There’s no doubt 2019 has been a busy year! We’ve responded to Government consultations, studied in detail MHCLG guidance notes, read the comprehensive Law Commission reports, kept up-to-date with legislative changes and learnt lessons from appeal cases decided, and much more.
As a lawyer, I’ve found the case law this year interesting. That’s not to say 2018 or previous years were dull, but it has not just been the usual suspect RTM or service charge cases; we’ve had some interesting cases and trends are developing.
So, let’s reminisce on what’s passed, and consider what might lay ahead.
It’s not always all about the lease
For someone who is on their soapbox at any opportunity espousing the importance of reading, understanding and implementing leases, this may seem a rather unusual statement.
But I’m noticing an increase in corporate-based challenges brought by individuals (wearing their member hat rather than leaseholder hat) who are challenging the RMC as a corporate entity, rather than as the provider of services under the lease.
This trend features in a couple of important cases from 2019, too.
So while it’s important to read, understand and implement the terms of leases, it’s also important to read, understand and adhere to the rules set down by an RMC’s memorandum and articles of association (or mem&arts for short). Because it’s the mem&arts that set down the corporate governance of the RMC.
And while our industry is familiar with landlord and tenant legislation, in 2020 I anticipate we’ll become more familiar with company legislation.
Section 303 of the Companies Act 2006 gives members of a company the right to requisition a general meeting. There are criteria that must be met for a valid request to be made, but essentially once a section 303 request has been made, the company has specific time limits to requisition a GM. If they don’t, then the members can call one anyway (and recover any costs from the company!).
Where a company receives a section 303 request, they have 21 days to send out the notice calling the GM. Kaye and anr v Oxford House (Wimbledon) Management Company Limited and ors taught us the purpose of that 21-day window is for directors to consider the request that’s been made and its validity. If the resolution proposed would be ineffective, is defamatory or is frivolous or vexatious, then the directors are not required to call the meeting.
But what’s vexatious? Although strictly obiter, vexatious means a resolution that’s troublesome, burdensome, or is proposed for no proper purpose connected to the company. However, proposed resolutions to remove the current board and replace them with a new board are unlikely to be burdensome or troublesome.
Interesting comments were also made by the High Court that chairmen do not run GMs for their own benefit, but for the company as a whole. And presiding over a meeting “does not confer dictatorial power”…
Payment of service charges where there’s an NHBC warranty
Any review would be incomplete without including a service charge case and the Court of Appeal decision in Avon Ground Rents Limited v Cowley and ors is important.
Anyone involved in property management knows the various contractual and statutory restrictions on the recovery of service charges – one of the statutory restrictions is section 19 of the Landlord and Tenant Act 1985. Section 19(1) regulates after the event expenditure, and section 19(2) is directed towards monies which are payable before relevant costs are incurred.
Cowley deals with the scenario where there’s the possibility of a third party (in this case NHBC) contributing towards the costs. How does section 19(2) operate in those circumstances?
In this case, the landlord demanded service charge contributions from lessees, notwithstanding that NHBC had agreed to cover the repair costs.
To conclude, all parties agreed that, under the leases, the lessees were contractually obliged to pay service charges and that the service charges would be used for works that fall to the landlord under the lease. But the contractual position is the starting point only; section 19 overlays this. Section 19 has the effect of modifying the contractual obligation of the lessee so no greater amount than is reasonable is payable.
In this case:
- an effective policy of insurance was in place which covers the majority of repair works
- the landlord agreed to give credit for any sums received from NHBC and
- the amount of insurance contributions wasn’t hypothetical, the sums had been identified.
Accordingly, it wasn’t reasonable for lessees to pay in advance for the entire cost of the remedial works where it was expected that NHBC would make a contribution. A reminder of the protection conferred on lessees by section 19(2).
Variation of leases
Leases can be badly drafted. I’m sure we all have horror stories about the worst we’ve seen.
The Tribunal can help as it has jurisdiction to vary the terms of leases where they fail to make satisfactory provision for certain things (as in Section 35, Landlord and Tenant Act 1987). The grounds on which a Tribunal can intervene include where there’s unsatisfactory provision for:
- the repair and maintenance of the flat, building or land
- the provision or maintenance of any services (which are reasonably necessary to ensure that the occupiers of the flat enjoy a reasonable standard of accommodation)
- the recovery by one party from another of expenditure incurred (or to be incurred)
- the computation of service charge (The classic example of when the percentages don’t add up to 100%)
Unhelpfully, there’s no statutory definition of what’s “unsatisfactory”. However, we know from the recent Upper Tribunal decision in Morath (The Mayor and Burgesses of the London Borough of Camden v Morath [2019]UKUT 0193 (LC)) what “satisfactory” means in the context of the recovery by one party to the lease from another of expenditure incurred.
In Morath, the lease permitted the landlord to use service charge monies towards building-related costs but did not permit the monies to be used towards the landlord’s estate-wide costs liabilities. Accordingly, the landlord was suffering a shortfall, whilst the lessee was getting a windfall.
The question for the Upper Tribunal was whether this kind of shortfall is unsatisfactory, so the Tribunal can intervene and vary the terms.
It was accepted there was a perceived inequity in the bargain made between the parties (ie in the lease). The Upper Tribunal said:
“…section 35 does not enable the Tribunal to vary a lease on the basis that it imposes unequal burdens, or is expensive or inconvenient”.
It seems section 35 will not come to the rescue of parties where there’s drafting errors, unless it can be demonstrated the terms are unworkable. In Morath, Camden had not shown the provisions were unworkable, and there’s no suggestion it couldn’t meet its contributions.
Qualifying Long Term Agreements
Since Corvan, QLTAs have been firmly on radar. So it’s unsurprising there’s been a seeming increase in service charge challenges based on agreements being QLTAs. In the summer, the Upper Tribunal reminded us in Ghosh (Ghosh v Hanover Gate Mansions Limited and anr [2019] UKUT 290 (LC)) that a contract comes into effect when performance commences, and not when the goods or services are paid for.
As we’re approaching the new year, it’s an opportunity to check the wording of agreements (and not just management agreements) to make sure they aren’t QLTAs.
What’s on the horizon?
In short, quite a lot!
As far as the appeal Courts are concerned, we’re awaiting the decision of the Supreme Court on mutual enforceability covenants. The Court of Appeal in January will consider forfeiture and waiver, and in the early spring the Upper Tribunal will examine section 20B (again).
We’ve got the Law Commission reports on enfranchisement, right to manage and commonhold to look forward to in the new year.
No doubt there’ll be a continued focus on fire safety issues too. So, 2020 is certainly on track to be as busy as 2019!
Cassandra Zanelli is a partner at PM Legal Services
