6 September 2019 by

As a leaseholder and a director of a landlord company, do you know your rights and obligations?

In certain circumstances, leaseholders in a block of flats are legally entitled to get together and buy the freehold of the block from their landlord. Often, the leaseholders will do this by setting up a company which will become their new landlord but with themselves as members/shareholders of the company.  This ensures they have control of the block.

What is not as widely known is what this means for the leaseholders as members of the company, what rights they have over the company, and what obligations they are signing up to.

A recent case has highlighted the rights of members of freehold companies and their ability to appoint and remove directors.

What happened?

The leaseholders were members of a company that owned the freehold.  The members intended to overthrow the current directors by using their rights as shareholders to call a general meeting and vote by way of a resolution to remove the directors and appoint new ones.

One of the standing directors, who was about to be removed, sought legal advice before the general meeting and was told that a company under the Companies Act could not pass a resolution if the action was ‘vexatious’ – i.e. proposed in order to cause annoyance without sufficient legal grounds.

At the meeting, the director consequently announced that the resolutions were vexatious and therefore ineffective and declared the meeting at an end.  The directors then walked out expecting the meeting to end.

Some of the members had other ideas and carried on the meeting without the current directors, passed the resolution which resulted in the removal of the majority of the board and appointed a new one.

The previous directors then went to court arguing that that they had been wrongly deposed.

The court focused on three questions when determining who should be a director of the company:

Did the director have the power to end the meeting?

Quite simply, no.  The court determined that, once the meeting has begun, it is up to the members jointly as to whether a resolution is passed and whether the meeting is closed. It is not for the directors to make that decision alone.

Was the reason to close the meeting justified?

Nothing in the circumstances meant that the members could not continue the meeting after the directors purported to close it. There are circumstances on which meetings can be adjourned but the court found that, in this instance, the members were well within their rights to continue the meeting.

Were the resolutions invalid?

Under the company’s articles of association there are various timelines setting out how much notice must be given for a resolution to be valid.  These rules were not followed by the members. However, as these rules had never been followed by the company before, the resolutions were considered valid.

Ultimately, the new directors were validly appointed and the old directors lawfully removed.

Moral of the story

We all too regularly encounter newly appointed members and directors of freehold companies who are not aware of their rights and responsibilities or of the various rules companies have to comply with. With so many effective tools available for when things go wrong (or, even better, to prevent them from going wrong), members and directors alike need to know what they are and use them effectively.  It’s not only in the company’s best interest, but it’s also in their best interests as a leaseholder to ensure that the company is acting correctly.

The case highlights the importance of knowing your rights as a member and what directors can and can’t do. If you aren’t sure, now is the time to find out!

If you would like to discuss the rights and responsibilities of shareholders, or the rules that apply to your company,  please contact a member of the team who would be happy to help.

Similarly, if you are a leaseholder and want advice on whether and how you can acquire the freehold please speak to someone in our Lease Extensions and Property Management Team.

 

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