QUESTION
Our block of 100+ flats has two leaseholder companies 1) The superior landlord which owns the Freehold and Head Lease (Leaseholders Company LC) and 2) a Right to Manage company (RTMC) which appoints the Managing Agents and deals with the management of the block. These were set up to provide checks and balances and try to guard against predatory activity either internal or external. One director from each board sits on the other ex-officio. The directors are neighbours, sometimes friends, and have generally worked well, but separately over ten years or so.
Recently there has been some divergence of opinion between the RTMC and the LC. Increasingly the RTMC has taken new action (changes and alterations) in the common areas without consent of the LC and there is now talk of building new structures in the basement, to which many are opposed.
The Freehold was acquired in 1996 and the actual transfer document has clauses within it about what can and cannot be done. Clause 4.3 is of particular interest as follows:
4.3 save as required to comply with any legislation from time to time in force not at any time to make or permit or suffer to be made any external or structural alterations or erect any other building or erection whatsoever in or on the Property.
There is also a similar provision in the Head Lease.
My specific question is:- Does 4.3 above still have legal force today as the original Transferor has now moved on and we think the adjoining Freeholds are held by their successors in Title? We feel we ought to be able to rely on this, particularly as we think there may be plans to use service charge funds to finance new projects rather than just maintenance, repair, replacement, renewal etc. The leaseholders wishing to make the changes say that ‘there are ways round it’ via the local Planning Dept, but this does not seem to be the point if directors are breaching their own covenants.
ANSWER
This sounds like a complicated situation which could become potentially problematic if not resolved in the right way. There are three parties involved, each with their own rights and obligations – the RTMC, the individual leaseholders and the LC.
We start first with the RTMC, where the question is: “does the RTMC have legal authority to do these works?”. The answer can be found in two places - the leases and the RTMC’s articles of association.
If the RTMC is proposing to make alterations, they may not be able to do so if the lease does not permit it. Unless the RTMC has acquired the right to undertake alterations as a management function in the leases (which usually relate to repairs and maintenance – although some leases do permit the landlord to improve) they may not lawfully be able to alter the common parts (unless the lease permits them to). The RTMC does not become the owner of the common parts on acquiring the right to manage – it simply steps into the landlord’s shoes to perform the management functions set out in the leases.
The reader would then be advised to consider the articles of association, and in particular, the decision-making provisions. The reader would want to ensure that the RTMC has followed the correct procedures and complied with company laws. If the RTMC is making unlawful decisions, then those decisions may be open to legal challenge. The RTMC also only has authority under the articles to perform RTM functions. If the works are not therefore permitted under the terms of the leases, the works are also likely to be in breach of the articles.
The RTMC may therefore be stepping out of its jurisdiction either on the lease terms and/or company requirements. If this is the case, action ought to be taken by any willing members of the RTMC to ensure that the RTMC is complying with its legal obligations. This will turn on the facts of the case and will depend on the nature and extent of the proposed changes and alterations referred to by our reader.
We look next at the individual leaseholders’ rights. Notwithstanding that the leaseholders have both an LC and an RTMC, that does not preclude individual leaseholders from protecting their interests using general landlord and tenant rights. These include, for example, challenging the reasonableness or payability of service charges incurred by the RTMC or considering some form of injunctive application to prevent unlawful interference with the common ways.
When looking at the position of the LC, in general terms restrictive covenants bind successors in title to the freehold. However there are exceptions depending on the exact terms of the original transfer. This might mean that the reader has no personal right to enforce the covenant directly. There is also an ability for persons bound by a restrictive covenant to have that covenant released by a Tribunal in some circumstances, but it will depend on the facts of the case.
Addressing the last point about finding “ways around it”, planning laws, landlord & tenant laws and company laws play different roles in this situation. It is not the case that if the RTMC satisfies one part, they can forego the other parts. They must ensure full compliance with all of these laws in order for the works to go ahead lawfully. They are otherwise open to challenge.
In answer to the reader’s question therefore, it sounds like the reader may well have grounds to explore the RTMC’s proposals further in all three capacities. It will depend on what works the RTMC is proposing to do and how it intends to fund those works.
The Team at Commonhold and Leasehold Experts Limited
