THE RIGHT TO MANAGE: A CHEAP, QUICKIE DIVORCE? Oliver Radley-Gardner

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1 THE RIGHT TO MANAGE: A CHEAP, QUICKIE DIVORCE? Oliver Radley-Gardner An earlier version of part of this paper has been published in modified form, as Right to Manage: Ironing Out the Kinks (2014) L&TR 133 Introduction The Commonhold and Leasehold Reform Act 2002 ( CLRA ), Part 2, makes available to tenants of residential premises a no-fault right to manage ( RTM ). The only vehicle for securing and then operating the RTM is a special company, the RTM Company, which must meet certain statutory criteria under CLRA and subordinate legislation. RTM was intended to allow tenants to take over control of their own blocks, but it was also to be a stepping stone along the way to enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993 ( LRHUD ), via the (still not in force) RTE company provisions. As is, regrettably, often the case where Parliament has intervened into the landlord and tenant relationship, CLRA is very far from a perfect scheme. In fact, Parliament appears either to have ignored, or not considered, the various ways in which landlord and tenant relationships, and estates and buildings, are structured, and has devised a one-size-fits-all scheme, meaning that lawyers and tribunals are forever hammering square pegs into round holes. That is highly regrettable for all involved: it means that tenants can often not readily secure the autonomy CLRA purports to give them, and landlords, managers and third parties cannot say with reasonable clarity whether their rights and duties have been modified by the valid exercise of RTM. What follows is a survey of the problems that have arisen in practice, and a peek at the problems that lie further down the road. Before that, a sketch of the scheme is required for the reader fortunate enough to have avoided it, thus far.

2 RTM s Basic Building Blocks A number of concepts are fundamental to understanding RTM. RTM attaches only to premises answering the description in section 72. Premises are either (i) a self-contained (that is, structurally detached) building, or (ii) a vertically divided part of a building capable of independent development and autonomous in terms of services, with or without appurtenant property. Premises must contain the requisite proportion of qualifying tenants (defined in section 75) to qualify for the RTM. An RTM company is the only vehicle that can exercise the RTM. It must answer the description set out in sections 73 and 74 and subordinate legislation. The RTM company can seemingly be set up by anyone, however only qualifying tenants and landlords of relevant leases are entitled to join it. The RTM company may only then acquire the RTM by following the notice procedure in sections 78 and following. In short, it must ask the relevant persons (provided for in section 78) to participate (the notice inviting participation, or NIP ), and it must then serve a notice of claim (the NOC ), which may or may not be opposed by the recipient (provided for in sections 79 and 80). Both notices are in prescribed form, and have a prescribed content. As is to be expected, a certain amount of controversy has arisen in relation to each building block. As ever, disputes have arisen as to whether a building constitutes premises under section 72 (e.g. No 1 Deansgate (Residential) Limited v No 1 Deansgate RTM Co Limited [2013] UKUT 580 (LC); Albion Residential Ltd v Albion Riverside Residents RTM Company Ltd [2014] UKUT 6 (LC)). The tribunals have been asked to examine whether a particular company is an RTM company or not (FairholdMercury Limited v HQ (Block 1) Management Co Ltd [2013] U.K.U.T. 0487). By far the most litigated issue has been whether the notices under CLRA the NIPs which are fundamental to all that follows in the RTM process, and the NOCs that invoke the RTM are valid. Must What Does It Mean? Without a valid NIP, the entirety of the following process is defective the branches must fall with the tree. When is a NIP valid? That issue arose in Elim Court RTM Co Ltd v Avon Freeholds Ltd [2015] L&TR 3, which presently (and imminently) under appeal to the Court of Appeal.

3 The fundamental question is deceptively simple: What does Parliament mean if it says that something must be done? Is it must in the sense that a seatbelt must be worn in cars? Or does it mean that strict compliance is not necessary? This old chestnut arises very commonly under enfranchisement and right to manage legislation. The issue has come to prominence again in the enfranchisement sphere, in the Court of Appeal, in Natt v Osman [2015] 1 W.L.R Osman was not about the RTM legislation, of course, but it appears to be a strong authority determining the Elim appeal in favour of the landlord. Osman was instead concerned with the validity of a section 13[1] notice under the Leasehold Reform, Housing and Urban Development Act The notice was defective as one of the qualifying tenants, and his details, was omitted altogether from it. Section 13 states that such information must be included. The Court of Appeal in Osman stated that must means must without that information even if superfluous on the facts the giver of the notice had not performed the act which Parliament had required him to perform to trigger the legal consequences set out in the 1993 Act. It was no answer to say that, on the facts, that act was an empty ritual dance. Similarly, in Elim Court, a consolidated appeal when heard by the Upper Tribunal, the RTM Company had failed, in its NIP (which is the root of the RTM acquisition process) to give the required details to allow for inspection of the company s articles of association (section 78 of CLRA[2]). Again, the word must was used by the draftsman. Again, the Upper Tribunal decided that this meant that there simply had to be compliance in order to trigger the statutory machinery contained within CLRA. In a number of cases (considered in Osman and Elim, and which it is not necessary to set out here at length), the Courts have sought to draw a distinction between obligations that are mandatory (so that a failure to comply is fatal) and ones that are simple directory (where less than strict compliance may well do). There is now a strong argument that, in the landlord and tenant context, a strict approach will be adopted in relation to the word must. The Courts have now repeatedly stressed that a reliance on the old mandatory/directory distinction is unhelpful. Instead, attention should be directed to the question of what sort of scheme the relevant provision forms part of. Those cases where the Court has been willing to turn a blind eye to technical breaches of apparently strict provisions have tended to be procedural provisions, such as the provision in R v Secretary of State for the Home Department ex parte Jeyeanthan [2000] 1 WLR 354, which is in many ways to be regarded as the leading authority on the question. In cases of defective procedural compliance, the relevant tribunal is entitled to disregard a technical breach if there has been substantial compliance without prejudice caused though even then, a procedural error may be fatal if it goes not to the failure to take a procedural step within jurisdiction (such as serving the wrong form of notice of appeal), but if the error goes to the tribunal s jurisdiction itself.

4 On the other hand, where the provisions are part of a legislative scheme that affects substantive rights, then a strict approach is in order, and substantial compliance does not enter into it. In enfranchisement, as in the right to manage, the valid operation of the statutory scheme sets in train a process whereby fundamental private law rights and relations, contractual and proprietary, are altered by force of statute. In that context, the recipient of a notice whose rights will be affected is entitled to know exactly where he or she stands, and should not be required to make a necessarily vague assessment of whether a notice which does not comply with the statutory requirements of the statutory scheme might nonetheless be saved by substantial compliance: see Elim Court, at [83]-[92], [94]; Osman, at [28] [34]. In the RTM context, a landlord who receives a valid notice is required to cease management and is obliged to hand over uncommitted service charge. If the RTM process was deficient, the landlord is at real risk of being in breach of covenant under the leases if management is wrongfully ceased, and may find itself in breach of trust and worse in handing over residential service charge funds to an entity not, on close analysis, entitled to them. The landlord may also find himself in breach of contract with managers, gardeners, and other third parties with whom it has contracted (assuming that the RTM has the effect of terminating those agreements somehow, which is, as we all know far from certain and another oversight by the draftsman). The apparent hardship of this strict approach is of course strongly mitigated by the fact that the giver of such a notice, faced with the argument that the first notice is invalid, can always simply give another one without prejudice. It is notable from the reported cases on defective RTM notices that this basic precautionary step is apparently rarely taken in practice. In fact, in none of the Upper Tribunal appeals is there reference to an alternative fall-back notice. Multi-Block RTMs Multi-block RTMs have caused the most difficulty in practice, but at least the immediate difficulty has dealt with by a decision of the Court of Appeal. In what context does the problem arise? One must distinguish between (a) estates comprising several detached monolithic blocks, and (b) a terraces of maisonettes that could be vertically sliced. In the latter case, the terms of section 72 (and assuming that each slice could constitute a part of a building), qualifying tenants would have the option of treating the whole terrace as a single building so that the RTM attaches to it, or to slice it into individual parts of a building, assuming this is possible under section 72). The real difficulty arises in relation to multiple monolithic blocks on a single estate. Two principal approaches have historically been adopted by tenants in relation to multi-block estates. This involves the incorporation of a single umbrella RTM company over the whole estate, which either (i) serves a single notice in relation to all blocks ( Umbrella A ), or (ii) a series of notices, each in relation to each individual block( Umbrella B ). Either way, the

5 estate as a whole is thereby managed through one corporate vehicle of which all participating tenants in all blocks are members. The alternative (called the block-by-block approach) has been to incorporate a single RTM company for each individual block, and each then serves its own claim notice. The question for the tribunals has been whether the Umbrella approach, be that variety A or B, is legitimate. Both Umbrella approaches present real problems. The first is that CLRA is not drafted on that basis. One looks in vain in Part 2 of CLRA for a discussion of how the RTM is to be treated where there are multiple blocks on one estate with shared appurtenances. The available material most strongly supports the view that Parliament considered an Umbrella approach to be an illegitimate way of exercising RTM. There are several pieces of evidence from the background material to CLRA (which it is considered is admissible in the exercise of construction) that support this. First, the multiblock issue was dealt with by the draftsman in relation to commonholds under Part 1 (see section 57), but not answered in relation to the RTM. One concludes that the draftsman intended to exclude that approach under RTM. Secondly, Parliament was evidently aware of the multi-block problem in connection with RTM, as it is referred to in the underlying paper (Commonhold and Leasehold Reform, August 2000, Cm4843), but the problem was considered too problematic to grapple with and too difficult to draft. Instead, the paper invited further comment. In inviting further comment, one concludes that Parliament was not prepared to allow that approach at that time and elected instead to kick the can down the road. Finally, the paper noted in terms that the Bill was framed on a block-by-block approach (at page 119), and in this regard the Bill was enacted without further material change. The block-by-block approach excludes the Umbrella approach. In other words, the underlying material is consistent with the fact that CLRA does not permit Umbrella RTMs as part of its scheme. Both Umbrella approaches have their own shared and individual problems when one steps out from the underlying materials and into the scheme of CLRA itself, as enacted: 1. A problem with both Umbrella A and B is that there is no test furnished by CLRA (as the consultation paper notes at the pages already cited) to allow a tribunal to

6 determine when separate buildings can, and cannot, be appropriately combined. Without such a limitation, there is no objection on the wording of CLRA to a countrywide RTM, or an RTM Company in charge of a block in Land s End and another in Preston. On the face of it there would even be no restriction on incorporating such an RTM Company with the consequences set out in point 3 below. 1. The Umbrella A and B approaches are inconsistent with the overall philosophy of RTM as appears from the CRLA scheme: it was intended to give tenants a democratic right of self-determination, as far as management matters were concerned (and see again the consultation paper, at page 119). Umbrella RTMs, even on the Umbrella B model, dilute that right, and potentially take it away altogether. This is because the right to decide is taken away from tenants of a block and is instead vested in tenants of the estate as a whole. The risk of a democratic balance is enhanced, particularly where (as is often the case) the estate comprises different sized blocks with different numbers of tenants. The problem is not entirely fanciful in circumstances in which most modern development will provide for a mix of housing, flats and maisonettes, and also where most modern developments will make provision for a smaller block of affordable housing. The smaller units are at real risk of being outvoted given that all decisions would be taken at the estate level. Block A may wish to have its roof repaired, taking up management time which the members of the RTM from Block B may not wish to devote. To point out by way of defence that tenants choose to join such a company at the outset is to overlook the point that these companies, once established, will survive multiple assignments of leases, and incoming tenants may find themselves locked into a management structure that is not set up to permit them adequately to express their views. It also overlooks the fact that, if an Umbrella RTM company is permitted and does exist, no other RTM companies may be set up on the estate, limited, for instance, to an individual block (see point 3 below). All of those problems arise before one even gets to the practical issue of how service charges are to be dealt with. 1. As already mentioned, once such an Umbrella RTM company is set up, with an objects clause which provides that it is set up to manage each of the individual blocks comprised in the Estate, then no other RTM company can be set up. There can only ever be one RTM Company over a particular block: see section 73(4). The choice for blocks on an estate subject to an Umbrella RTM would therefore be restricted: either choose not to join and stay with the landlord, or throw in your lot with the other blocks. 1. The Umbrella A approach is manifestly inconsistent with CLRA as drafted. It involves, in effect, not merely distorting, but actually re-writing, the definition of

7 premises in section 72 to mean that multiple sets of buildings can amount to a single set of premises. That is plainly impossible as a matter of statutory language. 1. The Umbrella B approach is of course superficially more akin to the block-byblock approach, as it entails the giving of a series of notices, rather than the giving of one global notice. In effect, a series of distinct and individual RTMs are aggregated in one company. There are, however, still good reasons why the Umbrella B approach does not fit with the RTM scheme as drafted. First, it is contrary to the passages from the consultation paper referred to above. It is also not consonant with the intentions of the draftsman in a range of contexts (see e.g. at pages 120, 121, 123). Both the Umbrella A and Umbrella B approach were, for a time, regarded as permissible and the Upper Tribunal endorsed the approach in Ninety Broomfield Road RTM Co Limited v Triplerose Limited [2013] UKUT 606; which was re-affirmed in Fencott Ltd v Lyttelton Court RTM Company Ltd[2014] UKUT 27 (LC). However, the Court of Appeal has now reversed that position: Triplerose Ltd v Ninety Broomfield Road [2015] EWCA Civ 282 (27 March 2015). Adopting a number of the arguments set out above, Patten LJ explained that Accordingly in my judgment 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, 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. The consequence of that reasoning is that a fundamental point which was assumed, not argued, in Gala Unity Ltd v Ariadne Road RTM Co Limited [2011] UKUT 425 (LC); [2012] EWCA Civ 1372 is now suspect, and with it, the reasoning in Gala seems open to challenge. I consider Gala in the next section. However, before I get there, it is worth teasing out the implications of the Court of Appeal s findings in Broomfield Road. Although the Court of Appeal was correct to decide as it did, the consequences for estates run on an Umbrella basis are potentially very severe, and have

8 yet to be properly worked out. There are three possible consequences that immediately spring to mind, in diminishing order of both correctness and severity (in my view): English orthodoxy is that the Courts declare what the law is, and what it has always been. This is the so-called declaratory theory of the judicial function. Applying that theory, one would conclude that Umbrella RTM companies are not RTM companies at all, and, critically, they never were. Finding otherwise was outside the jurisdiction of the FTT, and their decisions may therefore be waste paper, a nullity.[3] This means that these so-called RTM companies were never RTM companies at all, and have been discharging management functions, and holding service charge funds, when they have never been entitled to do so. One can foresee a range of possible legal issues arising out of management by such a company. It may be that a landlord, in allowing the company to take over management, is in fact in breach of covenant. It may be that the company, in exercising those functions wrongfully, is also in breach and is not entitled to be reimbursed out of the service charges (and may need to look to its members for a contribution). It may be that service charge trust funds have been wrongfully transferred and dissipated. All of these consequences are troubling in the extreme, particularly if something has gone wrong with the management in the meantime. It may be that the position of such companies was that they were RTM companies up to the decision in Broomfield Road, but thereafter ceased to be RTM companies. One could just about fit that into section 105(5) CLRA, which says that the RTM ceases when the RTM company ceases to be such a company. That would perhaps be the most practically satisfactory outcome, effectively re-setting the clock to zero without rendering unlawful anything that has happened in the meantime, however it is quite difficult to see how that argument fits with the established legal principles underpinning the conclusion in (1) above. It may be that, apart from the companies which were a party to the Broomfield Road appeals, other Umbrella RTM companies which have been recognised as such either because a landlord gave no counter-notice or because a Tribunal has so found continue to have the rights everyone thought that they had. However, that seems wrong for a number of reasons. First, the Court of Appeal was determining was an Act of Parliament means, and not merely what the particular rights between the parties were. Broomfield Road is of general application, and not confined to the parties to it. Secondly, that would extend CLRA by (most likely) some kind of estoppel, and as a rule estoppels cannot be used to confer jurisdiction where statute does not, or to extend the scope of a statute. To put it another way, the law does not tend to recognise estoppels that are inconsistent with a statutory scheme. This analysis seems incorrect. The answers to the questions in Broomfield Road seem correct. However, they will give rise to additional, and perhaps even more difficult, questions in the future in relation to estates which thought they had estate-wide RTMs, but which turned out to be wrong.

9 Shared Apprutenances In Gala Unity Limited v Ariadne Road RTM Co Ltd, the Upper Tribunal ([2011] UKUT 425 (LC)) an issue arose between the freehold owner of a multi-block estate, and an RTM Company. The RTM Company had served two claim notices, in respect of two blocks of flats on the Estate (so that it was applying the Umbrella B approach to part of the estate). No RTM claim was brought in relation to some coach houses on the estate, which were also held on leases. The Upper Tribunal decided that (a) a claim notice specifying premises by simply naming them automatically carried with it rights to manage appurtenant property including property over which the tenants enjoyed only incorporeal rights, even if not further identified, and (b) that this was not precluded by the fact that the result would be that the shared appurtenance land would be subject to parallel management by (i) the RTM Company of the two blocks, and (ii) the landlord of the coach houses. Though that outcome was unsatisfactory (how does one concurrently mow a lawn or paint a fence?), the Upper Tribunal considered that the unsatisfactory outcome could be resolved practically. Should RTM company and landlord slavishly provide duplicate services even if those had already been provided by the other, then the ability to recover service charges would be affected (as it would be unreasonable to proceed on this basis under section 19(1)). The hope was expressed that the parties would therefore either agree or be forced to co-operate in the future. It is open to question whether such a hope is sufficient to mitigate the consequences of the approach of the Upper Tribunal in this case. An appeal was launched to the Court of Appeal, though the appeal was refused. It is important to appreciate the scope of the appeal, however: the sole issue before them was whether or not the appurtenant property should appertain exclusively to the self contained building which is the subject of the claim to acquire the right to manage. In other words, the Court of Appeal was asked to decided the simple binary question of whether the right to manage was confined to the RTM block s exclusive appurtenances, or also extended to shared appurtenances other blocks could also use. The Court of Appeal was not asked by the unrepresented parties to consider the problem more generally, and to consider the issues underlying the Upper Tribunal s decision. On appeal, it was decided that the RTM was not confined to appurtenant property that was exclusive to the block ([2012] EWCA Civ1372). An RTM Company would also become responsible for managing appurtenant property the use of which it shared with a neighbouring owner. Sullivan LJ stated, at paragraph [16], that. In my judgment, the wording of section 72(1)(a) is clear: there is no requirement that the appurtenant property should appertain exclusively to the self contained building which is the subject of the claim to acquire the right to manage. The prospect of dual responsibility for the management of some of the appurtenant property in this and other similar cases is not a happy one. As Mr. McGurk submitted, there is the potential for duplication of management

10 effort and for conflict between the "old" management company and the new RTM company in respect of such appurtenant property, but I am not persuaded that these consequences are so grave, or that the end result is so manifestly absurd, that we would be justified in adding a gloss to words appurtenant property which are already defined in the Act. 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 (see paragraph 18 of the President's decision); if they are unable to do so, paragraph 17 of the President's decision suggests a means of resolving disputes arising from dual responsibility for maintenance. It is suggested that, because of how the oral argument was advanced before the Court of Appeal and below, a number of points were assumed. The first point, in relation to which the Court of Appeal was not asked to rule in Gala, though the issue arose, was whether the RTM Company in Gala was entitled to serve two notices in relation to two separate blocks. In other words, an Umbrella B scheme had been set up in light of the discussion above, it is considered that it was not. The second point that should have been examined was whether a NOC can be said to specify the premises under section 80(2) if all it does is refer to the address of the block in question, without referring to any appurtenant property to be claimed. A perhaps more satisfactory reading though more onerous to tenants - of that section is that the notice must engage with the section 72 definition, and must explain with specifics ( specify ) what it is that is being claimed by the Claim Notice. A simple statement of the address may be obvious enough where there is a single, monolithic block on the estate with exclusive appurtenances. However, the answer may be less obvious where one is isolating one part a complex estate. Although the proposed reading of section 72 requires more of the RTM Company meaning more can go wrong - there are certain points in favour of such an approach. First of all, it is important so that everyone knows what the extent of the RTM claim is, given its effect on covenants and third party contracts. Secondly, this approach would bring it into line with what is required admittedly more explicitly - under section 13 of LRHUD in relation to collective enfranchisement claim notices. The draftsman of CLRA clearly thought that CLRA would be a gateway to enfranchisement, so that symmetry between the schemes might be expected. Thirdly, this approach would encourage parts of estates wishing to exercise individual RTMs to consider who is to do what, and what the geographic extent of the RTM Company s rights and duties are, before notices are given.[4] The FTT does not have the express power to determine the extent of RTM, only to declare that it has arisen. The FTT regularly refuses to engage in questions as to the scope of the RTM as a result. There is no statutory mechanism for resolving doubts (another potential oversight) as part of the RTM process, meaning that these issues have to be resolved afterwards, and probably by way of declaratory relief in the Courts in contested proceedings entailing costs consequences. Fourthly, the automatic right to appurtenances, shared or exclusive, can be detrimental to a particular RTM Company: it is at least arguable that, if a claim notice will in each case drag with it a right to manage all appurtenant land, including shared appurtenant land, then, unless such land is capable of being excluded in the notice, there will be overlapping RTM

11 regimes on a complex estate. Each RTM company will have a right to manage the shared gardens, paths and car parks. This has two consequences. First. the later RTM Company claims may be opposed on the grounds of section 73(4) and Schedule 6(5) CLRA. Secondly, unless capable of exclusion, the small block on the high-spec multi-block estate may, by oversight and without intending this to be the case, go RTM and suddenly find that it is, at least technically, required to manage a gym and swimming pool, and other expensive and complex infrastructure of the high-spec riverside development, the use of which it shares with other blocks. Maybe it would therefore be better to require the RTM Company to specify what appurtenances it wishes to take charge of, and which it is content to leave to the landlord (with, perhaps, a right to amend if the company over- or under-specifies). Conclusions RTM has proven popular. This is understandable. It is enfranchisement-lite, giving control without the cost. However, a close reading of CLRA and the underlying materials makes clear that it is a most imperfectly-implemented scheme, and that Parliament simply refused to engage with complex issues that arise often in practice. There are a number of potential pitfalls. We can expect to see significantly more cases in the future seeking to resolve issues, not merely arising out of notices, but also arising out of the operation of the RTM in practice. Gala will surely not stand as the final word on appurtenant land, for example. A further case which has arisen in the last few days is Francia Properties Limited v Aristou (LTL 9/8/2016), a decision of the County Court and therefore not a binding authority. This considered whether the effect of an RTM was to preclude the landlord from developing parts of the building which were subject to the RTM. The Recorder found that the effect of the RTM scheme could not possibly be to deprive a landlord of a valuable right to develop and realise value from its property rights. Whilst there would necessarily be some conflict between management by the RTM company and the landlord whilst works were ongoing, provided that the landlord did the works so as to minimise problems, it would be allowed. However the drafting of CLRA on this, and other, points is far from perfect. If tenants believe that exercising the RTM will be a cheap, no-fault quickie divorce from their landlords, they may be disappointed.

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