The application of the Right to Manage to an estate of flats

By Nicholas Kissen, Senior Legal Adviser

November 2012

On 23 October 2012 the Court of Appeal ruled on the case of Gala Unity Limited v Ariadne Road RTM Company Limited.

This judgment is particularly important for those wishing to exercise the Right to Manage (RTM) their building as it clarifies the rights of leaseholders in buildings that are part of estates. In this article we explain the facts and issues arising from the decision.

Background

There are a number of ways that leaseholders can take over the management of their building. One of them was introduced by the Commonhold and Leasehold Reform Act 2002, namely the Right to Manage a building.

By following the correct procedures a number of leaseholders can collectively take over the management of a building without having to prove fault on the part of the existing landlord or, unless the right is contested, involving the courts or tribunals.

Coming into force in England on 30 September 2003 (and on 31 March 2004 in Wales) it has taken almost ten years for a case on Right to Manage to come to the Court of Appeal.

The case began in 2009 when leaseholders served notice to exercise the right to manage two blocks on an estate where the common areas were also used by flats not part of the RTM Company. The Leasehold Valuation Tribunal (LVT) ruled that the right to manage their blocks included the right to manage appurtenant property even though this was also used by others. The landlord challenged the decision, first to the Upper Tribunal (Lands Chamber), which agreed with the LVT’s decision, and finally the Court of Appeal.

What did the Court of Appeal decide?

The appeal was dismissed and the Right to Manage allowed to proceed. The court decided the following:

1. The two blocks were self-contained buildings within the meaning of the 2002 Act.
   Each block was structurally detached and there was no justification for imposing a further requirement that the structurally detached building be able to function independently without the need to make use of any shared facilities such as private access roads, car parking, gardens or other communal areas.
2. “Appurtenant property” is not required to be exclusively appurtenant to the self-contained building.
   As defined by the 2002 Act it includes appurtenances belonging to or usually belonging to or usually enjoyed with the building, part of a building or flat. The carports or parking spaces belonged to the flats in the two blocks. The bin area, access road and gardens and other “estate common parts” were enjoyed with those flats. The fact that occupiers of the coach houses also enjoyed those appurtenances did not mean they fell outside the definition in the legislation.

Why does this judgment matter?

In the words of Lord Justice Sullivan who gave the leading judgment:

“there is the potential for duplication of management effort and for conflict between the ‘old’ management company and the new RTM Company in respect of such appurtenant property … it is always open to the parties, if they wish to avoid duplication and/or conflict to reach an agreement which would make economic sense for all parties.”

The estate

1. The freehold of part of the land on a modern development situated on the outskirts of Swindon is owned by Gala Properties Limited
2. This land includes two self-contained blocks comprising ten and two flats respectively (“the blocks”)
3. There are two further self-contained blocks with one unit each (“the coach houses”)
4. For flat owners in the block of ten
   • Four parking spaces are allocated on the site and
   • Six further spaces (“the car ports”) allocated underneath the coach houses.
5. Flat owners in the block of two have parking spaces immediately in front of their building
6. All 14 units share five “visitor spaces”.
7. The estate includes facilities such as access roads, grassed areas and a bin area.

The leases for the 14 flats

Each lease for flats in the block and coach houses is for 125 years from 1 July 2006 and are in similar terms. It is in a ‘tripartite’ form with a management company (Hazelvine Limited), landlord and leaseholder. Each lease includes the use of a car-port or parking space. The landlord promises in the lease to provide certain services.

The lease specifies six categories, of which the following are relevant:

• Estate common parts
• Building main structure
• Building common parts
• Services relating to the car park
• Insurance

Service charges are payable for these facilities.

The lease also provides that the leaseholder, in common with the other leaseholders, has rights of way over the roads, drives, forecourts and pavements on the development, the right to use appropriate areas of the estate common parts, the right to use car parking spaces available for common use and the right to use the dustbin area (Schedule 2).

The “Estate Common Parts” is defined in the lease as meaning the areas and amenities available for use in common by the leaseholders and “including pavements, footpaths, forecourts, visitor car parking spaces, cycle store, roads, drives, landscaped areas, gardens and areas designated for the keeping and collecting of refuse, but not limited to them.”

The law

The 2002 Act states that

• RTM applies to premises if:
  1. They consist of a self-contained building or part of a building, with or without appurtenant property.
  2. They contain two or more flats held by qualifying tenants, and
  3. The total number of flats held by such tenants is not less than two-thirds of the total number of flats contained in the premises.
  4. “Appurtenant property” means “in relation to a building or part of a building or a flat … any garage, outhouse, garden, yard or appurtenances belonging to, or usually enjoyed with, the building or part or flat …”
• That a building is a self-contained building if it is structurally detached.
• Management functions which the landlord and the management company have under a lease become functions of the RTM company
• Management functions means functions with respect to services, repairs, maintenance, improvements, insurance and management.
• Once RTM is in effect, the freeholder is not entitled to do anything which the RTM company is able to do under the lease except with the agreement of the RTM company.

What happened?

On 17 March 2009 notices of claim seeking RTM were given by the two blocks of flats in the name of the RTM company they had formed – Ariadne Road RTM Company Limited.

The notices claimed RTM over the whole development including the parking spaces, access roads etc as “appurtenant property” to the two blocks. The claim was contested and went before the Leasehold Valuation Tribunal with Gala and Hazelvine arguing that owing to the car-ports underneath the coach houses and the shared access road and visitors’ parking spaces the buildings could not be described as “structurally detached” or “self-contained”.

What did the LVT decide?

The LVT made a decision on 24 October 2009 and determined the RTM company was entitled to acquire the right to manage both properties.

The RTM company contended that each building was self-contained and structurally detached and considerations as to common parking areas, separate car-port and pipes and cables lying under the common access areas was not relevant to this question although they may present practical problems.

The LVT was satisfied both blocks were indeed self-contained and structurally detached

“The Section specifically makes it clear that ‘appurtenant property’ does NOT affect the status of the building as a whole, and the Tribunal found that the car-ports and common parking areas were exactly the sort of facilities which were envisaged when the Section was drafted. If a ‘garage, outhouse or yard’ falls within the definition, then we are satisfied that the facilities in Ariadne Road fall within that definition”.
“whilst it is acknowledged that there may be practical difficulties which arise if the RTM application is successful, we do not take the view that these are matters which should influence our decision.”

The LVT considered “it is important to clarify what precisely it is the company has a right to manage” and went on to comment it seems logical for the RTM company to have control of all the categories set out above.

This would mean the RTM company having responsibility for all the common areas both those shared with the coach houses and those exclusively for the use of the two blocks.

So what did the LVT conclude about who manages what?

“In effect, there may be some duplication of service provision initially, but nothing in this decision precludes the lessees of the coach houses from applying to a Leasehold Valuation Tribunal for variation of their leases, or for a decision as to reasonableness of service charges. Variation could provide that they should pay a lesser percentage of the total service-charge in view of the fact that the majority of the maintenance is being undertaken and paid for by the RTM company, and not by the landlord’s managers.
“Similarly, it may make more economic sense for the site to be managed as one whole, and insured as one whole, but this is beyond our jurisdiction.”

What happened next?

On 2 January 2010 the LVT gave leave for Gala to appeal to the Upper Tribunal (Lands Chamber “UT”) and remarked:

“it would be helpful and constructive to hear whether the Lands Tribunal agrees with us on this point: namely whether the blocks in question could be defined as ‘self-contained and structurally detached’;
“it would be helpful to have some guidance as to the extent to which Tribunals in these circumstances are required to speculate upon – and make provision for – the practical difficulties which may flow from their decisions.”

What did the Upper Tribunal decide?

The President of the Tribunal handed down his decision on 25 October 2011 and turned down the appeal.

The President decided each of the two blocks of flats was “undoubtedly self-contained since it is structurally detached” and in respect of the appurtenant property he further decided:

1. 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;
2. It was unnecessary for the RTM company to specify in the Claim Notice what (if any) appurtenant property it intended to manage, as a successful RTM automatically leads to the acquisition of the management of the building and of any property appurtenant to the Building;
3. Property is appurtenant if is appurtenant to any flat in the Building. This is of two sorts. The car port or car parking space included in the area granted to the leaseholder and the rights of way and other rights granted under Schedule 2 of each flat’s lease.
4. The fact that those rights were shared with other leaseholders including those in the coach houses not taking part in the RTM claim was not relevant.
5. There was no basis to conclude that “appurtenant “meant only property which exclusively served the building subject to the RTM.

What are the consequences of the Upper Tribunal’s decision?

• In relation to the services provided under the lease set out above (“the services”) the RTM company takes over the duties of the landlord and the management company
• These duties are owed under the terms of each of the leases of the twelve flats in the blocks
• They are owed to the landlord as well as to the leaseholders
• The leaseholder’s responsibility to pay the service charge is owed to the RTM company
• Under the leases of the twelve flats the landlord and the management company are not entitled to undertake the services (including maintaining the roadway and gardens) except for insurance
• Under the leases of the coach houses the landlord is still required to provide the services
• These include maintaining the parts of the estate over which the coach house leaseholders have rights.
• The coach house leaseholders must still pay service charges to the landlord under the terms of their own leases.
• Should the landlord and management company continue to provide services in relation to those parts of the estate the RTM company is obliged to the 12 leaseholders of the two blocks to maintain, the cost of such services could be disallowed by the LVT as not being reasonably incurred.

What did the Upper Tribunal recommend?

The UT decision stated that it clearly makes economic sense for the estate to be managed as a single whole and expressed the hope that agreement can be reached between the RTM company, the landlord and the management company on how that is to be achieved.

The landlord was given permission to appeal to the Court of Appeal because the President felt that the issue was of general importance for leaseholders who wish to exercise the RTM and their landlords.

Why is this judgment important for leaseholders?

Leaseholders no longer need to worry that RTM is barred to them if their block is a minority on an estate of many such buildings.

The ideal situation is for all the buildings to participate but this may not be possible.

In going down the RTM route the minority blocks can assume management of the common parts of the rest of the estate if their leases give rights over them.

As with all such projects it is prudent to take professional advice from the outset in order to better prepare for the functions of management, including financial ones, in order to ensure the proper management of the buildings and the estate.

Indeed one should take to heart the opinions of the tribunals and courts that it would make economic sense for all parties to reach an agreement to deal with the management of the estate.

Alternative Dispute Resolution (ADR) should not be ruled out and we recommend all leaseholders and landlords consider this before going to tribunal. A good starting point can be our guidance on ADR below.

Further information:

• Alternative Dispute Resolution
• Right to Manage
• Leasehold Valuation Tribunal decision (CHI/00HX/LRM/2009/0002)
• Upper Tribunal decision (LRX/17/2010)