Real Estate Directorship may carry a real risk

25 March 2019

It is not unusual for tenants of apartments to be directors of the company that owns the freehold of their building. Sometimes tenants choose to become directors, sometimes they are required to do so by the contract when they purchase the property. In either event it would be sensible to take legal advice before agreeing to be appointed as a director.

The advantages of being involved in decision making about one’s home are obvious. The statutory duties of directors (e.g. to act in a way that promotes the success of the company and to avoid conflicts of interest, etc.) are also generally well understood. The risks and potential liability, however, are not always known to non-professional directors until things have gone wrong.

Below are just a few examples of things that can go wrong in the context of directorship in a property holding company:

  • If the company employs staff, it must have a written health and safety policy, ensure that all employees are aware of this policy, assess and keep records of risks. If a health and safety offence is committed with the consent (or is attributable to any neglect on the part) of a director, that person can be prosecuted under the Health and Safety at Work Act 1974 and face fines or imprisonment. The range of probable health and safety offences is wide and may include, for example, failure to assess the risk from exposure to Legionella (water borne bacteria causing potentially fatal Legionnaires’ disease) and implement measures to minimise this risk.
  • A director of a freeholder or management company may be a “responsible person” for the purposes of the Regulatory Reform (Fire Safety) Order 2005 and be liable for breaches of fire safety duties, which include carrying out a risk assessment and taking measures to ensure fire safety in the communal parts of the building.
  • A director of a freeholder or management company may be a duty holder for the purposes of the Control of Asbestos Regulations 2012 and will be liable for a failure to carry out an assessment to determine the presence of asbestos-containing materials (often found in older buildings) and to manage the risks from asbestos.
  • A director can also be personally liable for breaches of the Data Protection Act 2018 if an offence has been committed by the company with the consent or connivance of or attributable to the neglect of the director. Offence under the Data Protection Act 2018 may include the offence of knowingly or recklessly obtaining or disclosing personal information without the permission of that person or failure to register with the Information Commissioner’s Office if the company uses any electronic equipment to process data.  
  • If the company’s mismanagement causes someone’s death and the company is convicted of corporate manslaughter, directors may be may be prosecuted as individuals for the common law offence of gross negligence manslaughter. The action or inaction would need to fall far below that reasonably expected of a director for the offence to be made out. The maximum sentence is life imprisonment.
  • When an offence under the Environmental Protection Act 1990 (e.g. discharge of waste) is committed with the consent or is attributable to any neglect on the part of the director, the director, as well as the company will be prosecuted.
  • If the company does not file its confirmation statement and/or accounts with Companies House by the relevant deadline, it is a criminal offence which can result in directors being fined personally in the criminal courts.
  • If a director is aware that the company is insolvent and allows it to continue trading, this director may be held personally liable to make a contribution to the assets of the company for the benefit of its creditors. Making a declaration of solvency and voluntarily winding up a company while knowing that the company is insolvent is also a criminal offence punishable by imprisonment or a fine.
  • A claim may be made against directors of a property holding company under the Defective Premises Act 1972, if there is a breach of duty to ensure that occupiers and visitors are reasonably safe from personal injury or from damage to their property (this does not have to be as drastic as a threat of collapse of a building and could be rising damp in an apartment occupied by an asthma sufferer).

As well as employing competent professionals for the management and maintenance of the building and maintaining adequate public liability and employer’s liability insurance, prospective directors should enquire how the company will protect them from personal liability and loss.

Until 2005 companies were prohibited from insuring or indemnifying its directors. However, Companies Act 2006 has allowed companies to purchase directors and officers (D&O) liability insurance and give qualifying indemnities to its directors against certain liabilities.

It is important to check:

  • whether the company’s articles give the company the power to purchase insurance and indemnify its directors;
  • whether the company uses these powers (it is not obliged to);
  • the current level of cover; and
  • that the level of cover has not already been exhausted by other claims.

Common areas for claims include breach of directors' statutory duties, inaccurate or misleading information given as part of a transaction, legal or regulatory non-compliance, employment disputes (such as alleged discrimination or harassment) and accounting errors or inadequate disclosures. Certain areas (e.g. paying fines or penalties) will not be covered on grounds of public policy, to deter individuals from committing an offence in the knowledge that the liability could be passed to an insurer. 

Being a company director can be a hugely rewarding experience but duties and liabilities must always be considered before and during the appointment. 

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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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