Management Companies in Residential Properties in Kenya: An Overview
Concept of Management Companies
The term “Management Companies” can be used to describe companies that are used in managing housing units, such as apartments, located in multi-unit developments. They are common in situations where residential housing units comprise the entirety of the development, or a substantial component of it. The developments are usually constructed with the intention that the developer would retain the reversionary interest in the land, but upon registration of all subleases over the units, he/she will hand over management of the estate and ownership of the reversionary interest to an entity owned by the purchasers of the various units constructed (“Unit Holders”). Thus, when one purchases a unit in the development, they purchase also a share in the entity and enjoy two legal interests; as the owner of the individual unit, and as a part owner of the entity. It is that entity that takes over management of the estate and ownership of the reversionary interest that is called the Management Company.
Why Management Companies?
Save for developments done pursuant to the Sectional Properties Act, incorporating Management Companies in multi-unit developments is not a requirement of the law. Indeed, there are developments in which, upon a developer selling the units, they retain the role of maintaining the estate and retain ownership of the reversionary interest (duties ordinarily carried out by Management Companies). Management Companies are therefore largely a creation of industry practice. The idea behind their establishment is that where a group of persons individually own all the apartments in a multi-unit development, they ought also (at least after the multi-unit development has been fully completed by its developer) to be the members of a company which owns the common areas associated with their individual units, and which ultimately controls the extent, quality and cost of the shared services from which individual units benefit.
Several advantages flow from establishment of Management Companies, both for the developer and for the Unit Holders. For the Unit Holders, they are able to maintain an input into decision-making as regards their development and controlling the costs of having common services provided for their collective benefit. This they do by periodically electing the persons to serve as the management company’s directors. In addition, as an advantage to both to the developer and the Unit Holders, it is a convenient way of dealing with management of the estate once the units are sold out. Unless the multi-unit development is very small, it would normally be impractical for the common areas to be co-owned by all the unit-owners in their personal capacities, and for arrangements in relation to the provision of common services to be dealt with by contracts under which each of the owners was jointly and severally liable in their personal capacities.
Ownership and Control of Management Companies
The ownership and control of Management Companies varies depending on the phase of the development and the registration of the units. At the point of incorporation, the developer has only just begun to build the property and therefore they (directly or through their nominees) own and control the company. At this stage, the company is inactive, and the developer is responsible for all the operations of the residential property. During letting out of units in the development, the management company may be owned by the developer and Unit Holders whose units have already been registered. After registration of all sub-leases in the development and upon transfer of the reversionary interest in the underlying land to the management company, the developer finally hands over the ownership and control of all operations to the management company. From amongst them, the members appoint a board of directors who run the company and contract the services and persons needed such as a management agent.
Role of Management Companies
Generally, the duties of a management company include maintaining the common areas and associated facilities, contracting third parties to provide services or advice, procuring insurance to cover risks in the development determining the amounts of service charge payable by members and applying for renewal of the reversionary interest from the Government upon expiry of the term of the main lease from the government.
Where a Management Company fails, refuses or neglects to perform its duties or does so in a way that leaves Unit Holders aggrieved, the members of the company can seek appropriate means of redress available in the documents governing the subleases and in law. For instance, as shareholders, the Unit Holders have recourse to various remedies available under company law.
In sum, the benefits that accrue from use of Management Companies are numerous and perhaps this explains why developers have embraced them. It is however important for developers to seek appropriate legal advice on structuring of the Management Companies as circumstances vary from each development to the other. It is important for purchasers to understand the role of Management Companies, right from the point they sign agreements for sale, as these end up being the entities that determine the quality of services in the estate as well as other fundamental issues governing the estate.
Article by: Enock Mulongo and Pauline Njau
Please note that this publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. Readers are advised in all circumstances to seek particular advice on any issue dealt with herein.