This note has been prepared to provide information for the benefit of the directors and shareholders of private limited companies that own the freehold of a building divided into flats and of which the tenants of the flats are the shareholders or members of a company limited by guarantee (referred to in this note as "members"). It is general guidance and specific advice should be sought if difficulties arise.
A company has a Memorandum and Articles of Association. The Memorandum is used to set out the main objects of the company and the nominal capital of the company. For practical purposes it is the Articles of Association ("the articles") which is important as it contains rules relating to matters such as membership of the company, the transfer of shares, directorships and general meetings. The Companies Act contains a model form of articles but that is not always adopted when a company is formed and reference must always be made to the specific articles of the company concerned.
The liability of the members of a company is limited either to the nominal value of the share, which is paid when the share is issued, or, in the case of a company limited by guarantee, to the guarantee sum specified in the Memorandum of Association – this is normally a nominal amount. Unless there is a provision in the articles to the contrary (which is most unusual) a company has no right to require the members to provide finance either by way of share capital or loans.
The day-to-day management of a company is the responsibility of the directors and not the members. In companies of this type the directors will not be remunerated nor will they have contracts of service. Their duties to the company will flow from their position as office holders and not employees.
Some of the key duties are as follows:
- to act in good faith in the best interests of the company;
- to act for proper purposes;
- not to make secret profits;
- to avoid conflicts of interest.
Common law duties:
- of skill and care;
- of mutual trust and confidence.
- to creditors and employees;
- to disclose any personal interest in contracts;
- to observe restrictions on, amongst other things, loans to directors and substantial property transactions;
- health and safety matters;
- procedural requirements;
- to ensure that the company does not trade whilst insolvent.
Management and decision making
In limited companies with few directors it is common for them to act informally but in respect of important decisions it is essential that all directors are fully informed of the relevant facts and issues and it may well be necessary for a meeting to be convened. If that is the case all directors must be notified of the meeting although it is not essential for all to attend. Normally a decision is made by a majority of the directors. Members who are not directors of the company are not entitled to participate in the discussions of the directors nor may they attempt to control the day-to-day running of the company. If a member is dissatisfied with the manner in which a company is being run he may ask to be appointed as a director or call a general meeting to consider a resolution that he should be appointed as a director.
A new director can be appointed by the existing director or directors but his appointment must be confirmed by the shareholders at the next annual general meeting (“AGM”). A director may resign but can only be dismissed by a vote of shareholders at a general meeting -this can be at the AGM or a member may be entitled to convene an extraordinary general meeting (“EGM”) for that and/or other purposes. At a general meeting the members may only vote on resolutions of which appropriate notice has been given to all members unless all the members (not just those present at the meeting) agree otherwise. There are regulations in relation to the calling of general meetings and notice of resolutions about which we can advise if necessary.
It can be an onerous task to administer a company and in our opinion it is advisable for the company to have at least two directors. This is especially the case if the management and care of the building is being handled personally by the directors rather than by an outside managing agent. It also shares the burden of making decisions when there is a dispute between the members in relation to the maintenance of the building and/or other issues. A situation can arise in which the company has to issue proceedings against a tenant, for example for the recovery of unpaid service charges or because alterations have been made by the tenant without consent.
It is rare for the directors of a company of this type to have any expertise in relation to the management of property and consideration should be given to the appointment of a suitably qualified managing agent. This will increase the management costs but should ensure that the building is properly maintained and managed and, of great importance, that service charge accounts are properly maintained and demands issued in accordance with statutory requirements and the terms of the lease.
Service charges and disputes
The Landlord and Tenant Act 1985, as amended, contains detailed provisions and regulations in relation to service charges payable by a tenant under the terms of his lease to reimburse the landlord (in this case the company) for expenditure incurred by it. The fact that the freehold is owned by a tenant owned company makes no difference to the statutory and contractual obligations of the freeholder/lessor. If a managing agent has been appointed the directors will still have the duty to supervise the services provided and, for example, make decisions on recommendations by the agent in relation to the maintenance and insurance of the building but will not need to be involved in day-to-day issues.
A failure by the landlord to comply with these requirements will in all probability mean that the service charges are irrecoverable from a tenant. Service charges for companies of this type are frequently administered and collected on an informal basis, which will not cause a problem if every tenant is in agreement, but if a dispute arises a tenant will be entitled to rely on his rights under the lease and/or legislation even if, in the past, he has been agreeable to the informal arrangement. It is beyond the scope of this note to provide information regarding the service charge obligations of the landlord but we can provide more detailed advice if requested.