A Supreme Court “Leapfrog” Case Provides Clarification For RTM Estates

A Supreme Court “Leapfrog” Case Provides Clarification For RTM Estates

Key Contact: Jennifer Butcher

Author: Laura Spence

This month a landmark case has succeeded in the Supreme Court, overturning decisions in the First Tier and Upper Tribunal where it was previously dismissed because the courts found the facts to be bound by a 2012 Court of Appeal case known as Gala Unity Ltd v Ariadne Road RTM Co Ltd.

Firstport Property Services Ltd (Appellant) v Settlers Court RTM Company and others (Respondent)

Facts:

The case involved a block of flats known as Settlers Court (“the Block”), on the Virginia Quay Estate in East London (“the Estate”) held under long leaseholds. Leaseholders of the Block were entitled to acquire the right to manage the Block by virtue of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”). Consequently, under the 2002 Act, leaseholders took over management of the Block from the existing third-party manager (“Firstport”) via a single purpose company, named Settlers Court RTM Company (“RTM Company”).

In addition to the Block, the Estate contains nine further blocks of flats which share facilities such as parking and security, known as “Estate Services”, with the Block. Under the terms of the leases, Firstport was entitled to levy charges from the leaseholders on the Estate in respect of proving the Estate Services.

A dispute arose between the RTM Company and Firstport over the extent of the RTM Company’s right to manage. The RTM Company arguing that the right to manage extended beyond the Block to include the Estate Services from which the Block benefitted, and that it should no longer have to pay its proportion of Estate Service charges to Firstport.

Firstport disputed this on the basis that it was entitled to continue to levy the Estate Charges from the Block leaseholders. They argued that the RTM Company’s right to manage did not extend beyond the Block and that Firstport alone continued to provide Estate Services to the entire Estate pursuant to their obligations under the leases of flats in all blocks and incurred the full cost of doing so.

Gala Unity Ltd v Ariadne Road RTM Co Ltd [2012] EWCA Civ 1372 (“Gala”)

The First Tier Tribunal and Upper Tribunal found against Firstport due to the decision in Gala being binding. The decision in Gala had dictated for the past 9 years that a leaseholder’s right to manage extended to facilities on an estate shared between blocks of flats despite this leaving the right to manage company and third party manager responsible to different groups of lessees for providing the same services. The view taken by the Court of Appeal in Gala was that the parties would just have to cooperate and reach an agreement as to how this worked. Unfortunately, in practice for the last 9 years this has not always worked. Instead, it has resulted in a plethora of issues where parties cannot reach agreement, such as right to manage companies and third-party managers both spending money on Estate Services, resulting in wasted costs, with neither party having the right to recover expenditure from the other. Interestingly, and historically for one of the first times, the Upper Tribunal issued a leapfrog certificate for an appeal at the Supreme Court, bypassing the Court of Appeal to determine whether the analysis in Gala was correct.

The Supreme Court found in favour of Firstport and in doing so overturned the decision in Gala:

The Supreme Court concluded that the right to manage conferred by the 2002 Act extends only to the relevant block, together with facilities used exclusively by flat owners in that block and crucially does not extend to estate services, which are shared by residents of the other blocks. The Court came to this decision for the following reasons:  

  1. The 2002 Act’s definition of ‘premises’ only includes the relevant building and physical features close to it which serve that building alone, contrary to the description provided in Gala which suggested the definition included easements shared by other occupants on the estate. Therefore, the definition of ‘premises’ in Gala was wrong.
  2. The right to manage given to a right to manage company is an exclusive right unless it chooses to agree otherwise. The Court felt like this is logical if the subject matter is limited to the block of flats whose owners set it up but makes no sense in relation to estate services.
  3. The 2002 Act specifies that the right to manage company exercising its rights must notify affected persons of a change in manager (including flat owners, landlords and third-party managers) but not the owners of the other blocks of flats in the estate. The Court felt like this would only make sense if the right only extends to the relevant block but not if it extends to the estate services.
  4. On the RTM Company’s interpretation, it would become involved in the management of Estate Services which leaseholders in other block relied upon, without there being any contractual relationship between the RTM Company and those leaseholders, meaning they could not hold the RTM Company to account and the RTM Company could not charge them for the management of the estate services. This was in sharp contrast to the relationship between the RTM Company and the flat owners of the Block who are entitled to become members of the RTM Company with a say in its affairs. The Act amends their leases so the RTM Company takes over the contractual relationship with those flat owners which the original manager had. The Court made it clear that other flat owners are entitled to have flats managed exclusively by their third-party managers provided for in their leases and the Act does not take this away or require them to be notified of any change. As the RTM Company’s interpretation was contrary to this, the Court found in favour of Firstport.
  5. Finally, and arguably most important for future reference; where there are two or more interpretations of statutory provisions the Court will lean away from interpretation which produce unworkable results. The interpretation here favoured by the RTM Company and confirmed in Gala produces unworkable results whereas the one favoured by Firstport does not. Difficulties which could come to surface include if the flat owners in each of the ten blocks formed their own right to manage company, all ten would not be able to agree/cooperate on estate services or on the recovery of charges for doing so. Accordingly, the Act provides no sharing mechanism in default of agreement thus the interpretation is unworkable.

The outcome is significant as it has overturned the leading authority that a right to manage company acquires the rights to manage a wider estate at the same time as acquiring the rights to manage the ‘block’. Since Gala, leaseholders have been unsure what the right to manage includes, or often put off acquiring the right to manage due to the potential of this including management of parts of the wider estate. The Supreme Court’s decision will provide welcomed clarity as to the extent of the parties’ responsibilities and reinstall confidence in leaseholders’ ability to acquire the right to manage. It is also anticipated to result in a significant reduction in the number of Tribunal cases such as those seen in recent years, which have considered this question.

If you have any questions in relation to the issues raised, please contact Jennifer Butcher.

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