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By J
26/10/2011

Getting to know the neighbours

One thing you could never accuse the Right to Manage legislation of being is “user friendly”. In Gala Unity Ltd v Ariadne Road Rtm Co Ltd [2011] UKUT 425 (LC), the Upper Tribunal (Lands Chamber) (in the person of that very nice chap, the President) has, however, tried to solve one of the more perplexing drafting problems to arise from the awful provisions that are the Commonhold and Leasehold Reform Act 2002.

Gala Unity Ltd was the freehold owner of, inter alia, a modern development consisting of two blocks of flats and two free-standing coach houses, which were themselves flats with parking spaces. The leases provided for various categories of service charge (estate, building main structure, building common parts, car park, insurance, etc). An RTM company was formed to acquire the RTM over the two blocks. One claim notice was served, claiming the RTM over the whole of the development.

The President was perfectly content that one RTM company could claim the RTM over two blocks like this (which might come as something of a surprise to those regular LVT users who frequent this blog, as this is one of the issues which splits LVTs on a regular basis), but thought the more interesting question was what happened to the remainder of the estate. He held:

(a) the RTM can be acquired over any premises which consist of a self-contained building or part of a building, with or without appurtenant property (s.72(1)(a)), 2002 Act);

(b) it was unnecessary to specify in any claim notice what, if any, appurtenant property was claimed, since the effect of a successful RTM application was to acquire the management of the building AND any property which was appurtenant to the building;

(c) property is appurtenant if it is appurtenant to any flat in the building;

(d) in the present case, that included the car parking spaces on the estate and the rights of way and such like over the remainder of the estate;

(e) the fact that those rights were shared with other leaseholder, including those in the coach houses (who were not part of the RMT claim) was irrelevant;

(f) there was no basis for concluding that “appurtenant” meant only property whcih exclusively served the building subject to the RTM;

(g) so, in the present case, the management was now split: the RTM company owed the management functions under the leases of those tenants within the RTM application and the landlord owed them to the other flats;

(h) the landlord and RTM company would, therefore, have to come to an arrangement, since they could not both provide management tasks to the same land (i.e. both arrange for it to be cleaned) without one of them falling foul of s.19, Landlord and Tenant Act 1985 (i.e. costs being unreasonably incurred).

So – clear? Two hugely important points emerge; first, there is nothing wrong with one RTM company and one claim notice for two blocks. Secondly, on big estates, unless the RTM company claims and acquires the RTM over all the blocks, there will have to be shared management of, in effect, the estate items, between the RTM company and the landlord. That shouldn’t be too hard to arrange, right?

 

J is a barrister. He considers housing law to be the single greatest kind of law known to humankind and finds it very odd that so few people share this view.

11 Comments

  1. Peverel Action

    A bad decision? That places you above the Court of Appeal, and dare we add makes you sound lacking in the wisdom of grace and humility.

    The outcome is surprising perhaps, but for many it will be great news. The worst affected will be “old” management companies who have continued to boss their way round Estates with an RTM’d block, who are now faced with returning “unreasonably incurred” charges.

    It could be bad news for legal advisers so impressed with their own cunning they have been up in the face of the LVT and the President of the Lands Tribunal; and bad news for legal advisers who have been encouraging “old” management dinosaurs to bully RTM companies over common areas.

    So what are the ramifications, for all parties?

    Reply
    • J

      I’ll do the blog post over the weekend (hopefully!), but, in outline:
      (a) I hope I don’t sound like I’m lacking grace and humility just because I think a decision is bad – one of the fun things about doing the blog is that I (and the other NL writers) get to say what we think about cases; people can – and should – disagree;
      (b) I think the decision is a bad one because I don’t think it deals adequately – or at all – with the various cases on what is (and is not) appurtenant property;
      (c) nor do I think it deals properly with the consequences for “duel management”;
      (d) In particular, it is far from clear the the “old” manager is going to be the one who ends up having to refund unreasonable charges, it’s perfectly possible that the RTM Co will be in that position;
      (e) Perhaps most importantly, however, surely this decision will lead to insolvent RTM companies. The RTM company now has all the “block” functions and the “estate” functions insofar as those relate to the flats in the RTM block. So, using Gala as an example, the RTM Co now has to arrange for the gardens to be maintained, etc. That will cost (say) £100 p.a. The RTM Co will therefore have to place a contract for £100 p.a. with a gardener. But, the RTM Co can only recover (say) £80 of that expenditure from the leaseholders (since the leases of the flats presume that there will be a contribution from the coach houses). That means that the RTM Co now has a shortfall that it can’t meet via the service charge. So how does it meet that shortfall? Further, by placing a contract that it knew it couldn’t meet, how is it not trading insolvently?

      But, as I say, full post coming over the weekend.

      Reply
  2. Peverel Action

    Well put. Perhaps we should have read “I think” into your first post.

    Are you suggesting the “old” manager does not have to return those post-RTM Estate service charges it has already collected ?

    The “old” manager still has to provide the services, due to its responsibility to the freehold townhouses and non-RTM’d blocks on the Estate; it cannot escape its duty because it is written into their leases and the management contract with the landlord; but it cannot charge the RTM’d block, in the reverse of your scenario above.

    In the case where the “old” manager was insisting on providing services but at 3-4 times the cost, if the RTM Company was able assume the execution of the service it would happily do so even if it could not collect charges from other Estate properties – but even then, we suspect there would be a way to arrange to do so with the consent of those other properties. There would be no shortfall and no trading insolvently.

    We would consider that scenario to be a WIN-WIN-WIN for the RTM Company.

    Reply
    • J

      Much will depend on the individual facts but, if you’re saying that a freeholder who has been collecting service charges for the estate common parts where there is an RTM Co has to give them back, I’m not sure I’d agree. A leaseholder could bring a claim for money had and received, but the freeholder will defend that on the basis of good faith change of position and I would generally expect him to win that.

      I agree that the landlord has the same problem as the RTM Co in that both now have an obligation to incur more than they can recover, but I suspect this won’t matter as much to landlords since they’re likely to have greater financial reserves than the RTM Co. A landlord who is prepared to run his estate costs at a loss for, say, 3 years, might well find that the RTM Co runs out of money before he does. And once the RTM Co goes bust, the landlord gets the management back.

      Whether this happens or not, we’ll have to see. But I’d have liked to see some consideration given to these issues in the CA decision.

      Reply
  3. Peverel Action

    We all need time to think it through.

    The President of the Lands Tribunal, with the support of the Court of Appeal, has stated in a deliberate and precise paragraph which amounts to a binding decision that if an “old” manager demands charges for Estate services, post-RTM, from leaseholders in the RTM’d block, those charges are “unreasonably incurred”.

    We would be astonished if any “old” manager (on behalf of the freeholder, if you like) attempted to continue to demand those charges, or to defend themeselves in LVT.

    We assume the decision applies to all charges that have been demanded since RTM. It would certainly apply to any charges demanded since the Lands Tribunal decision of October 2011 – no “old” manager can claim they were acting in good faith after that binding decision.

    In the scenarios we have painted it is the “old” manager who is faced with costs they cannot recover, not the RTM Company. The RTM Co and the leaseholders are enjoying lower costs, and riding high on the windfall refund. It would easily be worth the leaseholders’ while to sustain the RTM Co, even in your unlikely scenario where some costs might not be recovered, but we’re not sure the shareholders of the “old” manager or landlord would thank you for suggesting they run at a (greater) loss.

    We do not believe your scenario of a landlord / “old” manager deliberately running at a loss is credible even where they are in cahoots, and if it was done so as to try and bankrupt the RTM Co … well, you tell us what that would mean.

    Surely the landlord is neutral as to who provides the services and charges – aha, except of course where the landlord and “old” manager are bedfellows.

    Reply
    • J

      I’m not sure I agree with what you say about paying money back. It’s a difficult argument to have in the abstract, since the facts as likely to matter a lot in each case but:
      (a) if money has been demanded – and paid – and now spent on a third party providing a service, you’re getting into the eye-wateringly complicated realm of restitutionary remedies. These can only be dealt with in the court and not the LVT, so the leaseholders/RTM companies are going to have to decide if they’re willing to risk the costs consequences of being wrong;
      (b) certainly, in “normal” service charge disputes, the view has previously been taken by the HC and CA that monies demanded, paid, and spent, are going to be hard to get back: see ex p Daejan in both HC and CA.

      As to when this decision takes effect from… I don’t know, but it seems a bit harsh to back-date it to the UT decision, since the UT itself gave permission to appeal (i.e. the UT thought there was a decent argument that it was wrong). As to whether a landlord/management company would try to absorb losses for a period with a view to undermining the RTM company – I don’t know. I’m conscious that I only deal with cases where the RTM claim is contensted and so the nature of what I see are those cases where the parties already don’t get on. But I’m not prepared to rule it out.

      Reply
  4. Peverel Action

    We see that you have now put up a headline post about this decision, thank you, so we will transfer our attention to that, but not before making a final point here …

    … what you say about refunding service charges strikes us as absurd. The LVT is all about restoring service charges to leaseholders where those charges were “unreasonably incurred” or unreasonable, whether or not those charges have already been paid by the leaseholder and spent by the “old” manager. In fact the LVT deals almost exclusively with charges that have already been spent. You know better than most how many LVT cases have been fought and won on that basis, with some enormous historic sums eventually returned by the “old” manager. The LVT would almost certainly award a refund to a successful applicant, and we cannot imagine why a court would not enforce that award with an order (and maybe also costs and damages) against the “old” manager if necessary. The “old” manager is firmly on the hook and no amount of wriggling will get them off this one.

    By the way, since a leaseholder should not ordinarily withold service charges, it is almost inevitable that those sums have already been paid and probably already spent before bringing a case. Since the leaseholder and “old” manager have already fallen out over service standards, costs or procedures – this is why there has been an RTM already – it is equally likely that there has been some protest or prior dispute about those charges and services.

    We will wait for time to tell whether the President of the Lands Tribunal and Court of Appeal consider this decision to apply from the point of RTM handover. The idea that granting leave to appeal means the standing decision does not apply is interesting.

    Reply
  5. J

    As a matter of law, the LVT has no power to order anyone to pay (or repay) anything. I agree that, based on LVT decisions, parties can often (if not usually) work out what their respective rights and liabilities are, but simply because an LVT finds a service charge to have been unreasonably incurred (or whatever other failing it may be) does not impose an obligation on the receiving party to make a refund.

    Surprising? Possibly. But it is the law.

    Reply
    • J

      I should have said, my authority for that proposition is: R v LVT ex p Daejan (both High Ct and CA, 2000 and 2001 I think), Solitaire v Holden (UT, 2012) and one other UT decision of HHJ Huskinson that I can’t remember at the moment!

      Reply

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