Why manage property through a company structure?
A residential property management company is set up either by a group of owners who each own a part of one building or group of buildings (perhaps having exercised their right of enfranchisement to buy the freehold), or by a developer who constructs or divides the building in the first place.
The usual structure is that each unit owner (by unit, we mean a flat or a house) has a long lease of his or her property from the management company, which owns the freehold.
Examples of the types of property typically managed in this way include:
- a large house divided into a number of flats
- block of flats
- small housing estate
What all the above examples have in common is a requirement for the individual owners to take responsibility for the building they own together through the company. So within the collective group of owners we have a diverse group of people with only one thing in common - the building.
Despite holding each unit (such as a flat) independently, the owners are likely have a shared interest in common parts like stairways, parking areas, gardens, as well as the fabric of the building itself.
The reasons to use a property management company then become apparent:
- each unit depends upon the others for physical support and protection - quite literally
- the company can hold the freehold title to the building and surrounding land, so that a new legal transfer of all of it is not needed every time a unit changes hands
- decisions can be made democratically on all aspects of the management of the building
- the structure re-assures existing and potential long leaseholders that there is a proper structure in place to maintain the value of the building and regulate the relationship between the owners
- shared services such as gardening, janitorial or concierge services can be organised and paid for by the residents management company on behalf of all owners, and the charges recovered later through a service charge
A flat management company is nearly always a private limited company, but it could be either limited by shares or by guarantee, with either type working perfectly well.
In practice, leaseholders generally prefer it to be a company limited by shares as this provides a direct link between a shareholder and the building. It gives him or her ownership, albeit indirectly.
Although companies limited by shares are nearly always profit making enterprises, they can be not-for-profit as well. People understand the concept of shares better then the concept of guarantee, and it is easier (and cheaper) to find accountants and lawyers who are experienced with how companies limited by shares work.
The company will issue only one share per flat or other division. So a small block of flats or mini-estate of houses might have issued only ten shares of one pound each. Of course, each share has one vote and no-one has a casting vote.
In a new-build situation, the developer will form the company before they sell the first unit, and will retain the shares to be allocated later to each of the other flats. That enables them to continue to control the building until they no longer need that control.
How a property management company differs from a trading or commercial company
A management company requires different provisions in its articles of association from a trading company in order to be able to meet its objectives.
As the sole object of the company is to manage the property, the articles should include a very precise objects clause. That way, it will require more than a mere 51% of the shareholders to agree to engage in a trade or a property deal; to use the garden personally, or engage in any other activity which may be unfair to other owners.
The number of issued shares in the company should be equal to the number of flats, houses or units in the property.
Every property might be owned by a director. Of course, if some properties are owned by two or more people, then only one of them will represent their flat or unit. That might give the company many directors, so the basis of decision making (particularly decision making on different subjects) needs to be clear in the articles.
Alternatively, the owners may appoint a certain number of them to be directors for a short period of time (such as one year) and hope that they are well represented. In this case, again, how decisions are made needs to be set out very clearly.
The articles will need to include additional clauses relating to how expenses are funded, and who collects the money and on what basis. 'What if' scenarios also need to be considered such as what happens if an owner refuses to contribute or has no money?
Importantly, you should include a provision for a new purchaser to become a shareholder of the company and for the seller/assignor to have an obligation to transfer his or her one share.
When the assignment of a leasehold (when a sub-property unit is sold) takes place, the conveyancer will also make sure his buyer client also takes the transfer of the share in the freehold management company. A standard stock transfer form can be used.
Using a model set of articles of association
If you are new to being a shareholder, you might have found references to 'old' companies and 'new' ones. The reason is that the Companies Act 2006 changed and consolidated old law, some of it unchanged since 1948. Surprisingly, many companies still cruise along using articles of association from 'the olden days'.
New law has provided a set of 'model' articles. Despite the name, they are quite unsuitable for a property management company - they really are just a model on which you might base those your company rather than being suitable for any company. You can read about why you should change your company articles.
Solicitors at Net Lawman have edited the default model set specifically for a property management company. You can download the template articles of association for a property management company.