Leaseholders required to become directors. How?

[mc2fool]

I live in a collectively enfranchised self-managed block of flats and as a director of the freehold & management company I deal with the buyer's solicitor's enquiries whenever a flat is sold.

One of the questions the solicitors often ask is "Is our client required to become a director of the Freehold & Management company?"

The answer for us has always been no, however the fact that solicitors have asked that question implies that requiring leaseholders to become directors is something that's possible and done.

My question here is DAK how? And can anyone point me to cases/examples?

I'm guessing that it'd be a clause (or set of) in the Articles of the company, and I can foresee that there'd have to be some get-out clauses (e.g. you can't require someone to be a director who's been legally banned from being one), so I'd be interested to see actual wording of real life or example cases of that, or whatever mechanism is used. So, any pointers are welcome.

(I can see that there might be pros and cons of requiring leaseholders to become directors, but this is DAK and that's not what I'm asking... )

[the0ni0nking]

I recently had to look into this because Barclays were (in my opinion) causing a raft of noise about KYC and directors of the company that owns the freehold to a block of flats.

I ended up taking the decision - with the agreement of the other directors to resign them all other than me. Previously, we adopted the approach that when you purchased one of the flats, you became a director of the flat management company given that you also became a shareholder in the same company.

The articles of association of the company - which are unchanged since incorporation in 1999 - state that "the lessee of each flat shall be entitled to be appointed as a director but where 2 or more persons are the lessees of one flat only one of such lessees shall be so entitled to be appointed as a director"

There is a separate article disqualifying the company from section 293 of the Companies Act but as I understand it that is simply about having an age limit on directors which is clearly nonsense anyway.

Nowhere else in the articles or MoA does it require there to be more than one director - and I think the rest of the lessees are simply after an easy life and to let me do any and all of the heavy lifting in terms of admin etc.

[Dicky99]

Apologies for answering with a question but our Articles state that there must be 2 Directors of the Management Co.
I can't imagine that someone could be compelled to become a Director but if the buyer were purchasing from an outgoing Director, leaving only 1, they would want to know that it may be required to become a Director to avoid default of the company.
Could that explain the question?

[gryffron]

Apologies for answering with a question but our Articles state that there must be 2 Directors of the Management Co.
I can't imagine that someone could be compelled to become a Director but if the buyer were purchasing from an outgoing Director, leaving only 1, they would want to know that it may be required to become a Director to avoid default of the company.
Could that explain the question?

That was my thought too. Even if only one director is required. Some "blocks" of flats may have only a tiny handful of units, meaning very few people available to be directors. Presumably the solicitor asking the question has no idea whether there are 2 flats or 50?

Gryff

[gryffron]

Aha! The above then spurred another thought

https://www.1stformations.co.uk/blog/di ... areholder/

Does a director have to be a shareholder?
whilst there is no legal requirement for a director to be a shareholder, some companies choose to include a “shareholder qualification” clause in their articles of association.
A shareholder qualification clause means you can only be a director if you hold shares in that company. In other words, if a person does not hold shares in the company, they cannot be appointed as director. This type of clause is particularly common in property management companies.

I think that’s your answer. If the director has to be a shareholder, and there aren’t enough other qualifying individuals.

Gryff

[mc2fool]

Apologies for answering with a question but our Articles state that there must be 2 Directors of the Management Co.
I can't imagine that someone could be compelled to become a Director but if the buyer were purchasing from an outgoing Director, leaving only 1, they would want to know that it may be required to become a Director to avoid default of the company.
Could that explain the question?

That was my thought too. Even if only one director is required. Some "blocks" of flats may have only a tiny handful of units, meaning very few people available to be directors. Presumably the solicitor asking the question has no idea whether there are 2 flats or 50?

Gryff

A minimum of 2 directors is, indeed, the default for companies incorporated before (I think) 2007 as they automatically subsume The Companies (Tables A to F) Regulations 1985 into their Articles, and that's what para. 64 of Table A states, and that is the case for ours.

However, that's not it 'cos, even after any existing director selling up, we've never had less than 3. And the solicitors absolutely knew how many flats there are as the question has always come after the LPE1.

[gryffron]

A ltd company could be a leaseholder/shareholder, but could not act as a director. So even in a fairly large block it is possible there may be no other qualifying individuals.

Gryff

[mc2fool]

Aha! The above then spurred another thought

https://www.1stformations.co.uk/blog/di ... areholder/

Does a director have to be a shareholder?
whilst there is no legal requirement for a director to be a shareholder, some companies choose to include a “shareholder qualification” clause in their articles of association.
A shareholder qualification clause means you can only be a director if you hold shares in that company. In other words, if a person does not hold shares in the company, they cannot be appointed as director. This type of clause is particularly common in property management companies.

I think that’s your answer. If the director has to be a shareholder, and there aren’t enough other qualifying individuals.

Gryff

That's the other way round! Is says a company can require a director to be a shareholder, not that it requires shareholders to be directors!

(FWIW there's no shareholders in our case; it's a co ltd by guarantee.)

[mc2fool]

A ltd company could be a leaseholder/shareholder, but could not act as a director. So even in a fairly large block it is possible there may be no other qualifying individuals.

Gryff

Companies can be directors, as well as leaseholders/members, but none of that is the case for us.

[Clitheroekid]

I'm guessing that it'd be a clause (or set of) in the Articles of the company

No, the requirement is contained in the lease, not the articles.

Here's an extract from a lease I drafted for some flats in Oxford a few years ago:

1.1 The Tenant must within 14 days of becoming the Tenant apply to the Management Company in accordance with its articles of association to become a member of the Management Company
1.2 The Tenant must not withdraw from membership of the Management Company or dispose of any of the rights attaching to the membership of the Management Company whilst it remains the Tenant
1.3 If requested to do so by the Landlord, the Tenant shall:
(a) become a director or secretary of the Management Company; and
(b) deliver to the Landlord the duly completed signed company Form AP01 or AP03 or such other company form as shall replace these forms PROVIDED ALWAYS THAT in the case of the Tenant being a corporate Tenant, the Tenant shall procure that an individual who is a director or secretary of the corporate Tenant becomes a director or secretary of the Management Company and shall deliver to the Landlord the duly completed Form AP02 or AP04 or such company forms as shall replace these forms.

One of the questions the solicitors often ask is "Is our client required to become a director of the Freehold & Management company?"

As the buyer's solicitor will always have a copy of the lease they could perfectly well answer the question themselves, but it's sadly the case nowadays that so many `conveyancers' are totally unqualified, and unable to interpret a lease.

[mc2fool]

I'm guessing that it'd be a clause (or set of) in the Articles of the company

No, the requirement is contained in the lease, not the articles.

Thanks CK, that makes sense.

[Arborbridge]

I'm guessing that it'd be a clause (or set of) in the Articles of the company

No, the requirement is contained in the lease, not the articles.

Here's an extract from a lease I drafted for some flats in Oxford a few years ago:

1.1 The Tenant must within 14 days of becoming the Tenant apply to the Management Company in accordance with its articles of association to become a member of the Management Company
1.2 The Tenant must not withdraw from membership of the Management Company or dispose of any of the rights attaching to the membership of the Management Company whilst it remains the Tenant
1.3 If requested to do so by the Landlord, the Tenant shall:
(a) become a director or secretary of the Management Company; and
(b) deliver to the Landlord the duly completed signed company Form AP01 or AP03 or such other company form as shall replace these forms PROVIDED ALWAYS THAT in the case of the Tenant being a corporate Tenant, the Tenant shall procure that an individual who is a director or secretary of the corporate Tenant becomes a director or secretary of the Management Company and shall deliver to the Landlord the duly completed Form AP02 or AP04 or such company forms as shall replace these forms.

One of the questions the solicitors often ask is "Is our client required to become a director of the Freehold & Management company?"

As the buyer's solicitor will always have a copy of the lease they could perfectly well answer the question themselves, but it's sadly the case nowadays that so many `conveyancers' are totally unqualified, and unable to interpret a lease.

I own a leashold flat, and wish this sort of clause had been in our original leases. It turns out that the management company was dissolved through lack of interest (no one knows exactly how), and there is no "fall back" position in the lease to cope with this. We are having to spend quite a tidy sum rectifying the situation since no one body has authority to manage maintenance and revenue raising. It's always been on a "trust" basis, but now the management company which the owners appointed have realised they have no authority under the lease and have insisted we sort it out once and for all.
It doesn't help that the landlord's agent (Estate and Management) take forever to answer each email and are impossible to talk with on the phone. This saga is now into its second year, and were it not for the " many `conveyancers' are totally unqualified, and unable to interpret a lease" factor, it's quite possible we would have had more trouble buying and selling these flats in the past 20 years since the company was dissolved.

Arb.

[richfool]

I live in a leasehold flat where the flat owners are Directors of the management company, and the management company owns the freehold. Therefore the directors collectively own the freehold. In such a situation it would seem to me that each owner would want to be a director. Indeed, when flats change ownership, we arrange for the new owners to become directors as a matter of course.

[mc2fool]

I own a leashold flat, and wish this sort of clause had been in our original leases. It turns out that the management company was dissolved through lack of interest (no one knows exactly how), and there is no "fall back" position in the lease to cope with this. We are having to spend quite a tidy sum rectifying the situation since no one body has authority to manage maintenance and revenue raising. It's always been on a "trust" basis, but now the management company which the owners appointed have realised they have no authority under the lease and have insisted we sort it out once and for all.
It doesn't help that the landlord's agent (Estate and Management) take forever to answer each email and are impossible to talk with on the phone. This saga is now into its second year, and were it not for the " many `conveyancers' are totally unqualified, and unable to interpret a lease" factor, it's quite possible we would have had more trouble buying and selling these flats in the past 20 years since the company was dissolved.

Arb.

Two phrases that if you're not already familiar with may be of use. The two are independent, one doesn't rely on or necessitate the other.

Collective Enfranchisement: https://www.lease-advice.org/advice-guide/ce-getting-started/
Right-to-Manage: https://www.lease-advice.org/advice-guide/right-manage/

[the0ni0nking]

I had a look through the lease of the property I referred to above and there is no such clause in our case as far as I can see.

What there is, is what I think is a relatively simple statement that:

"On any change of ownership of the Premises the Tenant shall notify the Management Company in writing and (in the case of a company limited by shares) transfer the Tenants share in the Management Company to the new owner to ensure that the Tenant for the time being of the Premises is a member of or shareholder in the Management Company"

In our case the company is limited by shares so they can take a share in the management company but do not need to be a director. Of course, if they wanted to become a director they'd be more than welcome to - but when the service charge is still cheap by comparison to many (£100/month) and becoming a director would involve a trip to the bank for KYC/AML reasons and also that I do all the administrative work for free then they're quite happy with the way things are! Maybe if I sold up then it would at least force them to do something but it'd also land me with a nice CGT bill too!

[Arborbridge]

Two phrases that if you're not already familiar with may be of use. The two are independent, one doesn't rely on or necessitate the other.

Collective Enfranchisement: https://www.lease-advice.org/advice-guide/ce-getting-started/
Right-to-Manage: https://www.lease-advice.org/advice-guide/right-manage/

Thanks for those links - we were aware of the terms and mugged up a couple of years back. We have appointed a solicitor, and the landlord has agreed to a simple deed of variation of the lease which will solve the problem and have registered a company to manage the block - all of which E and M have accepted. So, progress! Then it became "stuck" over specific wording as the draft from the landlord's side was very amateurish, but they seem reluctant to discuss the fact, or accept any amendments. I think there's an AI toddler involved - or maybe AI would actually do it better and it's a numpty writing the emails

We are hoping to hear favourably before this turns into a Bleak House episode!

How the law could ever make progress in complex cases is beyond human understanding.

Arb.

[mc2fool]

I live in a leasehold flat where the flat owners are Directors of the management company, and the management company owns the freehold. Therefore the directors collectively own the freehold. In such a situation it would seem to me that each owner would want to be a director. Indeed, when flats change ownership, we arrange for the new owners to become directors as a matter of course.

Ah but is that mandated or just by agreed convention?

In most cases of collective enfranchisement, while all of the lessees are members or shareholders of the company, which gives them both the collective ownership and their say in how things are run (overall), only a few are appointed directors. In your first two sentences you need to replace "directors" with members/shareholders. The fact that members/shareholders can also be directors doesn't affect the ownership aspect.

Being a director means formal and legal responsibility and a duty to "do stuff", whereas being a member/shareholder ducks that but still gets you the ownership and a say.....

[richfool]

I live in a leasehold flat where the flat owners are Directors of the management company, and the management company owns the freehold. Therefore the directors collectively own the freehold. In such a situation it would seem to me that each owner would want to be a director. Indeed, when flats change ownership, we arrange for the new owners to become directors as a matter of course.

Ah but is that mandated or just by agreed convention?

In most cases of collective enfranchisement, while all of the lessees are members or shareholders of the company, which gives them both the collective ownership and their say in how things are run (overall), only a few are appointed directors. In your first two sentences you need to replace "directors" with members/shareholders. The fact that members/shareholders can also be directors doesn't affect the ownership aspect.

Being a director means formal and legal responsibility and a duty to "do stuff", whereas being a member/shareholder ducks that but still gets you the ownership and a say.....

Thanks for the clarification. Previously, I hadn't really considered the distinction between being a shareholder and a director. Our Accountant lists all the owners as directors, in the annual accounts, and (until recently) they were issued with a certificate for one share each. (I understand that system is now computerised, so no physical share certificates anymore).

[mc2fool]

Thanks for the clarification. Previously, I hadn't really considered the distinction between being a shareholder and a director. Our Accountant lists all the owners as directors, in the annual accounts, and (until recently) they were issued with a certificate for one share each. (I understand that system is now computerised, so no physical share certificates anymore).

You can double check that on the companies house website. https://www.gov.uk/get-information-about-a-company

[Dicky99]

I live in a leasehold flat where the flat owners are Directors of the management company, and the management company owns the freehold. Therefore the directors collectively own the freehold. In such a situation it would seem to me that each owner would want to be a director. Indeed, when flats change ownership, we arrange for the new owners to become directors as a matter of course.

I'm in a similar situation but apart from me and a 76 year old owner none of the other 5 owners were remotely interested in being Directors. Some were very good at being vocal about their minor gripes about our voluntary efforts though.

I feared becoming last man standing so I went through a section 20 consultation to appoint a managing agent under a long term agreement. Unsurprisingly nobody responded to the proposals until the 2nd stage when the costs were reported.

Having got the MA on board I then circulated a report highlighting to the owners the serious pitfalls of not having enough Directors of the Management Co and explaining that now we have a MA carrying out all the obligations, they would be Directors without having to shoulder any duties.

Still no takers so in the end I wrote to everyone saying effectively "I'm doing the off, you need more volunteer Directors, I've done my bit and told you the implications, now do as you please". That resulted in 2 signing up and the other 3 never replied. Those 3 will be unaware whether anyone else replied.

For a small block with a limited pool I'd advise anyone I know don't volunteer to run a Management Co, it's literally a thankless task, and don't even become a Director without duties unless it's one in all in.