Property management company
- What is a property management company?
- Why are property management companies used?
- What does a property management company do?
- Limited by shares or by guarantee?
- Legal characteristics of property management companies
- Continuing legal requirements of a property management company
- Legal compliance service
A property management company is a particular type of company: one set up to hold an interest in a property which is divided into units, each unit being owned separately. A typical use of a property management company is where a large house which has been divided into a number of flats, each flat being owned by one or two people. A property management company can also be used for large blocks of flats, housing estates and commercial properties divided into units. A property management company can be limited by shares or by guarantee. In practice, either type of company is acceptable, though there are some differences, explained below.
Where a property is divided into separate units (such as a house divided into flats) there is usually a need for somebody to own the building as a whole, including common parts such as stairways, gardens, access paths, etc. Unless there is a landlord of the property retaining this interest, the simplest legal device is for a property management company to be set up to own the freehold (or head lease) of the property, and for each owner of a flat (or other unit) to have an interest in the company.
The property management company may also be a mechanism for managing the common parts and general condition of the property, though this may not always be the best arrangement for smaller companies (see below).
This varies from company to company. In many cases the the most important use of the company is to hold the title to overall property and some do no more than that.
The active property management company
Many property management companies take on the maintenance and repair of the fabric of the property and its common parts. Typically this may include the costs of cleaning and decorating halls and stairways, maintaining grounds and gardens, security and caretaking services, repairs to roofs, gutters, etc. Such a company will usually proceed by electing a board of directors at a first general meeting once the company is set up, and subsequently at each annual general meeting. The board, which is accountable to the members, will take responsibility for the company's various activities and its finances. The company should have its own bank account, and records must be kept of all expenditure and receipts. The company raises funds by levying subscription or other charges on the members. It has to file accounts each year at Companies House.
The dormant property management company
With a small property with little or no routine maintenance, it is often simpler for such matters to be arranged between the owners of the flats without involving the company at all. The advantage is that the company may then be maintained as a dormant company under the Companies Acts, allowing pro forma dormant company accounts to be registered at Companies House and keeping the administration of the company to a minimum.
In practice it makes little difference for most purposes which type of company is used. The essential practical difference arises when one of the units in the property is sold. In a company limited by shares, the share that relates to that unit also has to be transferred, a legal process that may incur additional legal fees. There is no equivalent process for a company limited by guarantee.
Other reasons to take into account are that the company limited by shares is widely used for trading companies, and so is more familiar to a to some people than a company limited to guarantee. Also, some lawyers feel that if the company owns the freehold of the property, it is better to have a direct proprietory connection, through the ownership of shares in the company between the property owners and the freehold than is possible with a company limited by guarantee. Others do not share that view.
A property management company will always be a private limited company. It may be limited by shares or limited by guarantee. We can register either kind. Whichever kind is used, a property management company is set up so that it is always controlled by the owners of the units in the property.
Articles of association
It is essential that the company has articles of association which have been drawn up for this particular company. A standard trading company is not suitable. Whether limited by shares or guarantee, the company's articles will be based on the Model Articles (a specimen set of articles laid down by statute) but with a number of very important modifications.These will vary according to the circumstances, but will include:
The property management company should have objects which are to hold that particular property (identified by its address). There should, however, also be provision for the acquisition of other property in case, for example, it is decided at some later date to acquire an adjoining piece of land as a garden, car park, etc. Further objects cover such things as repairing and maintaining the property, raising the funds to do so, etc.
The company must have at least one director. In a small company, where there are only a few shareholders, our recommendation is that there should be one director for each unit. Where a unit is held in joint names, the director for that flat should be entitled to nominate the other joint owner as an alternate director, so that they may attend board meetings if the person appointed as the director for that unit cannot do so. An arrangement more suitable for larger companies is for the members to elect a board of directors, usually at the Annual General Meeting. The articles should provide that only a member may be a director of the company.
The company secretary
Since April 2008, like any other private company, it is optional for a property management company to have a company secretary. The company secretary has responsibility for ensuring that the company complies with the requirements of the Companies Acts. These include seeing that the company maintains its statutory registers, sends annual returns and accounts to Companies House, keeps minutes of general meetings and board meetings, etc. The company secretary may be one of the members or directors of the company, or a professional company secretary (such as ourselves) may be appointed.
There must be a provision for the company to raise subscriptions or levies on the members from time to time to pay for the activities of the company. This should be included even if the company is intended to be kept dormant.
Company limited by shares
The usual situation is for the share capital to be limited to one share for each unit in the property. For example, if a property is divided into four flats the company should have a share capital of just four shares, one for the owner of each flat. Where a unit is held in joint names, it would be usual for the share in the company to be in joint names. Unfortunately, the Companies House registration system does not cater for the joint registration of shares on incorporation of a company. The only solution to this problem is for the share to be registered in the name of one of the joint owners and then transferred from that person to the two or more joint owners. Company Law Solutions provdes a share transfer service, but it will involve an additinal charge.
The company's articles provide that shares may be held only by someone who owns a unit in the property and that anyone selling their unit must transfer their share to the person buying it. No other shares may be issued. In some complex property developments, where there are large differences between the sizes or values of the units within it (e.g. large shops on the ground floor with offices and/or flats above), there may be arrangements for more shares to be issued to the owners of the large units than the smaller ones and for similar differences in the level of maintenance charges. If you need an arrangement like this it will have to be specially drafted, so please contact us.
Company limited by guarantee
Such a company does not have a share capital so there are no shares and no shareholders. The company is controlled by its members through general meetings. The holder of each unit will be entitled to be a member of the company. Where the unit is in joint names, the owners may be joint members. The members elect a board of directors in the same way as in a company limited by shares.
Though not a trading company, a property management company must meet all the requirements of the Companies Acts, including:
Maintenance of statutory registers
Every company must maintain certain statutory registers which must be kept at the company's registered office (or in some cases at another address notified to Companies House) and made available to any person who wishes to inspect them. The registers relevant to a property management company are:
- Register of members
- Register of directors
- Register of secretaries
- Register of directors' interests (company limited by shares)
- Register of charges
Although not absolutely essential, it is also usual for a company limited by shares to keep registers of share allotments and transfers.
All the registers must be complete and kept up to date.
Registration of changes at Companies House
When any of the details of the company are changed, e.g. a change of directors or transfer of a share on sale of one of the units, the change must be registered in the correct manner. For example, each change of directors must be recorded in the company's own register of directors and notified to Companies House on the appropriate form.
Every year the company is required to make an Annual return to Companies House with the annual registration fee (currently £15.00). The form records such details as the registered office, directors, secretary and shareholders. Failure to complete and return the annual return on time can render the company and its directors and company secretary liable to a fine.
All limited companies are required to send copies of their accounts to Companies House within the statutory time limit (9 months after the company's Accounting Reference Date in the case of a private company). These rules are currently being enforced very strictly and arrival at Companies House even one day late may be punished. Property management companies may take advantage of the provisions exempting small companies from the need to have their accounts audited. As described above, a company in which there has been no financial activity during the financial year will be a dormant company under the Act and a pro forma set of accounts may be registered.
Annual and Extraordinary General Meetings
There are detailed rules about the calling and conduct of general meetings. Under the provisions of the Companies Act 2006, a private company (such as a property management company) is not required to hold annual general meetings, but many such companies elect to do so.
Failure to send the necessary returns or accounts to Companies House can have very serious consequences for those interested in a property management company. If Companies House does not receive these it will strike the company off the register. If the company owns the freehold of the property, this is a major concern because the property is forfeited, and take by the government as bona vacantia. This often comes to light when the owner of a flat in the property tries to sell it and the buyer's solicitor discovers the truth. Not only is the sale of the flat likely to be lost, there can be considerable cost involved in having the company restored to the register.
Incorporation Services provides an annual legal compliance service, acting as company secretary and ensuring the company is kept in good legal order. Please contact us for details.