Jan

Legal case: a question of leaseholders’ rights to manage the full estate

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The Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to acquire the freehold landlord’s management functions by transfer to a company set up by them – the Right To Manage (RTM) company.

The thinking behind the right was to empower leaseholders. The leaseholders generally hold the majority of value in the property. When they are dissatisfied with the way things are bing managed they have the option of collectively taking the responsibility for the management of their own block.

This can be a double edged sword as when leasehold owners take responsibility for managing their own block it can and often does involve a considerable amount of work, time commitment, and it can create difficulties with relationships. The management committee is composed of fellow residents instead of an independent managing agent, so friction between residents can be the result.

Setting-up a right to manage scheme:

The Right to Manage (RTM) scheme lets some leasehold property owners take over management of the building – even without the agreement of the landlord. This means they’ll be responsible for things such as:

collecting and managing the service charge
upkeep of communal areas (such as communal hallways and stairs)
upkeep of the structure of the building (such as the roof)
dealing with complaints about the building from other leaseholders
Qualifying leaseholders can use the Right to Manage for any reason – they don’t have to prove the building has been badly managed.

Right to Manage companies

To use the right to manage, leaseholders must set up an RTM company and follow certain procedures. The RTM company can manage the building directly, or pay a managing agent to do it.

All leaseholders have the right to be a member of the RTM company and to vote on decisions. A landlord flat owner for example will get at least 1 vote, and extra votes depending how many flats they own.

Setting-up rules for right to manage:

The building must meet certain conditions and a minimum number of leaseholders are required to take part:

at least two-thirds of the flats must be let to ‘qualifying tenants’*;
it can be part-commercial but the non-residential part must not exceed 25% of the total floor area, excluding common parts
RTM does not apply where the immediate landlord of any qualifying tenant is a local housing authority.
RTM does not apply where the premises fall within the Resident Landlord Exemption. To fulfil this exemption would require the following:
- The premises must be other than a purpose-built block (for example a converted house); AND
- They must comprise not more than four flats; AND
- One of the flats must be occupied by the freeholder or an adult member of their family as their only or principal home for the last twelve months.

*A ‘qualifying tenant’ is a leaseholder whose lease was originally granted for an original term of more than 21 years. There is no requirement for any past or present residence in the flats, nor any limit on the number of flats which can be owned by one person.

The case – FirstPort Property Services Ltd v Settlers Court RTM Company Ltd

In the case of FirstPort a company incorporated by the leaseholders acquired the right to manage in a block of flats. The question in dispute was, do the leaseholders also enjoy rights over the estate in which the block is situated? Does the company only acquire the right to manage the block itself, or does it also acquire the right to manage the rest of the estate?

The Appellant (“FirstPort”) is a company that manages an estate in East London containing ten blocks of flats. The Second to Fourteenth Respondents are all leaseholders of flats in one of the blocks, “Settlers Court”, with rights to access the estate’s communal areas.

FirstPort provides services on the estate which includes maintaining communal areas, services for which it is entitled to levy a service charge. The First Respondent is the RTM company established by the Settlers Court leaseholders had acquired the right to manage the block and also took on the responsibility of providing services in relation to the block itself.

A dispute arose between the parties as to whether the leaseholders still had an obligation to pay the estate service charge to FirstPort. The Respondents initially took the dispute to the First-Tier Tribunal with the result that the Tribunal decided that as the RTM had acquired the right to manage the estate, then the leaseholders had no obligation to pay the estate service charge.

FirstPort Property Services Ltd (the appellant here) appealed to the Upper Tribunal but the appeal was dismissed, the UT issuing what is know as a “leapfrog” certificate enabling it to apply for permission to appeal to the Supreme Court.

Judge Siobhan McGrath sitting in the Upper Tribunal stated that:

“…The challenges of creating a regime which gives lessees the right to manage the block of flats in which they live but which also seeks to give them rights of management in respect of the estate where the block of flats is located should not be underestimated.”

The Supreme Court case

The Supreme Court had to consider the intended purpose of the RTM regime. The outcome would have significant consequences for all those who have an interest in multi-block estates, in particular managing agents.

The Law Commission had considered the difficulties with the RTM schemes and set out several reform proposals in a July 2020 report. One proposal was that RTM companies should not automatically acquire management functions relating to “non-exclusive estate property.”

The Supreme Court judgment:

I consider that the right to manage scheme in Chapter 1 of Part 2 of the 2002 Act makes no provision within the statutory right to manage for management by the RTM company of shared estate facilities.

In FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company Ltd and others (Respondents) before Lord Briggs, Lord Sales, Lord Leggatt, Lord Burrows Lady Rose on 12 January 2022, their conclusion was as follows

“I consider that the right to manage scheme in Chapter 1 of Part 2 of the 2002 Act makes no provision within the statutory right to manage for management by the RTM company of shared estate facilities.

“It is concerned only with management of the relevant premises, that is the relevant building or part of a building, together with appurtenant property (if any) which means nearby physical property over which the occupants of the relevant building (or part) have exclusive rights.

“The right to manage is an exclusive right in the RTM company to manage the relevant premises, and no provision is made in Chapter 1 for any shared management of anything, save only where the RTM company chooses to agree otherwise.

“In my view the Gala Unity case* was wrongly decided and should be overruled. In so saying I bear in mind that it has stood as binding authority for several years, and that estate facilities in many estates may at present be being managed under sharing agreements made by RTM companies and others on the assumption that the law was as set out in that case. That is not, however, a sufficient reason to perpetuate an interpretation which is not merely causing practical difficulties but, more fundamentally, is contrary to the purpose of the statute.

I would therefore allow this appeal.

*In Gala Unity the relevant estate consisted of two blocks of flats and two detached coach houses. Each coach house contained a single first floor flat, above parking spaces. There was also further adjacent land including residents’ parking, footpaths, roads, visitor parking and grassed areas, used by the occupants of both blocks and the coach house flats in common.

The respondent RTM company in the case had given separate claim notices to manage each of the two blocks, but not the coach houses. It claimed to be entitled to manage all the parts of the estate in common use (including the parking areas under the coach houses).

Here the RTM company succeeded at all levels, LVT, the Upper Tribunal (Lands Chamber) and Court of Appeal. The objection came not from the tenants of the coach house flats They were perfectly content with the scheme for management of the whole estate by a common RTM company. It came from the freeholder.

The result of this case will come with some relief to managing agents.

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