Setting up a share of freehold property company – the legal issues to consider

Freehold property management company – when and why? Property management companies are often formed where the freehold is sold off to the leaseholders and where the freeholder will be responsible for management. Freehold management companies typically occur with a small block of flats or a converted house and the leaseholders each have shares in the

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Freehold property management company – when and why?

Property management companies are often formed where the freehold is sold off to the leaseholders and where the freeholder will be responsible for management. Freehold management companies typically occur with a small block of flats or a converted house and the leaseholders each have shares in the company.

Things to watch out for with a company share of freehold

Voting rights – absent leaseholders and apathy

One of the most important things to consider is whether there will be a shareholders agreement governing the company.

A significant issue with property management companies is that leaseholders may be investors or even abroad. They may have different attitudes to managing the property to those who are owner-occupiers.

Take also, for example, the situation of significant works being potentially needed to a property. Your small block may have a lift or car park area, it may have a roof which needs attention or it may have enough flats such that services are provided and service charges need to be paid for.

What happens if you are a shareholder in favour of such maintenance works or perhaps improvement but others aren’t? Conversely, what if you oppose significant works which you don’t believe are necessary in a converted house? You may have bought a leasehold interest but didn’t count on other owners wanting to carry out works – should you be able to block certain types of significant expenditure as single shareholder? What about ground rent, will it be dispensed with ? Will all shareholders agree that leases can be extended without payment of a premium? Can agreement be reached on acceptable internal alterations to flats? Who will be directors of the company and what powers will they have to make decisions which may bind shareholders?

Disputes with other share of freehold shareholders

These types of companies can often get into quite a substantial number of disputes so it is important for the shareholders to be clear about how decisions, both small and large, will be made. This could include using a simple majority vote for smaller decisions, but requiring that larger decisions require a unanimous vote. It all depends on the circumstances of the property management company, and the relationship between its members.

If there is no shareholders agreement in place on how decisions will be carried out, the time spent working this out as and when the dispute occurs will make the company inefficient, wasting valuable time that is imperative for the sufficient running of the company.

Importance of  Company Articles for a share of freehold management company

An alternative to a shareholders agreement may be to alter the company’s articles, which may be more efficient than creating documentation to transfer rights in the shareholder agreement when a flat owner sells and there is a new shareholder. Articles should be consistent with any shareholders agreement, if there is overlap between the two or it should be clear which take precedence. Normally, articles of association cannot be changed without at least a 75% vote from the shareholders.

The articles of the company will be based on Model Articles but will need to include important modifications drawn up for this particular type of company. Firstly, the company should ensure the issued share capital is limited to just one share per unit in the property. If the unit is held in joint shares, so should the share be. There should be no other shares. If the unit is sold, the share in that unit should be transferred to the new occupier. The articles should provide that the shares can only be held by someone who owns a unit in the property.

How to set up a share of freehold limited company?

A property management company should always be formed as a private limited company. This can be done in one of two methods, either limited by shares or limited by guarantees. The recommended method is a private limited company limited by shares. It should be formed in this way to ensure that at all times, the company is always controlled by the owners of the units of the property. Each owner will be a member of the company, and they will be able to appoint directors to run the company if they so desire.

Why instructng a lawyer is recommended

As can be seen, setting up a property management company is much more complex than appears on the surface and it’s much better to get things right at the start, to consider all the possible problems, and get an agreement in place to avoid disputes later.

dserota-sb We have experience of advising on setting up share of freehold companies and offer a cost effective and commercial service. Get in touch to find out more. 

commercial law • Debbie Serota • Property law

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