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In this post, Jen Knibbs an associate with CMS, previews the decision awaited in the case of FirstPort Property Services Ltd v Settlers Court RTM Company and others.

On 10 and 11 November 2021, the Supreme Court heard FirstPort Property Services Ltd’s (“FirstPort”) eagerly anticipated appeal from the ruling of the Upper Tribunal (Lands Chamber), in a case which concerns the extent of a right to manage company’s powers.

The Right to Manage (“RTM”) was introduced by the Commonhold and Leasehold Reform Act 2002 (the “Act”). The Act gives leaseholders the statutory right, if they meet certain qualifying criteria, to take over the landlord’s management functions under the lease of their building. The leaseholders do not need to demonstrate that there has been any mismanagement of their building, they simply have to follow the procedure as set out in Chapter 1 of the Act in order to acquire the management functions and resulting entitlement to fees.

The case raises an important question – does an RTM company only acquire the right to manage the building itself, or do those rights extend to the wider estate, or “appurtenant property”, where the relevant building forms part of a larger development.

Background

FirstPort is the named management company in the leases of certain flats at the Virginia Quay Estate (the “Estate”) in London. The Estate comprises many properties, including several freehold houses and nine other blocks of flats, as well as certain common property such as gardens and accessways. Settlers Court RTM Company Limited (the “RTM Company”) acquired the right to manage Settlers Court, one of the blocks forming part of the Estate.

After successfully acquiring their statutory right to manage Settlers Court, the RTM Company took over FirstPort’s responsibility for providing services at Settlers Court. FirstPort continued to provide services to the whole Estate, including Settlers Court, as per its responsibilities in terms of the lease, and continued to collect fees for the services rendered.

An issue then arose when a number of lessees refused to pay their portion of the fees charged by FirstPort notwithstanding the fact that they had had the benefit of the services. The lessees argued that they were no longer obliged to pay FirstPort, as the right to collect fees had passed to the RTM Company. Under s 97(2) of the Act, a landlord or management company cannot carry out the management functions that have been acquired by the RTM Company unless otherwise agreed.

First instance decision

The RTM Company applied to the First-Tier Tribunal for a determination as to whom the service fees relating to the management of the Estate appurtenant property were payable.

The Tribunal held that service charges were payable to the RTM Company and not to FirstPort, finding that the right to provide all management functions and services at Settlers Court, including its appurtenant property, passed to the RTM Company when the right to manage was acquired. Reliance was placed on the Court of Appeal decision in Gala Unity Ltd v Ariadne Road RTM Company Ltd [2012] EWCA Civ 1372 (“Gala Unity”), where it was found that the right to manage extended to “non-exclusive” parts of a wider estate, e.g. car parks, gardens etc.

“Appurtenant property”, defined at s 112 (1) of the Act, means property “in relation to a building or part of a building or a flat, means any garage, outhouse, garden, yard or appurtenances belonging to, or usually enjoyed with, the building or part or flat”, or, in other words, the property surrounding the building.

The Upper Tribunal

FirstPort appealed to the Upper Tribunal on the basis that Gala Unity had been wrongly decided. The Upper Tribunal found that whilst the outcome in Gala Unity created many difficulties in wider estate management, the decision was not made in error, nor was the Court’s reasoning leading to the final decision demonstrably wrong.

The Upper Tribunal did however issue a “leapfrog” certificate which enabled FirstPort to apply for permission to appeal directly to the Supreme Court and bypass the Court of Appeal.

Significance

There are many practical difficulties that the decision in Gala Unity has created for those involved in estate management. If landlords and RTM companies cannot come to an agreement as to how the estate should be managed, both will continue to have potentially overlapping obligations leading to the risk of duplication, or indeed a lack of management, resulting in issues for landlords, tenants, and RTM companies alike.

Judge Siobhan McGrath sitting in the Upper Tribunal acknowledged that;

“…the difficulties described result from the legislation itself. The challenges of creating a regime which gives lessees the right to manage the block of flats in which they live but which also seeks to give them rights of management in respect of the estate where the block of flats is located should not be underestimated.”

The Supreme Court will have to consider the intended purpose of the RTM regime and whether Gala Unity was correctly decided. The outcome will have significant consequences for all those who have an interest in multi-block estates.

It is worth noting that the Law Commission has already considered the difficulties with the RTM scheme and has set out several proposals for reform in their July 2020 report. One proposal is to reverse the decision in Gala Unity and to ensure that an RTM company does not automatically acquire management functions relating to non-exclusive estate property. It will be interesting to see the extent to which the Supreme Court is sympathetic to the Law Commission’s proposals.