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Introduction

This booklet is for people who manage a company that has been incorporated to own a property divided into a number of separate leasehold flats. Usually, the company will own the freehold but sometimes it will hold a headlease instead. It is aimed at smaller companies, as the arrangements of larger flat management companies can be complex and are best handled by professionals.

It covers some of the possible questions you will need to consider such as:

It also gives advice on how to keep accounting records and how to understand the accounts that are prepared from them. It does not explain the statutory framework governing the format in which accounts must be prepared, or the complex and lengthy accountancy rules.

This is a guide only. If you are in any doubt, you should seek independent help from an accountant or solicitor.


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Chapter 1

Do you need a company?

1. What is a limited company?

In law, a limited company is a 'person' in its own right. This means it can own property (such as a freehold or leasehold) and enter into contracts in its own name. It exists independently and separately from the people involved.

When a property is divided into a number of flats, each flat owner has a lease of their own flat but they may also hold shares in a management company that owns the freehold (or lease) of the entire building. As shareholders, the flat owners have their say in running the limited company. Normally, the company's constitution will say that shareholders who sell their flats must also transfer their shares to the new owners. This ensures that - at any given time - the limited company represents the interests of all the current flat owners. However, it remains a separate legal entity regardless of who holds its shares from time to time.

Instead of having a company, you may wish to consider two other options:

Ask a solicitor or accountant to tell you whether one of these options would best suit your circumstances.

2 Why have a limited company?

The main reason why residents of a block of flats would have a company is to own the freehold or 'head lease'. Freehold gives outright ownership of the property to the company. A 'head lease' is a lease granted directly to the company, who may in turn grant subleases of the property (or parts of it) to the flat owners. For the purposes of this booklet, the difference between a company that owns a freehold and one that holds a 'head lease' is immaterial.

However, the company is also often used for collecting a central pool of cash for carrying out repairs and maintenance to common parts of the property.

Often it is a condition of buying a flat that the buyer becomes a member or shareholder of the company. In some cases all flat owners automatically become directors. See question 5 about directors' responsibilities.

3 What does the limited company do?

Your property probably has parts common to all the flat owners living in it: boundaries, roofs, halls, drives and gardens being typical examples. These require maintenance, insurance, lighting, etc. These costs are funded by the individual flat owners, who make periodic contributions into a pooled fund.

Many flat management companies choose to account for these transactions within the company. These companies are therefore used both to own the freehold (or head lease) and manage that ownership. Chapters 2 and 3 give information on the financial accounting required.

If your company just pays a few bills, perhaps for repair or maintenance, then your advisor may say that these payments need not go through the company's books. Less formal arrangements, such as collecting the money through a residents association, may be satisfactory. The company could then continue to own the freehold (or head lease) of the property, but all its accounting transactions would be conducted elsewhere - the company would then be 'dormant'. Accounts would still have to be prepared, presented to members, and delivered to Companies House, but all that would mean is a simple 'nil' balance sheet that does not have to be audited.

A standard dormant company balance sheet, Form DCA, is available for companies that have been dormant since incorporation. For this, and more information about dormant company accounts, see our booklet, 'Dormant Companies'.

4 What are the legal responsibilities of limited companies?

The prime purpose of limited companies is to limit the liabilities of entrepreneurs who use them for business purposes. In exchange for this limited liability, companies are required to make certain information about themselves available to the public. This information is filed at Companies House. The timing and presentation of the information is governed by law.

Flat management companies, although mostly formed for a different purpose, are governed by the same legislation - primarily, the Companies Act 1985. It does not allow flat management companies to be treated any differently to other companies.

The main requirements of this Act affecting flat management companies are that they file:

These documents and notifications must be filed at Companies House. Chapter 4 gives information about what you need to send to Companies House and when.

5 Who is responsible for managing the company?

Managing the business of the company is the responsibility of its officers. Legally, all companies must have:

A sole director cannot also be the company secretary. There must be two officers.

The directors and secretary manage the company on behalf of the members. Among other things, they are responsible for holding meetings and ensuring that all the necessary returns, accounts and other documents reach Companies House by the due date.

6 What happens if documents are not delivered to Companies House?

When you are appointed as an officer, you take on some very important obligations. If you don't comply with them, there could be very serious consequences. The company officers could be prosecuted because they are personally responsible for ensuring that documents are delivered on time. Failing to do so is a criminal offence.

Your company could also be 'struck off the register' and dissolved. In this case all assets (such as the freehold of your property) would be 'bona vacantia'. This means they belong to the Crown. Your company would then not be able to sell its freehold and you may find that you couldn't sell your flat. So it is in your interests to ensure that the company complies with the law and stays on the register.

7 Do the members get a say in how the company is managed?

Generally a company must hold at least one meeting of its members every year. This is known as the annual general meeting. Other general meetings may also be held.

At meetings, the members elect and remove directors, pass various resolutions and consider the company's accounts. However, they cannot reject the accounts, as these are the responsibility of the directors and not the members. If the members were to refuse to adopt the accounts, this could be taken as a vote of no confidence in the directors.

If all the members agree that they do not want to hold an annual general meeting, they may pass a resolution saying so. A copy of the resolution must be sent to Companies House.

If the company decides not to hold annual general meetings, this may complicate the appointment of directors and make it difficult for members to discuss company affairs.


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Chapter 2

Statutory accounts

1 What accounts must the company keep?

All limited companies have a duty to keep accounting records and to prepare annual accounts. The Companies Act and other regulations specify the format in which the annual accounts must be prepared, the information that needs to be disclosed, and the rules affecting the valuation and treatment of the transactions and balances appearing in the accounts.

These rules are long and complicated. Residents will rarely have the time and patience to understand them. So our strong advice to flat management companies is to employ a professional accountant to prepare your annual statutory accounts. The cost would be shared among the leaseholders.

2 What if our company cannot afford a professional accountant?

Many small flat management companies do not want to employ an accountant and try to prepare their accounts themselves.

Many of these attempts go badly wrong. They are made without the slightest reference to, or knowledge of, the Companies Act; yet the directors happily sign a statement in the accounts acknowledging their responsibility for preparing them to meet the Act's requirements.

Directors should note that the Companies Act means they can be prosecuted if their accounts fail to comply with its requirements.

Many small flat management companies elect one of their members to keep a record of transactions, and many also expect him or her to prepare the statutory accounts. But preparing statutory accounts can be time consuming, stressful and frustrating. All the members should carefully consider whether it is fair to impose that burden, and whether the chosen person is confident, competent and happy with the responsibility.

Again, our advice is that you employ a professional accountant to prepare the statutory accounts.

3 Our treasurer does the book-keeping and accounts what can we do to make their job easier?

Members can make the life of the book-keeper easier by ensuring that their contributions are paid into the company bank account on time.

Being able to write up the accounting records regularly, filing and cross-referencing paperwork, and completing details on cheque stubs will all make the book-keeping task easier. If you are the treasurer but inexperienced in this role, it is worth remembering that relying on your memory doesn't work very well - you should keep proper written records and update them regularly.

4 Does Companies House give technical advice on accounts?

No. We can give general guidance, but not advice on specific accounting issues. Firstly, giving technical advice is not a role that the Government has given us. Secondly, it is not practicable: your accounts are subject to complex legal requirements, and we do not know enough about your company to be confident that we are giving you proper advice.

Consult an accountant if you need this sort of advice.



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Chapter 3

Accounting records and statutory accounts - a worked example

This chapter uses a fictional example of a small flat management company, showing how it keeps its accounting records, and how these are used to produce the statutory accounts. You can judge from the example whether it is reasonably close to your own situation.

You can use this chapter to help keep your accounting records, and to understand the accounts that are prepared from them.

The example does not explain why records are kept this way, or the technical framework in which the accounts are prepared. To do so would require a longer and more complex guide.

There are two aspects that perhaps need a preliminary explanation.

Freehold purchase
The freehold will be shown as an asset on the balance sheet, usually valued at its cost. There are various ways in which its purchase could have been funded, and various ways in which to show the funding in the accounts. The accounts need to reflect both the purchase and its funding.

In our example we have set up a reserve, simply called other reserve. Thus the members paid £2,500 into the company to buy the freehold - the bank balance was increased by this receipt, as was the other reserve. On buying the freehold, the bank balance was reduced by £2,500 and an asset was acquired for the same value.

Rainy day funds - a maintenance reserve
The accounts of some flat management companies may contain a maintenance reserve, although a different term may be used. This will arise when the members recognise the probability of a major expense in the near future, such as a roof replacement. Members of these companies decide to drip-feed contributions towards the cost over a number of years, thus softening the financial blow of funding the project in one year.

The contributions will be reflected as income, and the money placed in a bank account, in much the same way as other member contributions. But on the balance sheet a separate heading, maintenance reserve, will be used to record the cumulative value less expenditure on project(s) earmarked to this reserve.

As most small flat management companies do not use such a reserve, and for the purposes of clarity, the accounting treatment of this type of reserve has been omitted from the following example.

Recording the transactions

Melyn House is a large building split into five flats, each with a 99-year lease. On 1 April 1999 the leaseholders bought the freehold of the building.

The freehold was actually acquired by a company specifically set up to own the freehold. The company is named 'The Melyn House Management Company Limited', and all five of the leaseholders are shareholders. When the company was set up, each leaseholder agreed to take one share with a face value of £1. This nominal value would be paid to the company on receiving the share.