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By Nicholas Kissen, Senior Advisor
On 27th March 2015 the Court of Appeal handed down its decision in the case of Triplerose Limited v Ninety Broomfield Road RTM Company Limited.
In this article we summarise the Right to Manage, the background facts and issues leading to this decision and what it means for those involved in the management of buildings or leaseholders thinking of taking over their own building’s management.
What is the Right to Manage?
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. The vehicle for taking over management is a Right to Manage Company (“RTM Company”).
By following the correct procedures a number of leaseholders can collectively take over their building management without having to prove fault on the part of the existing landlord or involving the courts or tribunals. Nevertheless, there are technical aspects to exercising this right and it is important that these are all completed properly. See our guide: “Right to Manage”
What was the Court of Appeal asked to decide?
Whether a single RTM Company can acquire the Right to Manage in respect of more than one building on an estate. An example could be an estate with 2 or more physically separate buildings.
Three separate estates were the subject of this judgment. Leaseholders at each development wished to take over the management of more than one building on their estate through using one RTM Company.
What happened next?
In response to the RTM Claim Notices served for each of the three developments the relevant freeholders served formal responses, or counter-notices.
In the main they disputed that a single RTM Company could be used to acquire the Right to Manage in respect of more than one building. When a challenge is made to exercising the right then the leaseholders, through the RTM Company, must apply to a tribunal, at that time the Leasehold Valuation Tribunal, for a determination that they are entitled to acquire the right to manage.
In the case of two of the developments, the tribunal decided that one RTM Company cannot acquire the right to manage more than one building. Appeals were made to the Upper Tribunal (Lands Chamber) by the RTM companies.
The third development was the subject of a referral directly to the Upper Tribunal (Lands Chamber), a power available to the First-tier Tribunal (Property Chamber) in appropriate cases.
What did the Upper Tribunal decide?
It decided that an RTM Company could acquire the management of more than one building provided that all the qualifying requirements were met in relation to each building.
In other words each building must fulfil all of the conditions that the law requires.
In short, a single RTM Company could manage more than one building on a development. Neither the decision nor its reasoning introduced any requirement that limited this conclusion to premises belonging to the same freeholder or to the same development or geographical area.
Why did the Upper Tribunal reach this conclusion?
The Tribunal considered that the “main objective” was to “grant long leaseholders the right to take over the management of their building without having to prove fault or pay compensation.”
The Upper Tribunal considered that where a number of buildings were managed together and sharing appurtenant property, the main objective of the 2002 Act’s provisions could only be achieved by adopting a purposive construction.
The Tribunal took the view that s72 did not limit the number of self-contained buildings or part of buildings to which the right to manage applies.
So there was nothing to stop an RTM Company taking over management of more than one set of premises or self-contained buildings so long as each set/building qualified.
Moreover it was enough to serve one claim notice in respect of a number of buildings on an estate provided its content was sufficiently clear to establish eligibility in respect of each set of premises.
What did the landlords argue?
- The landlords submitted that the purpose of the 2002 Act was to allow qualifying leaseholders to assume management of their own buildings through the medium of RTM companies. The purpose of the Act was not intended to allow anyone else to do so.
- On a proper analysis the complex provisions of the 2002 Act could only be interpreted as meaning there had to be one RTM Company for each exercise of the right to manage; that is, for each block. The provisions of the Act did not permit the concept of “global” RTM companies applying to premises with different geographical footprints.
- The reference to “premises” in the Act had to have the same meaning wherever it was used unless expressly provided otherwise.
- This analysis was supported by
- the consultation paper Commonhold and Leasehold Reform CM4438, August 2000 (the consultation paper) which came before the draft bill which ultimately became the Act, and
- the practical consequences which would follow if the Upper Tribunal’s decision was found to be correct.
What did the Court of Appeal decide?
The Court of Appeal decided that the landlords’ approach to the interpretation of the Act was the correct one and allowed their appeal.
Why did the Court of Appeal reach this conclusion when looking at the Act?
Section 71 of the Act says that the right to manage can be acquired only in relation to premises to which the Act applies and by a company which in accordance with the Act may acquire and exercise right to manage.
S72 (1) applies to premises which had to consist of “a self-contained building or part of the building” so making it clear that the acquisition and exercise of rights to manage applies not to a number of blocks or self-contained buildings in an estate but to a single self-contained building (ie structurally detached) or part of a building.
That was not in itself enough to decide the question whether one RTM Company could acquire the right to manage more than one set of premises.
By s74 those entitled to membership of an RTM Company are qualifying tenants of flats contained in the premises and landlords under leases of the whole or any part of the premises.
Accordingly, if a company was an RTM Company in relation to premises A, only qualifying tenants of premises A and relevant landlords of premises A are entitled to be members of that RTM Company.
Section 74 does not envisage that qualifying tenants of flats contained in premises B and relevant landlords of premises B are also entitled to be members of that RTM Company.
The judgment goes on to state that the Act could have so provided by envisaging or permitting a complex membership structure of RTM companies by which there were different classes of members in relation to different premises in respect of which the RTM Company had acquired the right to manage. However the Act does not do so.
The court also found that an interpretation of the regulations and model articles of association of the RTM Company leads one to conclude that a single building or set of premises was intended by the Act otherwise provisions of decision making by members and for the appointment of directors by means of an ordinary resolution would be “completely undermined.” For instance the majority of the qualifying tenants in relation to Block A on particular estate could outvote the views of the qualifying tenants in relation to Block B.
What practical problems did the court look at?
The court went on to consider the real practical problems that would come about if a single RTM Company could take over the management of many blocks or separate buildings. For example it would be possible for the members of the larger block to ride roughshod over the decisions of the smaller block. Furthermore there is scope for conflict of interest between leaseholders of different blocks on a number of issues such as service charges, granting approvals, carrying out major works and also estate rules and regulations.
Furthermore, however attractive it might seem for a smaller block to join in a single, estate-wide RTM, realistically this would mean that smaller block could not achieve the objective of self-management which was of course the purpose of the provisions.
The acquisition of the right to manage could not be exercised against an existing RTM Company. Therefore, leaseholders in a smaller block would in practice be fixed with the choice of the RTM Company for all time. The only way in practice to change the situation would be to apply to the appropriate tribunal to appoint a manager underLandlord and Tenant Act 1987, Pt. 2. That was a complex and costly process, in the case of a small block of four or five flats probably prohibitively.
So did the Court of Appeal disagree with the Upper Tribunal’s approach?
The court took issue with the Upper Tribunal’s proposition that the only way to achieve the purpose of the Act where a number of different self-contained buildings had been managed together and shared appurtenant property, was to give the Act’s provisions a purposive interpretation in order to enable one RTM Company to exercise the right to manage in respect of many buildings. Lady Justice Gloster commented:
“In my judgment there is no basis in the statutory provisions that justifies such a conclusion”.
Did the court make any suggestions for managing an estate of many blocks?
“Indeed, as Mr Rainey pointed out, from a practical point of view there would be nothing to prevent two or more RTM companies, which were established in relation to separate blocks on the same estate, from entering into an agreement to delegate management to one of the RTM companies, or indeed a third party manager, to act on behalf of both or all: the articles explicitly provide for delegation. RTM companies can also appoint agents.”
In conclusion what did the court decide?
“The relevant provisions of the Act, construed as a whole, in context, necessarily point to the conclusion that the words “the premises” have the same meaning wherever they are used (save where otherwise expressly provided).
“That means that the references in section 72 to “premises” are to a single self-contained building or part of the building, and that likewise references to “the premises” or “premises” or “any premises” in sections 73, 74, 78 79 and other provisions of the Act are likewise references to a single self-contained building or part of the building.
“That interpretation is consistent with the provisions for model articles contained in the Regulations and is the only basis upon which the machinery for acquisition of the right to manage can operate.
“Accordingly in my view it is not open to an RTM Company to acquire the right to manage more than one self-contained building or part of a building and the Upper Tribunal was wrong to reach the decision which it did.”
What are the implications of this judgment for leaseholders?
Faced with an estate comprising many buildings then even if it has one freeholder and is managed as one entity, to embark upon right to manage will involve the creation of a single RTM Company for each building, serving invitation notices on the tenant of each building and ultimately serving a claim notice on the landlord and any relevant third party in respect of each building. Care must be taken to ensure that each building qualifies and that a sufficient number of qualifying tenants are members of the RTM Company before each claim notice is served.