Directors play a pivotal role in managing and operating residential properties with communal areas. Often, the leaseholders themselves take on legal responsibilities to ensure their companies operate within the bounds of the law and in the best interests of stakeholders. A thorough understanding of these obligations is essential to minimise legal risks and maintain effective governance.

Key Legal Framework

Directors operate within the framework of the Companies Act 2006, which outlines directors’ general duties and specific legislation governing property management, such as the Commonhold and Leasehold Reform Act 2002, Landlord and Tenant Act 1985, The Law of Property Act 1925 and others. This legislation focuses on the Freeholder’s responsibilities, the RTM process, and the ongoing obligations of RTM companies.

General Duties under the Companies Act 2006

The Companies Act 2006 establishes core principles that apply to all directors, regardless of the type of company and how they relate to Directors of Freehold and RTM Companies:

  1. Duty to Act Within Powers
    Must act in accordance with the company’s articles of association and only exercise their powers for their proper purpose. This means managing the property in line with lease agreements and regulatory requirements.
  2. Duty to Promote the Success of the Company
    Must prioritise the success of the company for the benefit of its members. This involves balancing the interests of leaseholders, residents, and other stakeholders while ensuring financial and operational sustainability.
  3. Duty of Care, Skill, and Diligence
    Directors are required to exercise reasonable care, skill, and diligence, and have a basic understanding of property management, financial oversight, and compliance with legal obligations.
  4. Duty to Avoid Conflicts of Interest
    Must avoid situations where their personal interests conflict with those of the company. Transparency in decision-making and disclosure of potential conflicts are crucial in freehold and RTM companies, where directors may also be leaseholders.
  5. Duty Not to Accept Benefits from Third Parties
    Accepting gifts or incentives from contractors or service providers could breach this duty and lead to allegations of misconduct.
  6. Duty to Declare Interests in Proposed Transactions
    Must declare any interest in proposed company transactions, ensuring transparency and accountability.

Specific Obligations for Freehold and RTM Companies

Manage communal areas, maintenance, and services for a property. Directors take on additional legal and operational responsibilities under the leasehold legislation:

  1. Compliance with Lease Agreements
    Must ensure the property is managed in accordance with lease agreements. Includes collecting service charges, maintaining communal areas, and adhering to the terms set out in leases.
  2. Service Charge Management
    Transparent and accurate accounting of service charges is a critical duty. Mismanagement can result in disputes and legal action from leaseholders.
  3. Health and Safety Obligations
    Must comply with health and safety laws, including fire safety regulations, asbestos management, and the upkeep of communal facilities. Non-compliance could lead to severe legal and financial penalties.
  4. Consultation on Major Works
    When undertaking major repairs or improvements, directors must consult leaseholders in accordance with Section 20 of the Landlord and Tenant Act 1985. Failure to do so could limit the company’s ability to recover costs.
  5. Filing and Record-Keeping Obligations
    Must submit annual accounts, maintain proper records, and update statutory filings with Companies House and HMRC.
  6. Insurance
    Are responsible for ensuring adequate insurance coverage for the building, including public liability and employer’s liability insurance, if applicable.

Personal Liability and Risk Management

Directors who fail to meet their legal obligations may face personal liability. For example:

  • Breach of Duty: Directors could be held accountable if their actions cause the company to incur losses.
  • Statutory Breaches: Non-compliance with health and safety regulations or leasehold law could result in fines or prosecution.
  • Service Charge Disputes: Mismanagement of funds might lead to tribunal proceedings or legal claims from leaseholders.

To mitigate these risks, directors should:

  • Regularly review and update their understanding of relevant laws and regulations to ensure legal compliance.
  • Hold meetings at least once a quarter to monitor ongoing maintenance and legal compliance.
  • Implement effective succession planning for when Directors step down.
  • Keep clear and accurate records of decisions made.
  • Seek professional advice and consider outsourcing tasks where the Board lacks the necessary expertise.