Owning the share of a freehold property in the UK sounds a positive development, but there are responsibilities and risks that come with it, and those involved need to understand the implications. For HNW individuals in these situations, this article gives a few pointers.

The following article, concerning the requirements faced by those who own and manage freeholds in types of UK property, is written by Laura Southgate, partner in the property disputes team, Anna Favre, partner in the residential estates team, and Tom Bourne, partner in the commercial dispute resolution team, at Cripps, the law firm. The editors are pleased to share these views; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com

A Residents Management Company (RMC) is a company that is set up by the residents of a residential development to own and manage the freehold for the block of flats or apartments. The RMC will typically be responsible for managing the lease, maintaining the shared parts of the building or estate and ensuring that all residents comply with the terms of the lease.

In the UK, RMCs are usually established as private limited companies, owned and run by the residents themselves albeit they usually appoint professional managing agents to undertake the day-to-day management activities. The RMC tends to be responsible for the maintenance and repair of the main structure of the building, the common areas such as hallways, stairwells, lifts, and gardens, as well as the upkeep of any shared facilities such as car parks or communal lounges. In addition, the RMC is responsible for the oversight and enforcement of the tenants’ obligations in the leases of the flats. 

Membership or shareholding of the RMC is usually restricted to the residents of the development, and each member will typically be entitled to vote on key decisions such as the appointment of directors or the approval of the annual budget. Directors will be appointed to run the RMC on behalf of the members. Directors may themselves, also be members of the RMC. 

Directors' duties
The directors of an RMC have a range of legal duties and responsibilities. Although no specific qualifications or training are required to become a company director, they will be required to comply with several fiduciary and statutory requirements.

The directors have a fiduciary duty to act in good faith, with reasonable skill and care, and in the best interests of the RMC and its members. They should not misuse their position to gain a personal advantage or cause harm to the company or its members.  The Companies Act 2006 sets out a number of statutory duties for directors, which apply to RMCs. These include:

-    The duty to promote the success of the company for the benefit of its members as a whole, while taking into account the interests of other stakeholders and the long-term impact of decisions; 
-    The duty to exercise independent judgment, to avoid conflicts of interest, and to declare any conflicts that do arise; 
-    The duty to exercise reasonable care, skill and diligence in their role as directors; 
-    The duty to keep proper records and prepare accurate financial statements; and 
-    The duty to comply with legal requirements, such as filing annual returns and holding general meetings.

The RMC's articles of association (the companies constitutional document) may also set out specific, bespoke duties and powers for the directors.  

In addition to these legal duties, directors of an RMC should also be aware of their responsibilities under the leases as set out above.

Directors can often find themselves in a position of conflict given that they often wear three hats in respect of the building: leaseholder of a flat, member of the RMC, and director of the RMC. They may, for example, be in arrears with service charge, or complaining to the RMC about works that they say should have been carried out to the building. This can raise questions such as whether particular directors are entitled to attend meetings or vote on specific matters, and ultimately can lead to often rather fractious disputes between directors/member and leaseholders. 

Consequences for directors if they fail to comply with their duties
If company directors fail to act within their powers, they may be in breach of their duties as directors. This can result in various consequences, depending on the circumstances of the breach and its impact on the RMC.  If the breach is minor, the company may take steps to rectify the situation, such as providing training or guidance to the director. However, if the breach is serious or repeated, the company may take more serious action, such as removing the director from their position or taking legal action against them. In some cases, a breach of director duties may also result in the director being held personally liable for any losses incurred by the company as a result of their actions. This can include claims for damages brought by shareholders, creditors or other stakeholders.

Directors' liability under the Building Safety Act 2022
Directors of an RMC can also potentially face criminal sanctions under the newly-implemented Building Safety Act 2022 (the ‘Act’) where they do not comply with the legislation. 

Part IV of the Act requires the directors of the management company to register higher risk buildings to the Secretary of State by 1 October 2023. Any building in England that is at least 18 metres in height or has at least seven storeys containing a minimum of two residential units, will classify as a higher risk building. A higher risk building will be deemed as occupied if there are residents of more than one residential unit in the building.

Directors will commit an offence if the building is occupied but not registered, and can be liable for a fine or imprisonment for up to two years (or both). 

Where a building is occupied and has been registered, the regulator may require the director to apply for a building assessment certificate. The application must be made within 28 days, and if this is not complied with, the director will commit an offence.  

Once the building assessment certificate has been obtained, the director must ensure that it is displayed in a conspicuous position in the building, alongside a notice in the prescribed form containing the prescribed information about accountable persons for the building, the most recent building assessment certificate and any relevant compliance notice. Failure to comply will result in an offence. 

The perceived nirvana of resident-controlled buildings may seem alluring, but for all the reasons above, caution is the watchword.