October 2009 like other company types - despite lobbying the Government department responsible!). These articles were altered to take into account the changes brought in under the new Companies Act 2006 and removed the requirement for a voting register on entitlements to vote on a poll. For Wales, new articles for RTMs for a property in Wales came in at the end of November 2011. Please note that these are different to those for English RTMs although the substance is very similar. The differences include that they are not gender specific and refer to chair rather than chairman. In addition, there are differences in the use of must and shall between the two versions. It is important to use the right version.
In England, existing RTMs were given until 30 September 2010 to continue to operate under their existing/old constitutions. After that time all RTMs were deemed to be operating under the new articles of association. This is important as under the previous articles of association the voting register - the right to entitlement to vote on a poll - had to be kept. Now, under the new articles there is no requirement to keep this particular voting register. The registers that need to be kept for RTMs now are those for a standard guarantee company. Many RTMs also include references to make clear which flat belongs to which member. It may be that we get enquiries from clients wanting articles for RTMs to ensure that they run their pre-2009 RTMs properly.
Some key points distinguishing RTM articles
They can only be guarantee companies. It is not possible to amend the articles as they are prescribed by statute. The name of the company must end in "........ RTM Company Limited."
The objects of the company are then restricted at article 5 to certain activities. The name and details are very important. Getting them wrong can be a ground for refusal of the RTM's claim by the Leasehold Valuation Tribunal which will cost time and money. It may even involve the clients going through the whole application process again and then claiming from us the cost of doing so if we were at fault. The RTM company can only take over management of the property. It cannot take over the freehold.
Appointment of directors - a director does not have to be a member of the company but usually is. This is best practice and strongly recommended. Only a Qualifying Tenant or a landlord can be a member. To form an RTM company you must have at least two QTs. Membership of the company is not transferable and ceases as soon as a member fails to meet the requirements set out in article 26. As with other Companies Act 2006 companies it is possible to have a sole director. This is not recommended as two directors provide greater protection for the members. Two are less likely to be tempted to run off with the funds in the company bank account. It used to be the case that private companies had to have two directors for similar reasons. It is the same reasoning behind why we always have two persons countersigning cheques here at Jordans.
In relation to quorum the provisions are interesting in that a quorum is either 2 members or 20% of the membership whichever produces the greater number. This is a further protection for the members.
2-10 members - quorum of 2 (rather than 20%)
10 and above - quorum is 20 %
In terms of voting rights please note the following:
Voting: general - extracted from article 33
"(1) A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the articles.
(2) If there are no landlords under leases of the whole or any part of the Premises who are members of the company, then one vote shall be available to be cast in respect of each flat in the Premises. The vote shall be cast by the member who is the qualifying tenant of the flat."
Show of hands - one vote per flat (subject to joint membership provision)
"(3) At any time at which there are any landlords under leases of the whole or any part of the Premises who are members of the company, the votes available to be cast shall be determined as follows:-
(a) there shall first be allocated to each residential unit in the Premises the same number of votes as equals the total number of members of the company who are landlords under leases of the whole or any part of the Premises. Landlords under a lease who are regarded as jointly being a member of the company shall be counted as one member for this purpose;"
If there is one landlord then one vote per residential unit.
If there are two landlords then 2 votes per residential unit.
This is very interesting as it has been set up very differently from, e.g. our property management developer drafts. In this case, it has been expressly set up so that a landlord (especially as there could be more than one) cannot take control over the voting at members' meetings.
"(b) if at any time the Premises includes any non-residential part, a total number of votes shall be allocated to that part as shall equal the total number of votes allocated to the residential units multiplied by a factor of A/B, where A is the total internal floor area of the non-residential parts and B is the total internal area of all the residential parts. Internal floor area shall be determined in accordance with paragraph 1(4) of Schedule 6 to the 2002 Act. Calculations of the internal floor area shall be measured in square metres, fractions of floor area of less than half a square metre shall be ignored and fractions of floor area in excess of half a square metre shall be counted as a whole square metre;"
The number of votes for the non-residential part = total floor area of non-res/total floor area of all residential parts x total number of votes for the residential units. This is a good example of some of the more detailed provisions.
There are then other detailed provisions (3 (c) to (f) and (4) in relation to who casts the vote if there is no QT or the QT is not a member of the RTM company. What happens if there is no lease and also who can cast a vote in relation to the non-residential parts of the property are also covered. If you need more information please see me.
Please note that the above sets out some only of the key distinguishing factors in relation to these types of companies.
Jordans Bespoke Property Management Companies
Leasehold and Freehold Drafts
We have one version for flat owners in a block of flats - leasehold draft. This could also relate to leaseholders/freeholders in a residential estate.
We have another for owners of property making use of an amenity/utility, e.g., houses in rural areas set up a company to own and ensure that the sewerage plant for their group of houses is properly maintained, run and insured.
All of our property management companies have articles that restrict the objects of the company to ensure that only property management activities are carried out.
The differences between these two types occur in relation to the definition of unit (with the inclusion of "or served by" for freehold to indicate that the units (homes) benefit from an amenity/utility) and the activities the company is undertaking (for obvious reasons). To decide whether to use "PM" (leasehold) or "FPM" (freehold) articles you need to think about how the units will be defined. Generally, if the company is being set up to manage a block of flats, or houses or an estate, the units whose owners can be members of the company are easily identified by the description in the "PM" articles - any commercial, industrial or residential unit comprised in any property held, managed or administered by the Company). In this case the flats or houses are within the building or area owned or managed by the company.
If the company is being set up to manage a utility (such as a pumping station or septic tank), the units are not comprised in the property that is managed/owned by the company but are "served by" it. Therefore, you would use "FPM" articles.
However, there may be some cases where even the description in the "FPM" articles does not identify the units whose owners can be members with sufficient clarity. In those cases, it is advisable to draft a special definition of "unit". The definition of unitholder is a tricky one. This has been debated at length by the legal team. It has been drafted to allow for flexibility to allow for both leasehold and freehold interests as they may co-exist. For example, many houses (including mine) are held on a very long lease although in terms of restrictions on what the leaseholder can do there are so few that it looks a lot like a freehold situation.
These articles were created by Jordans to meet the needs of clients in these areas. Over time they have also included provisions in relation to mortgagees in possession and trustees in bankruptcy.
The articles require two directors to be appointed for the protection of members - for the reasons already mentioned. In both types only members can be directors.
Guarantee or Share
There are other variations as well. You can have a guarantee or a share version of both these articles. The guarantee version allows for flexibility as to the amount of the guarantee. There is no particular reason why a person would choose guarantee or share in preference to the other. For residential blocks of flats there are often problems with a failure to transfer the share relating to the flat on a sale properly. There are other documents such as the TR1 form and the assignment of the lease that must be dealt with. In doing so, the transfer of the share from the current owner to the new owner/s can sometimes be overlooked. This can cause significant problems later and may make a guarantee model seem a better option. However, if you have some parts that are commercial and some residential or persons owning more than one property shares might better reflect these differences.
Developer or non- developer?
The developer version is set up to enable, e.g., Crest Nicholson/Charles Church property development to retain control over the management of the company (and therefore the estate/block of flats) until all the units (homes) are sold. Once the last unit (home) is sold the developer no longer needs to be involved in the management of the estate.
Non-developer version - a few key points
The non-developer version - these are set up so that only unitholders can be members of the company (or mortgagees in possession/ trustee in bankruptcy or a personal representative on death - subject to conditions).
In terms of quorum - where two or more members then this will be two.
Voting - on a show of hands there will generally be one vote per share (one share per unit)/one vote per member if guarantee.
Developer version - key points
The articles have been specifically adapted to allow flexibility for the developer. Therefore, it allows, e.g. Mr Smith, Head of Operations - South West at Crest Nicholson/Charles Church to be the first subscriber and director of the company. As he may then move on to other roles it also allows him to transfer his membership to another employee of Crest Nicholson/Charles Church. That employee can then transfer his membership one more time. As only members can be directors this ensures that both flexibility and control is retained. After that final transfer only unitholders can be members.
Please note there are also provisions in relation to death of a subscriber and to cover other interests such as those of mortgagees in possession etc.
The developer version has an interesting quirk to ensure that the developer always retains control over the voting at members' meetings:
This ensures that the developer through its agents will always have control over the voting at members' meetings of the company.
For example, if there are 4 units, one is still unsold and there is a developer subscriber (Mr Smith became a member on incorporation) then Mr Smith will have 13 votes - 1 vote plus 12 (3 votes per unit within the block) so Mr Smith will always be in control of the voting in comparison to the one vote each of the other members.
Once the last unit is sold then the developer version becomes like the non-developer version and the members have one vote per share (one share per residential unit)/one vote per member if guarantee.
Q: Can a property management company become insolvent?
A: Yes, like any company this is a possibility. It causes problems as it may not be possible to deal with the property until this is resolved.
Q: Can a property management company be struck off even though still in operation?
A: Yes. Property management companies can be struck off the register by the Registrar on the grounds that the Registrar has reason to believe the company is no longer in operation. This will generally be for failure to file accounts and annual returns etc. This is a very common problem that we come across.
Q: Can we amend our property management articles?
A: Yes, we can but how much can be changed and in what way may require further advice from the corporate legal services team or me. For example, you can amend to allow for a sole director but this is not a provision that we would recommend for the reasons referred to earlier.
The articles are designed to be adaptable so, for example, we recently had a query from a client. Husband and wife owned the freehold of a house they converted into two flats. They have let out the upper floor flat and have been told that in order to obtain a mortgage on the lower flat (their flat) they need to transfer the freehold of the whole house to a company and then lease the flat back to themselves. They will be the shareholders of the company as they own the freehold in this case. They do not want the owner of the upper flat to be a shareholder. We can create this type of company for them. We would use our property management articles and amend them accordingly to reflect that only the shareholders of the lower flat were entitled to be shareholders. We would also want to discuss with the client why the person leasing the upper flat should not be involved in the company. It may be that at a later date that person should be allowed to be a member e.g. if they sold their flat on.
And finally - don't forget! Given the nature of these notes they can only ever be a rough guide and introduction. Please contact me if you require any further information on specific points.
Questions taken from workshops 13 and 27 March 2012.
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