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…