A Guide to Running Your Residents' Management Company

When you own a property in the building, you typically become a member of the company, which gives you a say in how your building is managed. This guide is designed to help leaseholders and flat owners understand the key responsibilities involved in running a residents' management company (RMC) or freehold company.

Your Company's Structure: Limited by Guarantee

Most RMCs are set up as private companies limited by guarantee.[^1] This structure is designed for non-profit objectives, which in this case is the management and maintenance of your building. It is not for the purpose of generating profit for the owners, and therefore does not pay dividends. It is crucial to understand that this is different from a typical commercial company.

·        You are a Member, not a Shareholder: The company is owned by its members. It does not have shares or shareholders.

·        Non-Profit Motive: All funds, such as service charges, are collected and spent exclusively for the purpose of managing and maintaining the building. Any surplus money is held in reserve for future works.

·        Limited Liability: As a member, your financial liability is limited to a nominal "guarantee" amount, usually just £1, which is only payable if the company is wound up with debts.

The Company Rulebook: Articles of Association

The articles of association are the legal rules that govern how your company must operate. Think of them as the company's constitution.[^2] This is a vital document that all directors and members should be familiar with. The articles can be changed, but this requires a special resolution of the members.[^3]

The articles set out the procedures for:

·        Membership: How leaseholders become members when they buy a flat and cease to be members when they sell.

·        Directors: How directors are appointed and removed, their powers, and how they must conduct meetings.

·        Decision-Making: The rules for calling meetings of both members and directors, and the voting procedures required to make decisions.

·        Service Charges and Finances: How funds are managed and how financial decisions are made.

Who Decides What? Directors vs. Members

Decision-making is split into two clear levels: the directors handle the day-to-day management, while the members vote on fundamental "big picture" issues.

Director Decisions (The Day-to-Day Management)

The board of directors is responsible for the operational running of the building. These decisions are made at board meetings. Directors are usually volunteer residents, but they still have legal responsibilities.

Key decisions reserved for directors include:

·        Setting the annual service charge budget.

·        Hiring contractors for cleaning, gardening, and repairs.

·        Appointing a managing agent if required.

·        Managing the company's bank accounts and ensuring suppliers are paid.

·        Overseeing major works and ensuring the building is properly insured and maintained.

Member Decisions (The Big Picture)

Members exercise their power by voting on resolutions, usually at an Annual General Meeting (AGM). There are two types of resolution:

·        Ordinary Resolution: Passed by a simple majority (more than 50%).[^4]

·        Special Resolution: Passed by a supermajority (at least 75%).[^5]

Key decisions that require a member vote include:

·        Appointing and removing directors (Ordinary Resolution).[^6] Members have the ultimate say over who runs the company on their behalf.

·        Altering the Articles of Association (Special Resolution).

·        Changing the company's official name (Special Resolution).

·        Approving the company's annual accounts (Ordinary Resolution).

Key Responsibilities of a Director

If you volunteer to be a director of your RMC, you take on legal duties under the Companies Act 2006. Even in an unpaid role, these duties must be taken seriously. The three most important are:

1.       To Promote the Success of the Company: You must act in good faith and make decisions that you believe will benefit the company and its members as a whole, not just your personal interests. This means ensuring the building is well-maintained for everyone's benefit.[^7]

2.     To Exercise Reasonable Care, Skill, and Diligence: You don't need to be an expert, but you are expected to be careful and diligent. This means reading documents before you sign them, attending board meetings, and taking professional advice (e.g., from surveyors or solicitors) when necessary.[^8]

3.     To Avoid Conflicts of Interest: You must not use your position to benefit yourself. For example, if the company needs a builder, you cannot simply appoint your own construction company to do the work without declaring your interest to the other directors and following a transparent and fair selection process.[^9]

Footnotes

[^1]: Companies Act 2006, s. 3(3) defines a company limited by guarantee.

[^2]: Companies Act 2006, s. 17 establishes that a company's constitution includes its articles of association.

[^3]: Companies Act 2006, s. 21(1) states that a company may amend its articles by special resolution.

[^4]: Companies Act 2006, s. 282 defines an ordinary resolution as one passed by a simple majority.

[^5]: Companies Act 2006, s. 283 defines a special resolution as one passed by a majority of not less than 75%.

[^6]: Companies Act 2006, s. 168 allows for the removal of a director by ordinary resolution.

[^7]: This duty is codified in the Companies Act 2006, s. 172.

[^8]: This duty is codified in the Companies Act 2006, s. 174.

[^9]: This duty is codified in the Companies Act 2006, s. 175.

Bibliography

Primary Legislation

·        Companies Act 2006, c. 46.

Further Reading

·        The Leasehold Advisory Service (LEASE). Living in Leasehold: A guide to living in, owning and managing a leasehold flat. Available at: https://www.lease-advice.org/

·        The Association of Residential Managing Agents (ARMA). Resources for Leaseholders. Available at: https://arma.org.uk/