Winning control of a block of flats is just the beginning – now you have to run it!

If you’ve taken over management from freeholders, there will now be a Right to Manage (RTM) company, registered at Companies House and subject to company law. That means directors can be held personally liable for their actions.

However, if there are no directors or officers listed and no one is filing accounts and confirmation statements, then the company would be in breach of the Companies Act and likely to be struck off by Companies House. In the case of an RTM company, all your hard work in seizing control could be for nothing as management functions would return to the freeholder.

Stepping up to the plate and acting as a director or secretary is not to be taken lightly. Given that the directorship of an RTM is unpaid and voluntary and there is a considerable workload, it can be difficult to find people willing to act. One director is the minimum, but it’s probably best to have more, just in case one needs to retire or move away.

One way to attract people to the job is to make sure they are protected as far as possible from the worry of personal liability for their actions, intentional or otherwise. One way to do that is for the residents collectively to provide them with directors’ and Officers’ Liability cover. It’s easy to set up and premiums can usually simply be recovered through the service charge budget.

It also helps to reassure them that the formal administration, such as filing accounts, is not as bad as may seem at a glance.

What do directors do?

While all leaseholders will be members of the company not all will necessarily be directors. Membership (similar to shareholding) ceases when someone sells the flat and passes to the new leaseholder). It is the members who are also willing to act as directors who are responsible for day to day running of the company.

In a nutshell, directors are responsible for the day-to-day running of the building and the company, which includes mandatory Companies House filings of reports, annual confirmation, and keeping the register of directors up to date.

Companies House and RTMs

Don’t be put off by the formal administration. For small companies, it has been streamlined by WebFiling services at Companies House, who will also send you email prompts so you don‘t miss deadlines.

That said, even though filing with Companies House is stripped back to basics, your RTM company will probably be classified as a micro entity and you will be filing headline figures only.  However, you to base them on comprehensive records of income and expenditure and ensure that everything you do as a director is following the company M&A (Memorandum and Articles).

An RTM company set up using the provisions of the Commonhold and Leasehold Reform Act 2002 will have specific Articles of Association prescribed by law. Management companies set up before then may have different M&As. These will set the parameters for what the company can and must do, so be familiar with yours.

The annual confirmation statement is also pretty straightforward and, as its name implies, confirms basic company details such as the registered address, who the directors are, etc. Failing to file a confirmation statement can lead to fines for company directors and the company being struck from the public register. It must be done annually, even if there have been no changes.

Adding and removing directors from the register can also be done online, via the WebFiling portal, with people concerned advised by post.

You will probably also need to register with the Information Commissioners Office (ICO). This is done directly with the ICO and is separate from Companies House but is also fairly straightforward.

The real hard work

Given the streamlining of formal administration, it’s probably going to be dealing with the practicalities of block management and people that will be directors’ focus and take up most of their time. This is especially true if there are disagreements on expenditure or, even worse, the dreaded leaseholder who just fails to pay their fair share of the costs of running the building.

Ideally, the block runs smoothly, everyone is in agreement about what work needs to be done, is kept well informed, and is happy with the records the directors keep and pays their fair share of the costs on time. But what if there are disagreements?

If you do run into disputes, then having planned maintenance programs, good communication, and good record-keeping pay dividends in backing up your case. If a dispute with a leaseholder does go to tribunal or court, our Directors’ and Officers’ Liability insurance can protect directors.  The cover is regularly reviewed to make sure we provide appropriate cover and now includes, for instance, protection against losses following identity fraud.

Freehold companies

If leaseholders have bought the freehold, there will also be a freehold company to account for.

That may be easier to run as it may have no actual revenue because ground rents will likely have been done away with (typically reduced to a “peppercorn of demanded” and then never demanded) and service charges will go through the management company.

You’ll still need to file annual accounts and a confirmation statement that nothing has changed, but that will be straightforward, and you can use the web filing service.

Why specialist D&O cover?

There are no qualifications required to be a Director of an RMC, but you will normally be required to be a property owner or leaseholder as defined on the Land Registry Title. There are a few exceptions such as that a director must be over 16 years old, not have been previously disqualified, and not be bankrupt.

Yet leasehold law is complex, and mistakes are easily made. After all, directors are volunteers and usually laymen. So do look for a Directors’ and Officers’ Liability policy that has been specifically written – and priced – for blocks of flats.

You should ensure that both the management company and the individual directors are protected. Individuals may likely have bigger assets than the RTM company (including their own home!) So individual protection is surely advisable?

Make sure too that directors who do need to resign stay protected. Even after their resignation is accepted, they can still be liable for errors and omissions made before their resignation. In practice, most policies should allow up to six years’ grace. Even if the management company decides not to renew or move the policy to a new provider, the old policy will continue to protect retired directors who were in place at the time it was in force for actions they took at that time.

Keep it in proportion

Limited companies have the benefit of limited liability. This means the company exists as a legal person who can sue and who can be sued. As a result, a director won’t usually be personally responsible for paying business or company debts. The law views the company as a separate legal entity, so any debt claims would ordinarily be made against the business rather than the individuals who run it.

Personal liability only arises when a director has acted in a way – intentionally or otherwise – that causes loss to the company or individual leaseholders. That’s when good advice and protection against mounting legal fees is needed.  We’ve looked at some of the scenarios where this may arise here.

So, while we stress the importance of having this insurance, we would also remind you that we too keep it in proportion and our policies and premiums reflect the likelihood and sizes of any losses.

Having the cover can be, in any case, a powerful incentive for more of your neighbours to take on the workload of becoming the directors you need. Why not ask us for a quote? You don’t need to have your buildings insurance with us.

Disclaimer:

The opinions and views expressed in the above articles are those of the author only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision based on the information

The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.

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