Shareholder Disputes – Flat Management Companies

Over the past couple of years I have noticed a marked increase in the amount of shareholders disputes on which we are being asked to advise. Shareholders disputes are very rarely black and white and often with private limited companies, personality clashes and family relationships need to be taken into account. A large number of

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Over the past couple of years I have noticed a marked increase in the amount of shareholders disputes on which we are being asked to advise.

Shareholders disputes are very rarely black and white and often with private limited companies, personality clashes and family relationships need to be taken into account.

A large number of the disputes on which I am currently advising centre on breach by the director (who is often a majority shareholder) of his or her fiduciary duties and who is not taking into account the views and considerations of the members (shareholders of the company).

Flat management companies

Flat management

Some of the most contentious shareholders disputes that I have dealt with have been in respect of “Flat Management Companies”, where companies have been incorporated with the sole purpose of holding and managing the freehold of a property and which the shareholders are the long leaseholders of the property.

It’s not always easy to get on with your neighbours and when you all share in the freehold and have a vested interest in how the property is managed things can become extremely heated.

It’s also a feature of freehold management companies that some others may be absent, buy-to-let landlords and other owners can be apathetic about management issues, rightly or wrongly. This means that a pushy or determined shareholder or small group can often try to steamroller or ignore others who may not agree with them.

In order to try and minimise the risk of issues arising it is important to ensure that the articles of association of the company are suitable for a flat management company rather than a small private trading company. When inappropriate articles are in place it can lead to :-

  • one party having too much power as a director or being able to pay themselves fees
  • expenses being incurred which one or more shareholders may not agree with, sometimes of very significant sums for major refurbishments or improvements
  • decisions without reference to other parties
  • not taking the members views into account which is completely against the spirit in which such companies should be run.

Ideally, the articles of a freehold management company a company should set out who is entitled to shares, generally only long leaseholders.  I would also expect that only a shareholder should be entitled to be a director. Depending on the size of the block in questions it would be sensible to have if possible a minimum of 3 directors to prevent a deadlock situation arising. They should also provide whether a party owning more than one property should be allowed more than 1 share and whether shareholders are dependent on the size of the property (as larger properties generally have to pay additional service charge) or whether each property entitles the long leaseholder to 1 vote regardless of the size. Other provisions may alter the majority required for expenditure over a certain amount to a higher level and alterations may be considered to deal with the situation of absent shareholders.

Other important legal and practical issues for freehold flat management companies

All matters should be dealt with in an open and transparent manner to try to prevent issues arising and meetings of both directors and shareholders should be held on a regular basis.

All too often directors of such companies use their position of “power” in a way that benefits them but may be detrimental to the other members of the Company or the Company itself. For example by trying to enhance the value of their property by authorising works to the property which may not be necessary and the other shareholders may not be able to afford, especially if the Company does not have a sufficient sinking fund.

When setting up a company such as this it is important to consider how you wish the Company to be run and to take expert advice in respect of this.

It does take time and energy to be involved in the management of such a company but it may be worth the effort to ensure that the company is run in such a way that you are happy with.

dserota-sbIf you are involved in setting up a freehold management company or any other company, I would be happy to advise. I can also assist where disputes have arisen, based on my considerable experience in this area.

commercial law • Debbie Serota • Disputes

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