It is becoming more and more popular in today’s property market that management companies are being created to be handed over to the residents of a development once finalised. As the residents will invariably have little experience in the inner dealings of being in control of a limited company, it is more important than ever to ensure that the management company that is handed over to them is properly set up and managed to ensure a smooth transition for those property owners. Here, our Corporate and Commercial team highlights some of the common pitfalls and issues they have found when dealing with management companies and what can be done in the early stages (even before incorporation) to avoid problems and additional costs down the line.
1. Set your company up as limited by guarantee
A company limited by guarantee means that the members undertake to contribute a predetermined nominal sum (usually £1) to the liabilities of the company. This sum becomes due in the event of the company being wound up. However, a company limited by shares means that each shareholder subscribes for or is allotted a certain numbers of shares in the company for which they subscribe and (usually) pay the nominal value which can be set at any value but is often £1.
The reason why it is preferable that a management company be set up as limited by guarantee is because a resident may become a member simply by consenting to become a member and the directors of the company writing the resident’s name in the company’s register of members.
Should the management company be set up as limited by shares, said shares will need to be transferred by way of a stock transfer form and many of such companies that we come across are set up with just one subscriber share. This means that when it comes to handover, further documentation is required to authorise the issue and allotment of new shares and can require the shareholders waive statutory pre-emption rights before these new shares can be issued and allotted to the residents.
A company limited by guarantee provides a simpler and more efficient corporate body given the fluid nature of residents’ membership with residents coming and going as and when plots are re-sold and is the company form that we would recommend for a management company incorporation.
2. Ensure you have a full, up-to-date set of company books
Company books or statutory registers are the registers of the company required to be kept by law under the Companies Act 2006. These include the register of members, register of directors, register of secretaries and register of persons with significant control as well as any copies of board minutes and shareholders’ resolutions. Non-statutory registers that most companies will keep include a register of allotments and transfers and register of mortgages and charges. These registers will start from the date of a company’s incorporation and must be maintained until its cessation meaning that even dormant companies must maintain such records.
We often come across companies without such statutory registers or with registers that were created on incorporation and haven’t since been updated. We can reconstitute statutory registers based upon Companies House filings, however, such filings often will not include all information necessary to compile these fully and if the company has been incorporated for some time, this can be a time-consuming and costly process.
It makes for a more efficient, quicker and cheaper handover whereby a management company has these statutory registers already prepared and fully up-to-date so that we may update these in light of changes related with the handover and pass them on to the incoming directors.
3. Handover on the last plot sale
We often see that, as part of the process for each plot sale, membership (or shares in the case of a company limited by shares – dealt with above) is given to the resident(s) at completion and therefore they become a part-owner of the company at this point. Whilst we would always advise that residents are informed of the intentions for management company to be a resident-run management company to ensure they are aware of the end position, it is recommended that membership of the company is not effectively handed over until after the final plot sale.
The reason for this is to ensure that the company is maintained and operated under the ownership of the developer. This allows the developer to make any necessary decisions without the need to burden themselves with the logistical headache that may be involved in seeking other resident-member’s approval. For example, if residents are given membership upon the purchase of their respective plot, it may be the case towards the end of the development that the developer is actually holding a minority of the company and whilst they may still be in control at board level (through having themselves as directors), it may mean that any necessary changes that are required at member level (for example, changing articles of association) will require the consent of the residents which can be difficult to obtain and a lengthy process on larger developments.
We would recommended that, as part of each plot sale, a resident(s) details are obtained as necessary to enable the information to be used in readiness for appointment as a member; however, it is made clear that this will not be implemented until after the final plot sale. It is also wise, at this stage and as part of completion of the plot sale, to have residents sign a consent letter for them to act as a director of the management company. When the management company is ready to be handed over, the developer will wish to ensure that, if there are no volunteers to become directors at that stage, they have the ability to put in place at least one of the residents to such a position and avoid a situation whereby the effective handover at director level cannot be done due to an unwillingness of residents to become directors.
4. Ensure management company articles are used on incorporation
A company’s articles of association are essentially its ‘rulebook’ and governs what can (and can’t) be done with respect to membership (or shareholdings) and its directors. The importance of having a set of articles of association for a management company that are fit for purpose cannot be overstated as it can be used to ensure that the company is run effectively and to ensure all of the residents have a fair say.
Where articles for a management company may differ from articles for a normal trading company revolve around the restriction on who can be a member or director, how much power those directors have and how things like payments from residents are to be collected. In short, some of the key articles included for management companies are:
- An article that states every resident must be a member (or shareholder) of the management company – this ensures that all residents are required to contribute and are all accountable and held to the same set of rules
- An article to ensure that nobody other than the residents may be a member – this ensures that membership is not given to somebody who doesn’t live (or own a property) on the estate
- An article to ensure membership ceases upon the sale of a property on the estate
- A set of objects which outlines the key objectives of the company i.e. what it is set up to achieve and what powers it may have
- An article that sets a quorum at a level acceptable (depending on the estate) to ensure a member cannot act independently without the consensus of the other residents
Without having a bespoke set of articles for a management company, it creates a potential risk for manipulation by the residents against each other, which could lead to disputes down the line. Having this set up prior to handover means for a smoother transition and less hassle.
5. Importance of insurance post-handover
Whilst plots are sold and the estate is built, it will of course be the developer who shall remain responsible for the common areas on the estate and it is often the case when dealing with resident-run management companies that, at the end of the development, the common areas will be transferred to the management company which is then subsequently handed to the residents.
As the management company is handed over to the residents, they will immediately be tasked with ensuring the common areas are effectively managed and, more importantly, insured. It is invariably likely that, whilst the common areas were owned by the developer, they will have been adequately insured (often under the developer’s whole insurance cover); however, once handed over, there may be a period for the residents where this is not insured whilst they get matters sorted following the transitional handover. We would advise developers that it is wise to speak to their insurers in advance of a handover to see if they can maintain a level of run-off insurance cover following the handover for a period of time to allow the residents to ‘find their feet’ and get adequate insurance in place themselves. For many residents, this will be their first involvement in dealing with a company and therefore they may take a bit of time to deal with things such as banking arrangements and insurance. It is wise for a smooth handover to maintain insurance cover whilst such measures are put in place.
In conclusion, a lot of issues we see arise in relation to protracted or costly handovers can be avoided from incorporation. Should you require assistance with incorporation, intervening changes or handover of a management company, please do get in touch with our Corporate and Commercial team.