How do you manage risk in relation to Management Companies providing services to your Estates?

Usually the issue of using a Management Company to provide services to a wider estate of which the registered provider has or intends to take ownership of affordable housing units arises on acquisition of and development of new housing.

However, as registered providers undertake mergers or stock portfolio transactions, where units are sold and purchased between registered providers, the remaining registered provider may find itself having to deal with an existing Management Company.

It is essential in both these scenarios to understand how to deal with each, to consider the risks involved and fully document these within your risk matrix and to review the same regularly to be proactive in managing the same.

We will look at both newbuild acquisition and existing estates with Management Companies for you below, from both a pure property and corporate perspective.

In complex legal structures for mixed use developments it is highly likely that the registered provider will hold several different “roles” within the one development – as leaseholder from the landlord/freeholder, as landlord to residents under long leases, shared ownership leases and tenancies.  Added to this is the reputational risk that can be associated to the registered provider from what could be publicly perceived as bad estate management.

Property ownership and Management Companies

Before purchasing plots on a development where a Management Company will be established, you could prepare a questionnaire to send to the developer requiring information about how the Management Company is structured and will be set up and run so that you can begin a conversation early on as to how you would like the estate to be run. 

Once the Management Company has been set up or during the setup of a new Management Company, you should ensure you have reviewed the Management Company’s articles and checked the following:

• the company is limited by guarantee rather than shares
• your voting rights and that you will have one vote for each dwelling you own (as opposed to just one vote per owner)
• your membership obligations and that you will not be required to become a company director or secretary of the company
• whether there are any exclusions on voting rights for owners of affordable housing, or owners of shared ownership leases.

You should also consider how service charges will be paid by tenants or buyers where the Management Company is not set up or fully operational until the whole estate is developed, i.e. who will be paid and where the monies will be held.  If the registered provider will hold the service charge monies, you will need to establish a separate account from your own estate costs.

Your solicitor can also add wording to the sale contract requiring the land and/ or facilities that the Management Company will be responsible for to be transferred to the Management Company within a set time period. There is also often wording in the transfer for the developer to step in to perform the Management Company’s obligations if it fails to do, and your acquisition solicitor will be able to confirm this. 

Going forwards, to ensure the Management Company is doing its job correctly, you can check the company’s filing accounts on the companies house website, as well as other online monitoring such as checking their website for any updates to personnel. If you do not think they are performing their obligations, our disputes team can advise as to what legal action can be taken. 

Restrictions in favour of the Management Company

When you purchase the property, it is likely you will agree to pay a service charge to the Management Company as well as other obligations, for example maintaining driveways. If you ever sell or rent the property, the Management Company will want the incoming buyer or tenant to then pay the service charge and comply with any other obligations, and will likely require them to enter a “Deed of Covenant” to confirm they will do this. To prevent you from selling or leasing the property without asking the incoming buyer or tenant to enter a Deed of Covenant, the Management Company will often require there is a notice, called a “Restriction”, registered on the title deed to the property that says you cannot sell without the Management Company’s consent. 

You need to ensure this Restriction will not limit or cause delays to how you wish to deal with your property. In particular, you may want to consider the following:

• Exclusions: check that the Restriction will not apply to shared ownership leases or assured shorthold tenancies, so that these tenants do not have to enter a Deed of Covenant and the management company’s consent is not required for the letting. Charges should also be excluded;  
• Fees: check the Management Company’s fee to provide its consent, and that there will not be any fees payable when consent is not required (such as for agreed exclusions like shared ownership leases); 
• Who can provide the consent: check whether it is only the Management Company who can provide the consent, or if any conveyancer can. If your solicitor or any conveyancer can provide a certificate confirming that either the consent is not required or that the Deed of Covenant has been obtained, this will likely be quicker than obtaining it from the Management Company – not only avoiding the Management Company’s fee but also avoiding any delays to granting a letting or charge;
• Bulk consents: if you will require the consent of the Management Company each time you let the property, see if they will provide a “bulk consent” which can be used for multiple plots. 

Corporate Risks in respect of Existing Management Companies

It is very common for registered providers to be unaware of what interests they hold in Management Companies following mergers, acquisitions or just generally where time has elapsed. This can cause a number of problems including:

• lack of corporate history around the interest / obligations of the registered provider in relation to the Management Company which takes a significant amount of time to unpick at a later date
• the registered provider inadvertently obtaining too many shares / voting rights in the Management Company to the extent that it forms part of the registered provider’s group (which is likely to be a breach of loan covenants)
• where there is lack of engagement by others involved in the Management Company, the registered provider becoming the responsible party to avoid issues such as compulsory strike-off
• reputational risks associated with the above, alongside involvement in Management Companies that are not performing their obligations and resultant impact on the registered provider’s residents.

The typical structure of a Management Company can often make it difficult for a registered provider to exit the arrangements if any of the issues above emerge. 

So what should registered providers do to combat some of these risks?

We strongly recommend undertaking an audit of the interests you hold – this may require quite a lot of digging through records held across the organisation, as well as publicly available information (e.g. held at Companies House). This exercise will also help you to identify any high risk interests – such as Management Companies that are not performing – and therefore prioritise your next steps.

You may also want to consider some general principles around the level of involvement you wish to have in these Management Companies. This may vary depending on the number of properties you own. For example, if you own a significant proportion of the properties on a particular site, or there are some performance issues, then you may want to have some representation on the board to ensure that these issues get addressed. This is in line with the Neighbourhood and Community Standard, which requires registered providers to “work co-operatively with tenants…other landlords and relevant organisations to take all reasonable steps to ensure the safety of shared spaces.”

A Corporate look at New Management Companies

Taking some of the issues and risks outlined above, it is worth thinking about how this may impact on your future strategy for new Management Companies. 

At a minimum, you should think about:

• whether you have any parameters / redlines for involvement in new Management Companies
• involving your governance/legal team in any proposals to take new interests in Management Companies and ensuring the arrangements are scrutinised, approved and properly documented
• training up directors who can sit on Management Companies boards where necessary – establish formal support for these individuals and what reporting you expect back
• establishing a group internally who can be responsible for monitoring Management Companies across all interested departments (finance, asset management, governance, development)

At Bevan Brittan LLP we have assisted registered providers in looking at their involvement and risks in relation to existing Management Companies and also to set up new Management Companies.  If you require assistance please do not hesitate to contact:

Wendy Wilks, Alice Watkins, Rose Klemperer (for Sarah Greenhalgh)