Setting Up a Flat Management Company
A company set up under the Companies Act to operate for the benefit of residents or tenants rather than being run as a "business for profit" is generally known as a "flat management" or "property management" company. Many types of multi-occupancy development, but particularly residential ones, need such a company and they account for a large number of the companies on the register at Companies House.
London Law offer a specialist flat management formation package, either manual or electronic. Electronic incorporation removes the need for signature of paper forms, if you already have a London Law webformation account just sign on and select the required Flat Management Articles, alternatively click on register to create a new webformation account. We are also happy to take instructions over the telephone and process your instructions in house.
For the ease of reference of members, self contained (long form) articles of association, are included, rather than using short form articles which amend the prescribed model articles. Short form articles require reference to the model articles to understand them and are thus much less user friendly.
London Law's articles contain the special provisions which are needed for flat management companies to facilitate their ongoing management and to deal with changes of members, resulting from transfers of ownership of leases. Clients can choose between a company limited by shares or limited by guarantee.
The formation package can be tailored to the client's specific requirements including:
- Fully completed registers (so enabling the professional advisor to make valuable savings of chargeable time that would otherwise be involved in completing this documentation).
- 6 printed copies of the Memorandum and Articles of Association, which is usually sufficient to ensure one copy for each leaseholder.
Below we look at the needs of developers and the different types of company available.
What is the function of a flat management company?
As the name suggests, many are connected to blocks of flats where an arrangement needs to be made to deal with the running, maintenance and repair of the common parts of the building. The leaseholders of the flats are the members of the company, some will be appointed to act as directors and one will usually be the company secretary. They may appoint a managing agent to carry out the day-to-day work, or one may be specified in the leases with the freeholder.
The freehold of the land on which the flats stand may be held by a third party, or it may be held by the management company (so that the leaseholders have the ultimate benefit of the freehold). The simplest form of flat management company is a dormant one which holds the freehold of the land for the members of the company, who are leaseholders of the flats built on that land.
This type of company can also provide a structure for the management of the common parts of private freehold estates of houses, which may include roads, communal gardens, security and other facilities.
What are the options?
A corporate body is needed to hold land, unless there are four or fewer lessees concerned, in which case the freehold of the land could be held jointly in the lessees' own names. However, if the freehold is held directly by the lessees jointly, then each time a flat changes hands, apart from the transfer of the lease on the flat, there would need to be a transfer of the freehold into the new set of names in the Land Registry. Getting all the necessary signatures and consents would take time and add to costs. The use of a flat management company to hold the freehold avoids the problem.
A flat management company may be incorporated under the Companies Act, either as a limited company with shares, or a company limited by guarantee. Either of these forms of incorporation provides limited liability for its members, subject to the usual caveats in the insolvency legislation about trading properly. Each also provides a corporate vehicle that can hold the freehold (or head lease) which underlies the various occupiers' leases. It can also collect maintenance charges and any ground rents, hold a sinking fund for major repairs, arrange cleaning, decoration, security, insurance, a warden's salary for sheltered schemes and janitorial or concierge services where appropriate.
The company limited by shares was designed for profit-making enterprises, but with properly-drafted articles also works well for flat management companies. When the related property interest changes hands, the leaseholders' share also has to be transferred by a stock transfer form (often for a token payment with no stamp duty payable) and the change recorded in the register of members. London Law's articles provide a special procedure to facilitate the transfer of the relevant share if a lease has changed hands but the transfer of the share was overlooked.
The company limited by guarantee was intended to provide a form of incorporation with limited liability suitable for a group of members with a mutual interest of a not-for-profit nature. The main advantage of using a guarantee company rather than a company limited by shares is that no stamped (or stamp exempt) transfer is needed on changes of members (on sale of the related lease). The articles can simply provide for the membership of the outgoing lessee to terminate automatically when they cease to hold the lease, without the need for any document to be signed by that member giving up their membership. The new owner of the lease can then be admitted to membership in place of the outgoing member.
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