When a residential development includes more than one property with shared areas, a formal structure is required to ensure that legal obligations relating to those communal parts are met. A Management Company (MC) is the most widely adopted model.

What is a Management Company?

A MC is typically incorporated as a private company limited by guarantee without share capital. This means:

  • The company does not issue shares or operate for profit.
  • The contractual paperwork for each sale/lease of a property on the development should obligate each property owner to become a member of the company by virtue of their ownership of a freehold/leasehold interest in the building or development.
  • The company’s powers are restricted by its articles of association to matters concerning the management, maintenance and insurance of the communal areas on the development.

Why is a MC Necessary?

Communal parts of a development—such as the structure, roof, stairwells, access roads, car parks, balancing ponds or landscaped areas—must be insured and maintained. Mortgage lenders generally require that these responsibilities are clearly allocated and enforceable. A MC provides:

  • Legal continuity: The company exists independently of individual owners, ensuring obligations are met as ownership changes.
  • Enforceability: The transfer/leases grant the MC the power to recover contributions from owners.
  • Fair apportionment of costs: Expenditure is shared according to the transfer/lease terms (for example, equally between two flats or equally between all houses using the same private roadway).
  • Compliance with statutory duties: The MC ensures health and safety, insurance, and other regulatory requirements are observed.

How Does the MC Operate?

  • Directors: Appointed from among the members. They hold statutory duties under the Companies Act 2006, including the duty to act in good faith, to promote the success of the company, and to exercise reasonable care, skill, and diligence. Often, upon setting up the MC the development freehold owner (or a director of the relevant development company) will be the first and only Director to control the communal parts until the sale/lease of the last property on the development. Upon the last sale/lease completing, the Members (purchasers/lessees) would be obligated to become Directors, allowing the original Director to resign (this should be covered in the contractual paperwork dealing with each sale/lease).
  • Members: The property owners become members on completion of their purchase/lease, with rights to vote on reserved matters and to hold directors to account.
  • Company Secretary: Optional, but the duties (maintaining registers, filings at Companies House, service of notices) must still be carried out by either a director or an appointed agent.
  • Decision-making: Directors handle day-to-day matters. Major decisions—such as altering the articles of association—require member approval by resolution.

Statutory and Administrative Obligations

Even small MCs must comply with corporate and property management requirements, including:

  • Filing annual confirmation statements and accounts at Companies House.
  • Keeping a register of members and directors.
  • Maintaining proper records of service charges, budgets, and expenditure.
  • Complying with the Landlord and Tenant Acts and, where applicable, consultation requirements for major works (Section 20 procedures).

Common Risks and Liabilities for Directors

While a MC is a limited company, directors still carry significant responsibilities. Key risks include:

  • Breach of fiduciary duties: Directors must always act in the company’s best interests and not act for personal gain. Breaches may lead to personal liability.
  • Failure to maintain and insure: If directors neglect their duties, and the property suffers loss or damage, they may be held personally accountable.
  • Non-compliance with the Companies Act: Late filings, inaccurate accounts, or failure to keep statutory registers can result in penalties or disqualification.
  • Health and safety obligations: Directors may be liable if accidents occur in communal areas due to neglect of maintenance.
  • Service charge mismanagement: Failure to properly collect, hold, and account for service charges may expose directors to legal claims.
  • Personal guarantees: While unusual in small MCs, directors should be cautious about entering contracts that require personal guarantees.

Most MC directors manage risk by acting prudently, seeking professional advice where necessary, and ensuring decisions are properly documented. In some cases, the company may also obtain Directors’ and Officers’ (D&O) insurance to provide additional protection.

Appointment of Managing Agents

The Director and/or members may choose to appoint professional managing agents to carry out functions such as collecting service charges, arranging insurance, and instructing contractors. Alternatively, members may self-manage, provided they still comply with statutory and leasehold obligations.

It is often advised, at the time the MC is set up, to appoint a Managing Agent to deal with producing service charge accounts and undertaking the various roles of the Director/Members, at the cost of the property purchaser/lessee.

This article is provided for general information purposes only and does not constitute legal or professional advice. If you require further information on setting up a management company, please contact our Corporate Commercial team and Alison Hare at alison.hare@ellisons.com.