Taking back control of a Residents Management Company, a case study

(this document was originally a ten-part blog post and is being reworked)

It's recently come to my attention that there's a housing development in North London whose Residents Management Company (RMCs) seems to have slipped out of control of the residents themselves. As nearly half of RMCs are not member-controlled at some point in their existence, this isn't earth shattering. What makes this case interesting is:

• the RMC was initially set up by a *housing association*
• subject to various conditions, the housing association seems to have the power under the leases of flats to "step in" to the management of the flats
• it's unclear who the voting members of the RMC are
• there appears to be no bar on paper to resident control of the RMC but allegedly their attempts to gain control are being ignored

Who are the RMC members?

Membership of a company requires two things: that a member consent to join the company, and that the member's name and address be recorded in the company's membership register. Where the company has share capital, as most do, then the number of shares has to be recorded too.

In the case of this particular RMC, there is a vague statement in the company's articles of association that persons having a property interest in a particular development (e.g., owning a flat or house) can be registered as members of the company, and no-one else can be. But there are two issues here:

• if the directors don't register the owners as members of the company, then they're not members
• it's not clear what property interest qualified: in a block of flats, there's the owner of the block, who grants a head lease to a Shared Ownership provider, who grants a 125 year lease to a Shared Ownership leaseholder. Any or all of these three parties might be registered as RMC members for such a flat. Some RMCs make it clear in their articles of association which party should be registered, but this RMC does not.

The actual text of the membership provisions of the articles is as follows:

"Unit" shall mean any unit, being residential or otherwise, comprised in the Estate;

"Unitholder" shall mean any person or persons having an interest in any Unit comprised in the Estate [...]

[...] no person shall be registered as a Member of the Company who is not a Unitholder.

and "Estate" is defined merely by a placename, rather than by reference to, for example, a map or plan or Land Registry title.

Allegedly, and I must stress, "allegedly", a statutory request was made to the company, by the housing association itself, to obtain access to the membership list, and allegedly it was ignored. Maybe the request was invalid. Maybe it was ignored. But ignoring such requests is literally a criminal offence. So something doesn't add up here.

It is expensive for aggrieved individuals to prosecute Companies Act offences relative to the potential gains, and the housing association may well have concluded it wasn't worth the candle.

Flying blind

Without knowing exactly who the members are, it becomes very hard to:

• calculate how many signatures are needed to call a general meeting to appoint new directors
• send out notices for a general meeting if the existing directors ignore a request that they call such a meeting themselves
• check if the "right" individuals are even registered correctly as members
• canvass for votes in preparation for a general meeting
• checking who is entitled to attend and vote at the general meeting

There is no alternative to using the Companies Act for collective management of residential property. In particular, the much-trailed "commonhold" that the government is promoting as the default for new builds relies on exactly the same legal mechanisms as RMCs do. If those mechanisms are unworkable, then so is commonhold.

Part 2

In Part 1, we saw that it wasn't clear who the RMC members were.

This has pretty serious implications. Residents cannot ascertain which of their neighbours are members of the RMC and thus have formal control over board of directors that chooses the estate manager.

Roughly speaking, we'd expect one member per dwelling (i.e., if we count up the number of houses on the estate, and add it to the number of flats, that's how many members there should be). But the RMC's articles suggest there may be non-residential units that carry RMC membership rights/obligations too.

Tenure mix

Focusing just on the dwellings, of which there are over 300, there seem to be dozens of houses and flats. There are three patterns of ownership:

• freehold houses, which the housing association ("the HA") has sold on to individual homeowners
• leasehold flats, where the flat owner owns the lease outright
• Shared Ownership flats, where the flat owner owns less than 100% of the lease and the head lease is owned by the HA.

There might also be flats and houses that are owned outright by the HA.

Role of Shared Ownership

According to Land Registry data for the freehold of the original plot of land comprising the estate, there are about 100 long leases for individual dwellings on the estate. Some of those leases will be Shared Ownership leases.

(It would be helpful at this juncture to pause and mutter a ritual curse upon those who never miss an opportunity to pretend that Shared Ownership isn't a form of leasehold; they do nothing but derail conversations).

If, on the other hand, one downloaded the title register for an individual flat, one would find two or three entries:

• a freehold title for the block of flats or the wider estate, plus a leasehold entry for the lease of the flat
• a freehold title for the block of flats or the wider estate, plus TWO leasehold entries, one for a head lease held by the HA, and the other an underlease held by the individual Shared Ownership leaseholder

From the point of view of of power within the RMC, it makes a big difference which of these owners is the member of the RMC referrable to that flat: does the HA represent a Shared Ownership flat in the RMC, or does the Shared Owner herself/himself?

There are dozens of Shared Ownership leaseholders on the estate, and they have no idea whether they can vote in the RMC (and similarly whether they can participate in calls to force an extraordinary general meeting of that body, or be elected as its directors). And if they don't have the vote, then the HA likely has the vote in respect of their flats, meaning the HA has a very large number of votes in the RMC ...

Part 3

There's a widespread misconception about the role of leases and transfer deeds in relation to membership of the RMC. Specifically, that if it says in a lease or a transfer that the owner of the lease (or of the property transferred) that the new owner has a right or an obligation to join the company, then that means that person must be a member.

Just to step back and think about it in the abstract: being a member of a company brings benefits (e.g., dividends) and risks (having to bail out the company if it goes bankrupt). It's therefore untenable that anyone could become a member of a company except by their agreement with the company itself or by trading places with an existing member. (In the case of RMCs, the benefit is having a say in the governance, and the risk is potentially unlimited liability for meeting the RMC's running costs).

The logical necessity of agreement is reflected by the requirement for the member's consent to join the company, in section 112 of the Companies Act. The other requirement for company membership is that one be registered in the company's register of members. It is not enough that one have the right or the obligation to be a member of the company; the company's directors have to have registered someone as a member, or they're not a member: they're just a *potential* member whose rights have been breached.

There are *statutory* rights to join a Right To Manage company and statutory obligations to join a commonhold association. But there's no statutory right to join an RMC: that right or obligation will only exist in the company's articles of association, if it exists at all.

Part 4

(In Part 3 it was mentioned that one of the risks of being part of an RMC was potentially unlimited liability to the RMC; in the case of the particular RMC that this series of blog posts is looking at, that risk doesn't exist)

What do the leases say?

There are two sorts of long leases of flats on the estate:

• head leases
• Shared Ownership underleases

The head leases were drawn up in the early 2000s and are tripartite leases with the following parties:

• The Housing Association, as "The Landlord"
• The Tenant
• The RMC, as "The Management Company"

As it happens, the *original* tenant named on the leases is a company that seems to have been a subsidiary of the Housing Association. When flats were sold on a 100% basis, the new tenant stepped into the shoes of this subsidiary.

The underleases, on the other hand, seem to be two-party Shared Ownership leases between this subsidiary and the Shared Ownership leaseholder. Those who staircase to 100% presumably end up having the underlease cancelled and take ownership of the tenant's interest in the headlease detailed above. It might be at this point that the Shared Owner gets registered as a member of the RMC.

RMC membership under the leases

The RMC is a party to the head leases. These leases have covenants on the part of the tenant, in the following terms:

2.4 The Tenant has agreed to become a member of the Management Company

4.14 If the Tenant at any time is not the holder of a share in the Management Company:

4.14.1 to carry out the obligations attaching to members of the Management Company under the Management Company's Articles of Association

4.14.2 upon being requested to do so by the Management Company or the Landlord to accept a share in the Management Company [...]

This strongly implies that it is the head lessee (rather than unstaircased Shared Owners) who are the RMC members with the vote; the RMC isn't a party to the Shared Ownership underleases, and these don't mention any obligation to join the RMC. So it would not be guaranteed that underlessees would be members of the RMC, and impossible to rely on them to fulfil any obligations the RMC attempted to impose on them.

On my own estate, there are two useful points of comparison:

• our RMC's articles of association are explicit about which of the two parties in a Shared Ownership setup has to be the RMC member for that dwelling
• the RMC's articles purport that all dwellings on the estate are to be represented in the RMC, however, the land was not all sold on such a basis, and forty percent of the dwellings are outside the system and the owners of those dwellings do *not* have a provision in their leases or transfer requiring RMC membership, leading to misapportionment of the estate charge

RMC membership under transfer deeds

For freehold houses, there is a different relationship with the RMC. There are no "leases" as such. The transfer deeds instead contain covenants by the new owners of houses, in the following form:

4.18 not to transfer or assign their interest in the Property without requiring the transferee or assignee to apply to become a member of the Management Company

Part 5

So far, we've been through some ways of making informed guesses about who is a member of the RMC that the residents need to take back under control.

This is all assuming that the directors are actually following the rules, but the rules are vague about what land constitutes the relevant "Estate" and what constitutes a "unit". It seems the directors may be able to designate commercial premises as units for the purposes of enrolling people as members of the RMC.

Other ways of enumerating the members

Ultimately, in any of these situations, there's very likely to be a defined set of properties that are being managed, and one RMC member per property. So to try to calculate how many RMC members there are, one can try to count the properties.

Ways of doing this include:

• buying a copy of the electoral register, which will also give some of the names of residents
• buying the title deeds for each property off the Land Registry, which at £7 a throw may or may not be affordable
• getting the schedule of leases off the Land Registry (which will give partial information)
• physically walking around and counting the properties
• inspecting plans registered at the Land Registry or in the leases and transfer deeds
• using online mapping tools, particularly OpenStreetMap
• getting lists of addresses and postcodes from various sources
• counting the "plot" numbers that are sometimes used on master-planned estates

It should be noted that OpenStreetMap is editable like Wikipedia, so you can actually use it for storing some of your research: making sure the right number of buildings displayed, and that they have the right street numbers on them. Mercifully, this can be done piecemeal over a period of weeks.

There are pitfalls with *all* these approaches, but they provide useful cross-checks on each other. These pitfalls include:

• extra buildings: what looks like a house on the satellite photo turns out to be an electricity substation disguised as a house
• missing buildings: there is no number 13 on a street. Or there's no number "1" on "One Tree Drive" because that would be confusing.
• one of the plot number is not used
• properties are yet to be built, or sold, or occupied, etc

Part 6

Even if one doesn't know who the members of the RMC are, knowing an upper bound on how many of them there could be is itself useful: if five percent of the voting members of a company demand a general meeting, then the directors must call one, or those members can call it themselves.

It follows that if, say, there is an RMC with 400 members, and a group of residents decide that they wish to call a general meeting to appoint new directors, they need to find 20 signatures of those members. But if they've underestimated the total size, at, say, 300 members, they'll think they only need 15 signatures. After the deadline for calling the meeting has passed and they have heard nothing, they won't know if they heard nothing because they didn't have enough signatures, or because the directors were ignoring them.

So obtaining access to the membership register can still be essential. Tiresomely, some companies try to pretend that GDPR is somehow a way of getting out of their statutory obligations to disclose the members of the company to anyone who makes a valid request for that information (and I have even known one company to falsify the information provided - but this is heading into criminal territory).

Part 7

Having gone through the whole rigmarole of how one might work out who is a member of the estate's RMC and why, how does it all fit together with day-to-day management?

Management Company versus Managing Agent

The Management Company (the "RMC") can delegate pretty much all its responsibilities to a managing agent.

You'll generally find that management companies are non-profit, and restricted to a particular estate or block of flats. They might have SIC Code "98000 - Residents property management" if you look them up on Companies House. An estate-specific management company will generally be named in the leases and transfer deeds for that estate. On the Land Registry, you'd find a restriction on the title, saying "this property can't be sold unless the management company has provided a certificate saying that the owner has fulfilled his/her obligations to the wider estate". The members of the management company will be those who own property on the estate.

A managing agent, on the other hand, will generally be a commercial, for-profit company, that manages property as its main line of business, anywhere in the country. It might have SIC Code "68320 - Management of real estate on a fee or contract basis".

The relationship between a management company and a managing agent is one of customer and supplier. The RMC is the customer of the MA. Or at least, *should* be. This allows the residents/owners on the estate to replace the managing agent from time to time. This is generally more effective than serially litigating over service charges.

What has happened in practice

It was an enlightened housing association that set up the RMC that is under discussion in this series of posts. Letting social tenants have a say over management was unusual in 2004.

And it is not often that I have anything nice to say, whatsoever, about housing associations and their staff. But credit where credit is due: in principle, the RMC they set up in this case went well beyond the management control that social/affordable housing tenants would normally get.

There have been three problems:

• the RMC was set up with a privileged member, whose powers to control the RMC only lapsed in 2022. I'm not really going to go into that here, because I have written elsewhere at interminable length on that issue as it affects RMCs across the country
• there is a supposed "step in" clause which allows the housing association to oust the RMC in certain circumstances
• the RMC was allowed to fall into a state where the managing agent himself controlled the board of directors; this managing agent benefited from the "privileged member" status mentioned above

In any case, since 2022, the members of the RMC, whoever they are, should have been able to take control of the board of the company, and thereby hold the managing agent do account or choose a new one. But attempts to do that have been frustrated.

Part 8

The general scheme of a homeowner-controlled estate is like this:

• the homeowners constitute the members of a Resident Management Company, and elect a board of directors
• that board of directors delegates responsibilities to a paid managing agent

So a group of, say, 300 homeowners would elect a smaller group of half a dozen or so, to hire and fire a single individual or firm. It basically can't work any other way. Yet the situation, though it recurs across the country, is constantly misrepresented:

• "if you're a homeowner you'd have to be a director"
• "if you're a director, you'd have to actually clean the corridors yourself rather than hiring a managing agent"

I'll return to those absurdities another time.

Suffice it only to say that the RMC we're looking at in this series of posts has got a problem, that also recurs across the country: the only director is also the person who serves as the managing agent: he reports to himself! he hires and fires *himself*!

Needless to say the quality of services provided is unacceptable to the residents, who are now trying to do something about it, by calling a general meeting of the RMC to elect additional directors who might outvote the existing director / managing agent.

Part 9

Having established roughly who is a member of the RMC, and how the RMC is theoreticaly governed (the homeowners elect directors who appoint a managing agent, "the MA") ... what are the actual responsibilities of the RMC and its MA?

These responsibilties arise principally under the leases of the flats and the transfer deeds for the houses.

The RMC's role in relation to the houses

For example, in one of the transfers of one of the houses on the estate, the Management Company (that is, the RMC) covenants as follows:

6.1 to maintain renew replace and keep in good and substantial repair and condition [...] the Management Areas [...]

6.2 to tend repair and maintain the Open Space [...]

and so on.

Presumably this is with the permission of the owners of the "Management Areas" and "Open Space", if the RMC itself is not the owner.

Now the RMC isn't actually a party to these transfer deeds, which are between the Housing Association and the initial buyer of the house. Over time, these initial buyers will sell their interest to someone else, who in theory takes on the benefits and burdens of the conditions enumerated in the transfer deed, including the relationships with the RMC.

The RMC's role in relation to the flats

Similarly, in the head leases of the flats, the Management Company, which is a *party* to these leases, covenants:

6.2 To provide and perform the Services [...]

and "the Services" are set out in great detail in one of the schedules. As a party to the leases, there's no further question as to the RMC's right to provide the services and charge for them. With two caveats: the Landlord rather than the Management Company has the power to place the buildings insurance, and secondly the Landlord has the right to "step in" to the Management Company's shoes as follows:

7.7 If the Management Company shall fail to perform and of its obligations hereunder on the request in writing of the Tenant the Landlord shall perform such obligations [...]

Part 10

The story so far:

• some of the residents on an estate are members of its Residents Management Company (the "RMC")
• but it's unclear precisely which residents, who hold a variety of tenures such as freeholder, leaseholder and Shared Ownership leaseholder, alongside various types of renters
• that RMC has the right to charge the owners of freehold houses for managing shared areas on the estate, and to charge leaseholders of flats for the same, as well as for managing the blocks of flats
• unfortunately, the only director of the RMC actually owns and/or controls that company to which the RMC has delegated management of the estate
• can you imagine the tendering process? "I, the board of directors, unanimously award this lucrative contract ... to myself."
• complicating all this, the landlord of the estate has certain "step in" rights allowing it to supplant the RMC's role in relation to some, but seemingly not all, of the dwellings

The impracticality of double management

Now on this estate, anyone who holds a long lease on a flat, and probably anyone renting a house from a freeholder, and some of those who are renting socially or from one of the flat leaseholders ... is going to be paying a variable service charge. And variable service charges payable to landlords have to be both reasonable and reasonably incurred, per section 19 of the Landlord & Tenant Act 1985. A situation where two different managers arranging for mowing the same grass, or sweeping the same corridor or repairing the same roof is not one where tenants have to pay both managers, because it's not reasonable to mow already-mown lawn and sweep already-swept corridors. And if it's not reasonable, then it's not a recoverable landlord-tenant variable service charge, which means legally it doesn't have to be paid.

The leases seem to afford the landlord (our housing association) the power to "step in" to the role of the RMC, and for service charge payments to be diverted to the landlord too. It's really unclear how this would work if the conditions existed for the landlord to "step in" to the RMC's role for some but not all of the flats in a single block of flats. Neither the RMC nor the landlord might have the funds to do repairs or cleaning, and so on.

A similar argument applies to the estate as a whole. There are shared open spaces, which the owners of the freehold houses must pay for alongside the owners of the leasehold flats. The transfer deeds for the houses don't seem to allow the housing association to "step in" to the RMC's role managing the shared open space in relation to the freehold hosues. Maybe there is an undisclosed side-agreement which permits this, but if such a thing existed, the whole RMC arrangement would be exposed as a sham, with implications beyond this North London estate.

The freeholders of houses, not having a landlord more or less by definition, are also excluded from the protections of section 19: so they *could* be charged unreasonable charges, though such a situation has a sell-by date as the government could commence legislation that is already on the statute book which would grant the freeholders similar protections. Until then, there exists the possibility of serious unfairness.

Undermining the RMC

If the RMC becomes irrelevant to everyone but the freeholders (in respect of whom there seems to be no "step in" rights), then the freeholders, if they wish to control their managing agent, will no longer have such willing support from the leaseholders on the estate. This is somewhat divisive and tiresome.

Step-in by invitation

As detailed a few posts ago, the "step in" rights are hardly unconditional. They depend on the RMC having breached its obligations under the leases (rather than say its statutory obligations under UK company law).

But they also depend on the consent of the leaseholder. Notably this leaseholder is immediate tenant of the housing association, which in relation to Shared Ownership leaseholders is not the part of owner of the flat, but a subsidiary of the housing association itself. So in many cases, the housing association will be able to impose itself in place of the RMC by virtue of still owning part of someone's flat.

I have heard on the grapevine that solicitations have allegedly gone out to certain leaseholders inviting them to request the landlord step in, without fully apprising them of the consequences (that the RMC loses most of its rights and can no longer meaningfully appoint a new property manager related to that flat).

This is presumably being presented as a formality for bypassing homeowner control of the RMC, and displacing the RMC's "choice" of managing agent. It's not clear that efforts in this direction had started before the homeowners on the estate started making moves to appoint additional directors of the RMC.

A managing agent that "can't" / "won't" work with RMCs

I have also heard allegations that the department of the housing association that now wants to manage the leasehold flats on the estate claims that it "can't" or "won't" work with the RMC. Apart from treading into "derogation from grant" territory, this kind of repudiation of homeowner control and RMCs does not feel like something that social landlords would want to be admitting openly, and I hear they are, allegedly, already walking it back.

Role of local MP

Some of the estate's homeowners have reached out to the local MP. I think the MP may not have understood the issue and thought that replacing the managing agent by hook or by crook was what was necessary (in which case "step in" might suffice for his leaseholder constituents, but would screw over his other constituents who owned houses rather than flats on the estate).

It is rumoured that at a recent meeting with the MP, someone tried to scare the estate homeowners off becoming directors on the grounds that it was too scary or burdensome. I tend to take a "nothing's too good for the workers" attitude to resident directors and encourage them to step forward and the power and the responsibility that comes with being a director of a company charged with managing an estate. Supposedly it would be too hard to find directors from amongst the homeowners. Whoever allegedly said this had obviously not been familiar with basic statistics about company directors, or indeed spent three minutes on Companies House checking how many people at the postcodes on the estate already served as directors of other companies. It was, of course, quite a lot, and in the end about a dozen people accepted nominations.

RTM

The final point I'd like to make is that this estate was set up just as owners of flats got the Right To Manage their buildings, around 2004. It was obvious to laymen that this included Shared Owners, but groupthink kept the lawyers claiming / assuming / hoping this was not so and it was only confirmed by the courts last year.

It may be the case that the generality of blocks of flats on the estate are subject to Right To Manage under the Commonhold & Leasehold Reform Act 2002.

In that case, a majority of leaseholders in an individual block of flats, including Shared Owners, can trump the RMC and the landlord's "step in rights". They would also gain the ability to stop the landlord rorting the building insurance e.g., by taking a commission on it, which the RMC cannot currently prevent.

In any case - it may be an avenue for leaseholders who want nothing to do with the landlord's in-house management team, for one reason or another. But it would fragment the estate.