Potential Grounds for Dispute and Suggestions for Good Corporate Governance

Property management companies are typically formed by the owners of shared residential property as a way in which to take collective responsibility and oversee the management of communal areas. Once incorporated, the residents will usually become the shareholders of the company and directors will be appointed to manage the company’s business day-to-day.

Last November, Companies House launched an awareness campaign aimed at flat management company directors after reporting that they receive multiple complaints each year from residents living in shared buildings. Although it was made clear that Companies House have no powers to deal with such complaints, it was hoped that providing additional guidance would help relieve some of the difficulties experienced by management companies across England and Wales.

The following issues may arise in the context of running a property management company and may therefore develop into grounds for dispute thereby inhibiting its function:

• The directors are likely to be participating in the company by sole virtue of being a resident in a shared building or area, which may mean that they are not familiar with the corporate procedural requirements and responsibilities of running a company. It may therefore be difficult to ensure effective corporate governance is being exercised and that proper processes are followed.
  
  
• The interests of the directors of a management company may not directly align. For example, one director may view his directorship as an opportunity to improve the place he calls home whilst another may participate only with the intention of ensuring a maximum return on his investment. Directors must not act in their own self-interest and must instead act in the best interest of the company (click here for a more detailed analysis of the duties of directors).
  
  
• Directors may find it difficult to separate their relationships with the residents as their neighbours and as shareholders of the company.

Below is a list of suggestions that, if put in place, may help to avoid the escalation of disputes and ensure the effective control of a property management company:

• Implementing a requirement for directors to have completed training on their responsibilities owed to the company and on the associated procedural requirements of a company.
  
  
• Ensuring that the company’s Articles of Association and other documentation is well-drafted and clearly identifies avenues for dispute resolution.
  
  
• Ensuring that records of the company are kept and are up to date and include, for example, minutes of all board meetings.
  
  
• Encouraging shareholders and directors to take the time to familiarise themselves with their rights in relation to the property management company. These are likely to be contained within lease documentation and the company’s Articles of Association.
  
  
• Communicating effectively, clearly and frequently with fellow directors and shareholders of the company to encourage transparent management.

For more information on how to ensure effective corporate governance of a property management company, please contact a member of the BPE Corporate team.

For further information on directors’ duties, please explore the following links to previous articles written by the BPE team on the topic:

An update on directors' duties

Directors' duties and their continuation after cessation of office

Covid-19 and directors' duties.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.