Question 1

Dissolving our Management Company

Accepted Answer

Q: Owing to a complete lack of volunteers to manage our block of 10 residential flats we intend employing a managing agent. At a meeting with a potential agent we were informed that they did not have any contact with Companies House. This left us with no choice but to abolish our limited company and become a residents' association which seems to be the general practice with blocks locally and, by the title of your Federation, is the main practice elsewhere. Each flat owner has a signed and sealed 999 years lease document which is registered at H M Land Registry. Will you please confirm that our change of status will cause no difficulties or complications when a flat is sold. FPRA Legal Adviser Nick Roberts replies: I am rather perturbed to read your email, as I fear that you have made a decision without fully appreciating its consequences. Your leases were set up as what are known as ‘tripartite’ leases, i.e. each lease is made between the freeholders (or ground landlords), the individual leaseholder, and the Residents’ Management Company (RMC), which is owned and controlled by the leaseholders collectively. This means that the leaseholders collectively have a degree of control over their own destiny. They are in a better position if they wish to vary the terms of their leases. But perhaps most importantly of all, they can appoint their own managing agents, and the agents are answerable to them (who are actually paying the service charges) rather than to an ‘outside’ ground landlord (i.e. the freeholders). By dissolving your Management Company you have lost this advantage, and effectively the management of your block is now in the control of an outside ground landlord. I am unclear from your email whether until recently you have been ‘self managing’ or have employed a managing agent. Some people assume that if there is an RMC, they will have to undertake all the management (engaging cleaners, builders, gardeners, etc.; setting the service charges; collecting the service charges; approving accounts, etc..) themselves. Some RMCs do this, particularly with smaller blocks, but this is dependent upon there being willing volunteers among the directors. Many other RMCs simply appoint a managing agent to do all this for them. The advantage of the latter – over having an outside ground landlord – is that the managing agents are answerable to to the RMC, and can be fired by the RMC and replaced if they do not do a good job. Some managing agents will also undertake the company secretarial duties, which leaves the directors of the RMC with few ongoing duties, except to approve the accounts and to consider whether to reappoint the managing agents at the end of each year. I am surprised that you found that local agents were not familiar with the situation where they were answerable to an RMC, and dealt with Companies House on their behalf (which is basically what providing company secretarial services involves), though in a rural area there may be a small pool of available managing agents. Although it may be more common for managing agents to be appointed by and therefore answerable to the ground landlords, the view of FPRA is that it is almost always better for the leaseholders themselves to have control of this. (When the FPRA was first set up in the early 1970s it was fairly rare for leases to be set up on a tripartite basis, and it was very rare for leaseholders to enjoy a similar degree of control by collectively owning their own freeholds. The latter did not become common until after the passing of the Leasehold Reform, Housing and Urban Development Act 1993. So in the early years of FPRA there were only Residents’ Associations. Now around half our members either own their own freeholds, or are Residents’ Management Companies). The right to manage oneself / appoint one’s own managing agent is generally seen as an advantage, and, indeed, it was as a result of lobbying by FPRA and others that the Commonhold and Leasehold Reform Act 2002 contains provisions whereby a group of leaseholders can compulsorily acquire the Right to Manage by setting up an RTM Company (which are also now mentioned on our letter heading). Fortunately, I do not think that allowing the Residents’ Management Company to be dissolved should have an adverse effect on the saleability of the flats. The fact that the RMC has ceased to exist will need to be accounted for, and the flats will frankly be less attractive to prospective purchasers who are well-informed and well-advised about this aspect of flat ownership. Although the lease is drafted throughout on the assumption that management etc. will be undertaken by the RMC, those who express concern about this should, however, be directed to Clause 4 in the 6th Schedule, which provides that ‘if the Management Company shall fail to perform any of its obligations under this Lease the Lessor shall perform or secure the performance of such obligations’. This provides a ‘backstop’ if the RMC either fails in its duties or if it ceases to exist. The Lessor’s obligations arise only if notice is given to them, so one or more leaseholders should give formal notice to the Lessors under sub-clause (iii) of this Clause, if the Lessors are not already aware of the situation. You will have gathered from this letter that I think the dissolution of the Management Company was a retrograde step, and that it would have been better to retain it, and to appoint managing agents who would also have been prepared to act as company secretary. Failing that, it would have been better to appoint managing agents, and a separate, professional company secretary. If you do indeed have second thoughts about the decision to dissolve I have come across cases where Companies House have been prepared to restore a company to the register as an administrative act. Failing that it is possible to make an application to the court to do this. [Submitted April 2017]

Question 2

Dissolving our Management Company

Accepted Answer

Q: Owing to a complete lack of volunteers to manage our block of 10 residential flats we intend employing a managing agent. At a meeting with a potential agent we were informed that they did not have any contact with Companies House. This left us with no choice but to abolish our limited company and become a residents' association which seems to be the general practice with blocks locally and, by the title of your Federation, is the main practice elsewhere. Each flat owner has a signed and sealed 999 years lease document which is registered at H M Land Registry. Will you please confirm that our change of status will cause no difficulties or complications when a flat is sold. FPRA Legal Adviser Nick Roberts replies: I am rather perturbed to read your email, as I fear that you have made a decision without fully appreciating its consequences. Your leases were set up as what are known as ‘tripartite’ leases, i.e. each lease is made between the freeholders (or ground landlords), the individual leaseholder, and the Residents’ Management Company (RMC), which is owned and controlled by the leaseholders collectively. This means that the leaseholders collectively have a degree of control over their own destiny. They are in a better position if they wish to vary the terms of their leases. But perhaps most importantly of all, they can appoint their own managing agents, and the agents are answerable to them (who are actually paying the service charges) rather than to an ‘outside’ ground landlord (i.e. the freeholders). By dissolving your Management Company you have lost this advantage, and effectively the management of your block is now in the control of an outside ground landlord. I am unclear from your email whether until recently you have been ‘self managing’ or have employed a managing agent. Some people assume that if there is an RMC, they will have to undertake all the management (engaging cleaners, builders, gardeners, etc.; setting the service charges; collecting the service charges; approving accounts, etc..) themselves. Some RMCs do this, particularly with smaller blocks, but this is dependent upon there being willing volunteers among the directors. Many other RMCs simply appoint a managing agent to do all this for them. The advantage of the latter – over having an outside ground landlord – is that the managing agents are answerable to to the RMC, and can be fired by the RMC and replaced if they do not do a good job. Some managing agents will also undertake the company secretarial duties, which leaves the directors of the RMC with few ongoing duties, except to approve the accounts and to consider whether to reappoint the managing agents at the end of each year. I am surprised that you found that local agents were not familiar with the situation where they were answerable to an RMC, and dealt with Companies House on their behalf (which is basically what providing company secretarial services involves), though in a rural area there may be a small pool of available managing agents. Although it may be more common for managing agents to be appointed by and therefore answerable to the ground landlords, the view of FPRA is that it is almost always better for the leaseholders themselves to have control of this. (When the FPRA was first set up in the early 1970s it was fairly rare for leases to be set up on a tripartite basis, and it was very rare for leaseholders to enjoy a similar degree of control by collectively owning their own freeholds. The latter did not become common until after the passing of the Leasehold Reform, Housing and Urban Development Act 1993. So in the early years of FPRA there were only Residents’ Associations. Now around half our members either own their own freeholds, or are Residents’ Management Companies). The right to manage oneself / appoint one’s own managing agent is generally seen as an advantage, and, indeed, it was as a result of lobbying by FPRA and others that the Commonhold and Leasehold Reform Act 2002 contains provisions whereby a group of leaseholders can compulsorily acquire the Right to Manage by setting up an RTM Company (which are also now mentioned on our letter heading). Fortunately, I do not think that allowing the Residents’ Management Company to be dissolved should have an adverse effect on the saleability of the flats. The fact that the RMC has ceased to exist will need to be accounted for, and the flats will frankly be less attractive to prospective purchasers who are well-informed and well-advised about this aspect of flat ownership. Although the lease is drafted throughout on the assumption that management etc. will be undertaken by the RMC, those who express concern about this should, however, be directed to Clause 4 in the 6th Schedule, which provides that ‘if the Management Company shall fail to perform any of its obligations under this Lease the Lessor shall perform or secure the performance of such obligations’. This provides a ‘backstop’ if the RMC either fails in its duties or if it ceases to exist. The Lessor’s obligations arise only if notice is given to them, so one or more leaseholders should give formal notice to the Lessors under sub-clause (iii) of this Clause, if the Lessors are not already aware of the situation. You will have gathered from this letter that I think the dissolution of the Management Company was a retrograde step, and that it would have been better to retain it, and to appoint managing agents who would also have been prepared to act as company secretary. Failing that, it would have been better to appoint managing agents, and a separate, professional company secretary. If you do indeed have second thoughts about the decision to dissolve I have come across cases where Companies House have been prepared to restore a company to the register as an administrative act. Failing that it is possible to make an application to the court to do this. [Submitted April 2017]

Dissolving our Management Company

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