Gala Unity Ltd v Ariadne Road RTM Co Ltd [2012] EWCA Civ 1372 is important for those doing long leasehold work. I’m not entirely sure it’s right (or, perhaps a better way of putting it, I’m not sure it’s a good decision, it may be right within the statutory framework), but I’ll save that for the end. Since this is the first Right to Manage case to reach the Court of Appeal, I’ll set out some of the relevant background.
Part 2, Chapter 1, Commonhold and Leasehold Reform Act 2002 established the Right to Manage. In outline, qualifying leaseholders of flats can form and join a company (called an RTM Company) to acquire the management functions of their landlord in respect of their leases. In order to qualify for the RTM, the building has to be, inter alia, a “self-contained building or part of a building with or without appurtenant property” (s.72). Appurtenant property is defined in s.112 as property belonging to or usually enjoyed with the building or any flat. On the assumption that a valid company is formed, gets the requisite support and serves the right notices, then it acquires all the management functions of the landlord under the leases (s.96). Those are defined as functions in respect of services, repairs, maintenance, improvements, insurance and management (s.96(5); basically, all service charge functions, see s.18, Landlord and Tenant Act 1985).
In the case of a stand-alone property, e.g. a converted house in a terrace or a self-contained block with its own (demised) grounds, this doesn’t pose a problem. But, on a modern development where you have numerous blocks of flats, together with houses, we have a problem. This case falls into that latter group. There are two blocks of flats and two houses on the estate. There are certain shared estate common parts that all residents can use (e.g. a garden area). The freeholder is obliged to repair, maintain, etc, those estate common parts and the residents all pay towards the upkeep of those common parts by a service charge. So, let us assume that there are 20 residential units (18 flats and 2 houses), then the estate service charges will be split 20 ways.
In Gala, the two blocks of flats had exercised the RTM (via one company). They therefore acquired all the management functions in respect of the blocks. But what about the estate functions? The landlord argued that the RTM didn’t extend to the estate functions as “appurtenant property” in s.72 meant property that was appurtenant to only one flat or building, i.e. as the estate was shared by all, it wasn’t appurtenant to any flat or building, and so not within the scope of the RTM. That argument was rejected both by the LVT and the UT (see our note here).
In the UT, however, the President noted that there was now a problem of double management. The gardens needed to be maintained. The RTM company had that function vis a vis the blocks and the landlord had it vis a vis the houses. It wasn’t possible to identify a bit of the garden that belonged to the blocks and another bit that belonged to the houses. The RTM Co and Landlord were each obliged to maintain the whole. His solution was that the parties had to find a way of working together and, if they could not, someone would find that their service charges were unreasonably incurred and, hence, disallowed (see generally s.19, LTA 1985; for completeness, the President seems to have thought that the landlord might try to continue to provide services to the blocks, but, with respect to him, that can’t be right as the landlord is prohibited from doing so without the consent of the RTM company – s.97(2), 2002 Act).
The President gave permission to appeal to the Court of Appeal, noting that this issue was one of general importance for landlords and tenants.
The Court of Appeal have dismissed the appeal. There was no reason to read in limiting words to the definition of “appurtenant property” and the problems of duel management were adequately resolved by the methods identified by the President.
I said in the comments to the UT decision that I was uncomfortable about this decision, and I am. Here’s why:
(a) There is quite a lot of law on what appurtenant means in any given context; sometimes a broad approach is taken and sometimes a narrow one. It is possible to argue, for example, that incorporeal rights, such as to use a garden, are not appurtenant to anything: see e.g. Sovmots Investments Ltd v. Secretary of State for the Environment [1979] A.C. 144, HL. The absence of the discussion of any previous authority always leaves me unhappy since it means you never quite trust the case. That’s particularly so where, as here, it’s been self-representing parties arguing the case all the way through. It seems to me, for example, that landlords may properly attempt to argue that Gala Unity is not to be followed as it’sper incuriam.
(b) I’m far from convinced that this “double management” problem is that easy to solve. Suppose you’ve had a bitterly fought RTM case. Is the landlord really going to co-operate with the RTM company? Would the RTM company want to co-operate with the landlord?
(c) Further, surely now the landlord can drive the RTM company into insolvency. Going back to my previous example. The RTM company now manages 80% of the units. It has an obligation to clean 100% of the garden. So, suppose the garden costs £100 p.a. to clean. The RTM company can only recover 80% of that via the service charge. What does it do about the shortfall? Surely, the moment it places a contract for the £100, it is facing insolvency as it knows it can’t recover 100% of the costs as a service charge. Do the RTM company members make up the difference themselves? I realise that the landlord faces the same problem (he’s got to maintain the gardens as well and can only recover 20% of the costs) but landlords generally have deeper pockets and might be prepared to wait things out. Further, whilst Gala was quite a small estate, what do you do with larger ones where the estate costs can be enormous (e.g. the enormous blocks along the south bank of the Thames between Vauxhall and Wandsworth bridges).
Will Gala try to go to the Supreme Court? I wonder…
The RTM and the landlord will have to fight it out over the grounds maintenance – that is where the problem of “duel management” will come in.
Pistols at dawn?
I’d hope we could find something less terminal!
Thanks very much for this post and the good explanations of the case and the problems.
We wonder that you continue with the unlikely scenario where an RTM Company will be driven to insolvency by this, when the reverse scenario is much more likely. It it the “old” manager who has continued to provide services beyond RTM, and it has now been confirmed they should not have been charging RTM’d leaseholders and may well need to provide refunds. At the same time the “old” manager (on behalf of the landlord) remains obliged to continue provide those services to non-RTM’d properties.
Where an RTM Company is obliged but still needs to be allowed, by the landlord and/or “old” manager, to take over the provision of common Estate services to the benefit of its RTM’d leaseholders, it will surely do so only where it is able to recover its costs in full. There are mechanisms (other thans duels) for doing so, and we suspect there will be significants cost savings and/or improved services available all round.
We suspect the RTM Company would in general be willing to agree a way forward which sees it adopting the management of common services – after all, they have already taken the RTM step because they were not happy with costs or services and those perceived inadequacies would not have been limited to the block.
How do we establish whether refunds are due from the point of RTM handover ?
We’re just going to have to disagree on refunds. Obviously, the facts will be important, but I can’t see that there will be any general rule that refunds are due. It’s going to be more complex than that and the decided cases seem to me to favour the landlord.
I also can’t see how the RTM co can pick and chose what services it provides. It’s got to do everything required by the lease and, if it doesn’t, can be compelled to do so by any leaseholder or the landlord (s.98? I’m not at my desk so can’t check that reference).
Of course, cool heads can find a good compromise. But, if anyone decides to be difficult, then these are the problems I can foresee.
Happy to disagree with you, but we would like to know where there has been any precedent – can you say which superior “decided cases” disagree with the recent decision that might lead to its overturn?
The likely outcome is that the “old” manager very probably has to provide refunds to, and certainly has to stop charging, RTM’d leaseholders.
The obligations on an RTM Company do not fall any heavier than those on the incumbent “old” manager – why are you continuing to hammer on that nail? Why would a landlord insist on one performing and not the other? Remember that it is the “old” manager since RTM handover who has been in place providing Estate services and demanding payments, at its own insistence, and in the process preventing the RTM Co from assuming its obligations. Why would a leaseholder try to find fault with the RTM Co – do you mean where there are those mysterious holders of a “lease of common parts”, or otherwise where there are leases held by the “old” manager or landlord allowing them to make mischief?
The question remains, how do we find out for sure if refunds are due?
By application to the President of the Lands Tribunal, a test case in LVT, … or could we just accept the BINDING decisions of the Lands Tribunal and Court of Appeal?
Errm, J already gave you two precedents for the LVT being unable to order the return of money already paid – R v LVT ex p Daejan (both High Ct and CA, 2000 and 2001), Solitaire v Holden (UT, 2012)
I’m not quite sure where this is going. I’m very happy to debate the Gala case and it’s implications, but you need to engage from a legal stand point and not (as seems to be the case) be asking for legal advice or simply making legally inaccurate statements. BTW, I’ve also deleted the link to your website as it seems to me that some of what you host there is defamatory.
Having said that, it is plain as a pikestaff that the LVT has no power to order refunds:
Solitaire v Holden [2012] UKUT 86 (LC), at [33]
“…I further conclude that the LVT was not entitled to find that it had jurisdiction to act in the manner it did by…finding that the appellants’ obligation to make good the trust monies which had been wrongly spent could properly be categorised as an obligation to pay a service charge, such that the LVT could find that the appellants as debtors were obliged to pay this money as a service charge to Mr Bulmer as the creditor.
R (Daejan) v LVT [2001] L&TR 9 (HC), at [22] (on the pre-2002 wording of s.19, LTA 1985, but not affected by the 2002 Act amendments)
“I accept that the purpose of tenants in making applications under section 19(2A) of the 1985 Act is likely to be recovery of an overpaid service charge. But once it is appreciated that the sole issue for the LVT’s decision is that of reasonableness, and that any proceedings for recovery will have to be commenced in the courts in the light of the LVT’s determination, it is plain that the application under section 19(2A) does not fall within any of the kinds of proceedings…”
R (Daejan) v LVT [2002] EWCA Civ 1095, at [17] (commenting on the then hypothetical position that the LVT could examine the reasonableness of paid charges; something it couldn’t do pre-2002 Act but can now do)
“The first of these considerations, as already indicated, is because the contrary conclusion would involve a multiplicity of proceedings: first an investigation into past charges by the LVT and then, if the tenant is successful, a restitutionary action in the county court.”
As to whether a landlord would pay back service charges that he’s (wrongly) demanded in the past, it seems to me that, if he has spent them, then he won’t pay them back. The tenant will then have to sue for the return of the monies. The landlord will then defend that claim on the basis that he’s changed his position. That was the analysis in the Daejan cases in the HC and CA and both the HC and CA thought that was likely to be a good defence. See further the excellent article by Nicholas Roberts (The Conveyancer, Sept-Oct 2003, 380 at 388):
“in the nature of things, with a service charge dispute, the defence [of change of position] will probably apply more often than not apply. To taken an example: the ground landlord arranges, say, for the exterior of a block of flats to be redecorated. He pays the contractor and adds the cost to the service charge. A leaseholder, or group of leaseholders, objects, either saying that the work could have been done considerably more cheaply, and the cost has thus not reasonably been incurred, or has been so poorly done as to not be worth the money that has been paid for it… the LVT agrees with the leaseholder and reduces the allowable item in the service charge account by, say, 20 per cent. This will be a Pyrrhic victory if the service charge has already been paid. If the leaseholder tries to get back his over-payment… the ground landlord will simply say that he has already paid the contractor on the assumption that the price was payable (as indeed it was, as between the ground landlord and the contractor), so that he has therefore changed his position in reliance upon the “mistake” and thus the leaseholder cannot recover a refund. This would appear to have been what was in the mind of Sullivan J and Simon Brown LJ when taking the view that ‘the prospects of a successful restitution claim are often slender’. If this is correct, in the context of a service charge dispute they will generally be very bleak indeed.”
Many thanks again for taking the time to explain the legal aspects and ramifications, we are content to bow to your expert knowledge, we are simple but (very) interested laypeople.
We understood that LVTs could only award refunds and not order them, it would take a court to do so; but we would be surprised if a court would not order the LVT’s award to be refunded where the decision is correct, accepted or upheld by the Court of Appeal. We were aware of a number of LVT decisions that have been over-turned, but did not see the relevance of your examples to the current debate – that is probably down to our ignorance, and we certainly do not want to cause offence or press you into giving free advice.
As postulated, maybe time and a test case will be needed to find out whether refunds are going to be sought, awarded and made or not.
Incidentally, it is of course your right to remove any reference to our website, we didn’t even know there was a link and we weren’t seeking to make one; but we don’t think we are responsible for any defamation, in fact we have a strict policy to moderate or withdraw any post where there has been a founded complaint, and have done so in a couple of instances; on the other hand the blog is intended to allow people to write what they think in good faith, something we believe should be defended.
Isn’t that where we came in ?
Presumably, in practice, what would happen in your example if the RTM company and the landlord were in an antagonistic relationship is that that the landlord would undertake no garden maintenance work (as it would be impossible to identify what part of such works ought to be done by him) and then there would be a stand-off and the RTM company (having the responsibility for the greater part) would reluctantly undertake all of the work (save for, perhaps, on the land nearest to the landlord’s non-RTM managed properties). The net result would then be that the RTM-managed lessees have to stump up more in the service charge and the landlord’s non RTM managed properties have to pay less for more or less the same garden rights as the RTM-managed lessees.
Perhaps, in such a situation, there would be an advantage for the lessees in enfranchising rather than applying for RTM status (though there are, of course, differences involved in the cost for lessees). If the same dual management issue was possible then perhaps the LVT could take this into account when setting the premium payable for the enfranchisement.
Yes, that certainly is one scenario. It’d be interesting to see how that affected the valuation on a 1993 Act purchase though. Any thoughts?
In CA Trott(Plant Hire) Ltd v Humble & Others (very recent Lands Tribunal case: http://www.bailii.org/uk/cases/UKUT/LC/2012/LRA_154_2011.html) a 10% discount on premium for a lease extension under the 1993 Act was ordered by the LVT to reflect the fact that the lessees had to pay for maintenance of the grounds even though they had no rights to use such grounds (taken together with horrendous ground rent provisions these leases were not particularly lessee-friendly). Having to pay for the maintenance of grounds you can’t use yourself is probably a little worse than paying for all of maintenance costs that a some others can use without contributing so, perhaps, a smaller percentage discount would be appropriate in the example given.
The defect was not establishing which areas the RTM sought to take on in the original application. Depending on the layout the support and (unanimous) involvement of the house owners in the application and the RTM can be persuasive to what the LVT determines.
Nope. The RTM doesn’t have a choice about what areas it acquires. This isn’t collective enfranchisement. It gets the appurtenant property no matter what, see para.14 in the UT.
With due deference J, the CoA seems to agree with me.
“In my judgment, the wording of section 72(1)(a) of the Commonhold and Leasehold Reform Act is clear: there is no requirement that the appurtenant property should appertain exclusively to the self-contained building which is the subject of the claim to acquire the right to manage”
The Act goes on to say that a landlord makes up any shortfall, I’d consider any claim to include those areas and relying on that to avoid insolvency, and they LL in turn recover from the freehold houses.
I doubt that suits every situation. The two owners are not precluded from (later) joining the RTM either. Its a method that I have employed several times. The landlord get his job done adds his fees and bill his houses. Simples.
That doesn’t mean the RTM gets to choose. It just means the the appurtenent property may not be exclusive to the RTM building – so there may be dual responsibility.
NL is right. No requirement to specify appurtenant property because you get it come what may.
Seems to me that the enfranchisement rules are much better than the RTM rules on this – the enfranchisement application has to say what gardens are intended and the Landlord can propose additional areas if they will have limited use if separated from the building.
Paragraph 14 of the UT decision was the crossroads. His statement “It would be unsatisfactory if a claim notice had to specify whether or not it was made in respect of appurtenant property” is a disaster for RTM’s with large shared gardens, unless the RTM covers all the blocks in the estate. A small separate block in a large estate can no longer dare to RTM, for fear of picking up the tab for the whole garden.
I don’t see how the president’s suggestion in paragraph 17 “solves” the problem of dual maintenance, as the appeal court suggests, instead it seems to lump full responsibility on the RTM company, for any areas that are common, quoting section 97(1) the RTM owes the duties to the Landlord and section 19(1) the Landlord can’t service charge them if he does it.
So the RTM has to do the lot, so a small block on a big estate has to go for full enfranchisement if they are getting poor service – or I am missing something?
You’re completely right. In fact, I think you can go slightly further. The absence of any sort of statutory scheme for dealing with estate common parts (in contrast to the 1993 Act) rather suggests that Parliament did not intend the 2002 Act to cover such estate common parts.
It’s just a mess.
Thanks for confirming my interpretation. I agree it’s a mess, not sure I agree on Parliament’s intentions though, the “structurally detached” definition in Section 72(2) is clear and even tries to reach out to blocks stuck together with Section Section 72(3). If they didn’t intend for small blocks on a large estate to be able to break away they would not have put all the language in section 72 about eligible premises. Would have been better for the president to have gone the other way in paragraph 14, and require RTM’s to say what garden’s they are taking over, and let the Landlord dispute the area if an RTM is trying to cheapskate their share of service charge by allocating themselves a small area.
s.72 is, I think, trying to cover the stand-alone building and the separate house in a terrace. I don’t think Parliament had any particular views about *where* these buildings were (i.e. part of a wider estate or not). But the problem with requiring the RTM to specify the area it wants to take over is that there is no dispute resolution mechanism if the RTM and landlord cannot agree.
There is one possible defence for the RTM, that will open wide the can of worms.
The “usually enjoyed with” phrase in S112(1)
For example in an estate with two bin areas, one of which is closer to the RTM’s block, The RTM could say they don’t have to pay for the other bin area maintenance as they don’t “usually” use it. Similarly forecourts of the other blocks would not count as “usually enjoyed with”, and you could even argue that gardens on the far side of the estate from the RTM block are excluded from that definition.
But where do you have the fight? There is no mechanism to do so in the LVT? County court declaration?
The freeholder’s way to make the RTM to maintain the whole of the area is to enforce their rights under section 97(1), seems to me that’s when you have the fight.
I’ve wondered about that, but – in a bad tempered case – that means we’re looking at almost endless litigation (an injunction each year for all functions? one per issue?). Is that really the answer? I agree it’s the only one that I can see on the face of the statute, but it just makes me think that the Gala decision must be wrong if that is the result it leads to.
I don’t like the Gala decision either, it seems to solve just that case and leave a can of worms for others. I never said it would be cheap to do this, the first person who tries might end up spending a lot of money to make a precedent and might lose if the judge takes a different view on “usually enjoyed with”, in Gala it might be clear because the RTM blocks are such a large part of the estate, but will that be apposite to a small blocks on a large estate? Oh for a codified legal system.
Also the costs of that fight are almost certainly greater than the costs of enfranchisement, so this is only ever going to be something an RTM on a big estate stumbles into. Eyes wide open they will go for enfranchisement or give up.
Or – if the underlying objection is really about management standards – get a manager/receiver appointed under the LTA 1987 and then use the compulsory purchase powers to acquire the freehold. But I agree, Gala has made RTM much less attractive for leaseholders and landlords
Take a look at 9-12A Mayfield RTM Co Ltd v Sinclair Garden Investments
CHI/00HY/LRM/2011/0007
Speaking to LAC they say a RTM claim can be without or without appurtenant property. If you don’t want the appurtenant property then S96 management functions only apply to those services as they apply to the stand alone building, and the rest of the lease and its management functions continue under the landlord. It’s up the RTM and the Landlord to co-ordinate the most efficient way of doing this. The difference between Gala and Mayfield is that Gala wanted to claim the RTM over the appurtenant property, while Mayfield did not. I’m not sure this is consistent with paragraph 14 of the UT decision, but the LAC recommendation is to specify (as Mayfield did) when you make the claim.
In para 14 of the UT decision could they have been trying to save RTM claims from failing in the LVT for lack of specification, because of the confusion that would cause when the 2010 Prescribed Forms do not require it?
If that is the case and their intention then I might change my mind about the decision and it would be a good one. A little plain English wouldn’t go amiss here though.
Also note that the Eastern LVT does not accept two buildings in a RTM company, even after this decision. See Luton Park View RTM vs Wenghold Ltd, where they consider that Gala is only about appurtenant property and they make their argument for one building per company. So for now if you are looking to take on two buildings, you have to look up where you are in the country and if you fall in Eastern LVT, or similar thinking tribunal, you’ll have to set up two companies, while others allow multiple buildings per RTM company.
UT appeal on the “multiple blocks/multiple RTM Companies” in May, so hopefully thing will be clearer after that.