Flat Management Companies
This guide is for people who manage a company that has been incorporated to manage a property divided into a number of separate flats. Usually, the company will own the freehold but sometimes it will hold a headlease instead. Under legislation introduced on September 2004, the property may be held as commonhold, where the common parts are owned and managed by a commonhold association.
This guide is aimed at smaller companies, as the arrangements of larger flat management companies can be complex and are best handled by professionals. It covers some of the possible questions you will need to consider such as:
- Do we need a limited company?
- If we have a company, what will our responsibilities be?
It also gives advice on how to keep accounting records and how to understand the accounts that are prepared from them. It does not explain the statutory framework governing the format in which accounts must be prepared, or the complex and lengthy accountancy rules.
This guide is a general source of information for companies registered under the Companies Act:
- it does not explain the process by which leaseholders may acquire the right to manage their own premises.
What is a limited company?
In law, a limited company is a 'person' in its own right. This means it can own property (such as a freehold or leasehold) and enter into contracts in its own name. It exists independently and separately from the people involved.
When a property is divided into a number of flats, each flat owner usually has a lease of their own flat but they may also hold shares in a management company that owns the freehold (or lease) of the entire building. As shareholders, the flat owners have their say in running the limited company. Normally, the company's constitution will say that shareholders who sell their flats must also transfer their shares to the new owners. This ensures that - at any given time - the limited company represents the interests of all the current flat owners. However, it remains a separate legal entity regardless of who holds its shares from time to time.
Some limited companies do not have shares and are instead 'limited by guarantee'. If your company is limited by guarantee, it means that the members have agreed to contribute to the assets of the company if it is wound up. In this guide, the terms 'shareholder' and 'member' mean the people who own the company.
Why have a limited company?
One reason why residents of a block of flats would have a company is to own the freehold or 'head lease'. Freehold gives outright ownership of the property to the company. A 'head lease' is a lease granted directly to the company, who may in turn grant subleases of the property (or parts of it) to the flat owners. For the purposes of this guide, the difference between a company that owns a freehold and one that holds a 'head lease' is immaterial. However, the company is also often used for collecting a central pool of cash for carrying out repairs and maintenance to common parts of the property. Often it is a condition of buying a flat that the buyer becomes a member or shareholder of the company. In some cases all flat owners automatically become directors.
Another reason why a company would be set up is so that leaseholders of flats can exercise their right to manage the building they live in. The right to manage must be exercised through a limited company set up for that purpose. This type of company is called a ‘RTM Company’.
A limited company would also be set up to own and manage the common parts of a development made up of separate units under ‘commonhold’. This type of company is called a ‘commonhold association’t.
What does the limited company do?
Flat management companies typically manage common parts of the building. They may have other responsibilities. Your property probably has parts common to all the flat owners living in it: boundaries, roofs, halls, drives and gardens being typical examples. These require maintenance, insurance, lighting, etc. These costs are funded by the individual flat owners, who make periodic contributions into a pooled fund.
Many flat management companies choose to account for these transactions within the company.
If your company just pays a few bills, perhaps for repair or maintenance, then your advisor may say that these payments need not go through the company's books. Less formal arrangements, such as collecting the money through a residents association, may be satisfactory. The company could then continue to own the freehold (or head lease) of the property, but all its accounting transactions would be conducted elsewhere - the company would then be 'dormant'. Accounts would still have to be prepared, presented to members, and delivered to Companies House, but all that would mean is a simple 'nil' balance sheet that does not have to be audited.
The main requirements of this Act affecting flat management companies are that they file:
- an annual report and accounts;
- an annual return; and
- other event-driven notifications (typically changes in directorships or registered office address).
These documents and notifications must be filed at Companies House. Chapter 4 gives information about what you need to send to Companies House and when.
Who is responsible for managing the company?
Managing the business of the company is the responsibility of its officers. Legally, all companies must have:
- At least one director (unless the company is a plc) and
- A sole director cannot also be the company secretary.
The directors and secretary manage the company on behalf of the members. Among other things, they are responsible for holding meetings and ensuring that all the necessary returns, accounts and other documents reach Companies House by the due date.
Do the members get a say in how the company is managed?
Generally a company must hold at least one meeting of its members every year. This is known as the annual general meeting. Other general meetings may also be held.
At meetings, the members elect and remove directors, pass various resolutions and consider the company's accounts. However, they cannot reject the accounts, as these are the responsibility of the directors and not the members. If the members were to refuse to adopt the accounts, this could be taken as a vote of no confidence in the directors.
If all the members agree that they do not want to hold an annual general meeting, they may pass a resolution saying so. A copy of the resolution must be sent to Companies House.
If the company decides not to hold annual general meetings, this may complicate the appointment of directors and make it difficult for members to discuss company affairs.
Statutory Accounts
All limited companies have a duty to keep accounting records and to prepare annual accounts. The Companies Act and other regulations specify the format in which the annual accounts must be prepared, the information that needs to be disclosed, and the rules affecting the valuation and treatment of the transactions and balances appearing in the accounts.
These rules are long and complicated. Residents will rarely have the time and patience to understand them. So our strong advice to flat management companies is to employ a professional accountant to prepare your annual statutory accounts. The cost would be shared among the leaseholders.
Who are the company officers?
These are the company director(s) and the company secretary. They are responsible for managing the company and for delivering documents to Companies House.
Details of who they are must be entered in the company's own register of directors and secretaries and notified to Companies House when the company is first formed. Any changes must be recorded in the company's register and notified to Companies House on the correct form within 14 days of the change.
A change of particulars for a director means any of the following: name, address, occupation, nationality and other directorships; and for a company secretary it means name or address.
Who are the company members?
A company member is defined as a person who has agreed to become a member and whose name is entered on the company's register of members. For flat management companies, this usually means the leaseholders.
The company must keep a register of its members. Any member of the company or any other person has a right to inspect the register. Unless it is kept at the registered office, Companies House must be notified of where the register is kept.
If the company is limited by shares, the members are also shareholders. Details of shareholders have to be notified to Companies House. The information must be updated every year on the annual return (Form 363s), which we will send the company shortly before it becomes due.
What if a member sells their flat?
If the company is limited by shares, the company's articles of association will usually require the seller to complete and sign the appropriate section of a 'stock transfer form' (available from legal stationers). On completion of the sale, the form and the seller's share certificate should be passed to the buyer. The buyer must then complete their section of the form, pay any stamp duty to HM Revenue & Customs (HMRC), and pass the form and share certificate to the company. The company secretary must then arrange for the directors to authorise the change to the register of members and issue a share certificate in the name of the new owner.