Being a leaseholder and a shareholder or a member of an RMC is not the same thing, although it is possible to be both. RMC Directors need to keep a clear distinction between the two roles when making decisions
What are the differences between shareholders and leaseholders?
There are both legal and practical reasons why being a shareholder and a leaseholder is completely different. You are more than likely to be both in an RMC though.
A shareholder or member can still take part in decision making. Although there is normally a restriction to voting on a Board of Directors. A meeting normally takes place once a year. In that meeting, you can then either remove the Board of Directors or vote them back in. It depends on whether you think they are doing a good job.
This is totally different from being a leaseholder. A leaseholder is contractually bound under the terms of the lease. This includes paying service charges and adhering to covenants. Most lessees often believe that once you are a shareholder of the RMC the lease doesn’t exist which is not the case. An RMC board have no legal right to take a decision against the terms of the Lease for a block even if agreed by the shareholder. The terms of the lease must still guide the shareholders.
RMC’s duties to Leaseholders
The duties that RMCs have towards leaseholders are set out in the leases and can take two forms. Either the RMC is a party to the leases with its covenants set out expressly. Or the RMC is directly responsible for performing the landlord covenants and managing the building.
The fact that leaseholders are also shareholders or members of the RMC means that the RMC has no excuse for failing to perform its obligations. Contractual duties such as repairs, maintenance, insurance and service charges combine with statutory duties. These include restricting service charges to a reasonable amount and consulting on major works. The leaseholders are allowed a duty of care from the RMC.
It is essential that RMC Directors have reliable advisers. They should be up to date with Landlord and Tenant legislation as well as various Companies Acts. We would suggest in this instance that you take out Directors and Officers insurance to cover the directors’ liability against errors. The RMC has a Board of Directors who then either employ managing agents or carry out the works on behalf of the lessees themselves.
Should we place the maintenance money and the company money in the same account?
No, RMCs need to have two separate funds. One that the service charge is in and the other has the companies own money. The RMC holds service charge funds on trust for the lessees as these are not the companies’ money. We often speak to people who have mixed up their management accounts with the company accounts and end up paying tax for no particular reason. Most management companies are known as “Dormant Companies”. This means that they only have to do a very simple form once a year to maintain the company at Companies House and for Inland Revenue purposes.
Company funds often derive from subscriptions or payments from members. If it owns the freehold they may charge ground rent but if all the lessees are shareholders it is unlikely that they will change this.
Leaseholders all contribute fairly to the service charge fund in accordance with the terms of their lease. The RMC is a statutory trustee for these contributions and the beneficiaries under the trust are the leaseholders.
It is a fundamental duty of a trustee to cover all funds received and spent. Service charge money is not owned by the RMC and so will not count as an asset of the Company. The leases normally set out clear service charge money payments which are contractual.
Preparing annual accounts
If the company receives no income and pays no money out then it is known as a dormant company for tax purposes and accounts are often not required.
Administration costs for running the RMC
Any payments made by the company for the company have to come from the shareholders’ funds or money paid in by shareholders. It is important to understand for instance that the company should pay the Directors and Officer’s liability insurance. Not the maintenance fund.
Can the RMC carry out major work and long term agreements?
Under Section 20 of the Landlord & Tenant Act 1995, the landlords must consult with leaseholders if proposed work to their block is likely to cost any one leaseholder £250.00 or above. The same applies if they intend to enter a long term agreement with a contractor to provide services over one year. RMCs and RTMs have the duty of this requirement to consult lessees even if they own their own freehold.
Don’t fall into the trap thinking that Section 20 doesn’t apply just because everybody who is a member of your block is a member of the RMC. Even if residents reach a unanimous decision at the residents meeting to go ahead with the work a Section 20 Consultation is required by law. It is not acceptable if shareholder committee members or Directors have taken a decision, and ignored the law. For instance, if you don’t consult properly you may be subject to a penalty, or not be able to recover the funds. It is important that you have the right insurance for your block or building. Don’t hesitate to contact us on this or look at our other article on Directors and Officer’s liability insurance.