Introduction
This commentary considers some practical problems that can arise following the exercise of the right to manage (“the RTM”) because the landlord continues to own elements of the building.
The RTM provisions of the Commonhold & Leasehold Reform Act 2002 (“the 2002 Act”) gives leaseholders of flats a statutory, no-fault, right to take-over the management of their building without the expense of buying out the freehold and any superior leasehold interests. Unlike a collective enfranchisement, where the participating leaseholders’ nominee acquires the landlord’s reversionary interests, the RTM is based on the transfer, to a leaseholder owned company, of management obligations rather than ownership.
Leaseholders wishing to exercise the RTM must establish a special purpose management company (“the RTM Co.”). When the RTM is acquired, the landlord’s management functions under the leases are assumed by the RTM Co. and cease to be exercisable by the landlord: see the 2002 Act, s. 96, which defines “management functions” as “functions with respect to services, repairs, maintenance, improvements, insurance and management”.
Accordingly, the RTM leaves the RTM Co. responsible for repairing and maintaining the building, as well as providing such services as the leases oblige the landlord to provide i.e. a transfer of the rights and duties contained in the leases, but without modifying them, nor creating any additional rights and duties: see Wilson v Lesley Place RTM Company [2010] UKUT 342. Essentially, the RTM can only be as comprehensive, or as basic, as the scheme of the leases.
Practical Issues
So far, so straight-forward. We now turn to some practical considerations.
Firstly, the fact of a RTM does not displace the landlord’s ownership of its retained property (typically the internal common parts, the roof, structure and exterior of the building), nor does the 2002 Act give the RTM Co. any express statutory rights of control of, or even access over, these areas. The RTM Co. must fall back on having sufficient rights arising by necessary implication e.g. where the RTM Co has an obligation to repair the roof, clearly, it must have implied correlative rights of access etc. However, identifying and asserting implied rights is often an uncertain business and a recipe for litigation.
The tensions and uncertainties are well illustrated in the recent County Court decision of Francia Properties Ltd v Aristou [2017] L & T.R. 5 in which the RTM Co. had management functions, including repairing obligations over the roof. Where did that leave the landlord’s prime facie right to develop its retained property, i.e. the roof, the roof- space and the air-space above, to create an additional flat? Broadly, the Court concluded that the landlord’s rights to develop its retained property are not trumped by the advent of a RTM. Therefore, unlike a collective enfranchisement, an RTM is unlikely to prevent further viable development of the property This can come as an unwelcome surprise to leaseholders who often assume the contrary.
Secondly, consider what happens when the leases oblige the landlord to provide a resident porter. The porter’s flat is the landlord’s retained property and likely to be an interest of considerable “bricks and mortar” value, even more so if it were shorn of the obligation to house a porter. Landlords understandably want to monetarise such interests. Leases sometimes allow the landlord to do so via a notional rent service charge recoupment mechanism of varying degrees of sophistication. They work by allowing the landlord to add to the service charge the rental value of the porter’s flat and thereby derive a profit rent on the porter’s flat. Absent such a provision the landlord may not be able to profit from its ownership of the porter’s flat and will want to find another use for it if possible: see of Earl Cadogan v 27/29 Sloane Garden [2006] 2 EGLR & Gilje v Charlgrove Securities [2001] EWCA Civ 1777 [2002] L & TR.
The advent of an RTM means that the RTM Co., not the landlord, will receive the service charge. That will be the end of any landlord’s (notional) profit rent on the porter’s flat that the leases allow. More starkly, it will be the RTM Co., not the landlord, who will be employing the porter and obligated to provide accommodation, but it is still the landlord’s flat. Subject to restrictive user covenants biting on the landlord, the landlord may decide to sell the porter’s flat, or demand that the RTM Co. pays a very full rent on it, which the RTM Co. may well not be able to fund out of the service charge. If the landlord takes such a stance, the leaseholders could lose their resident porter, or else find themselves relying on unpredictable general property law arguments such as seeking to persuade the court that the landlord taking back the porter’s flat is a derogation from their grant.
Conclusion
Generally, the RTM is a cheaper, though second best alternative to collective enfranchisement: an example of not getting what you have not paid for. With limited exceptions, a building qualifying for a RTM will also qualify for a collective enfranchisement. If it can be afforded, leaseholders are likely to be better served by enfranchising and buying the landlord out than relying on a RTM.
Stan Gallagher & Will Beetson, Barristers of Tanfield Chambers
