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Article by Esther Bukoye: The Supreme Court on the Right to Manage: FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company Ltd 

Introduction

This article will briefly outline the statutory right known as the ‘Right to Manage’ (RTM), and draw specific attention to the much-anticipated Supreme Court landmark ruling of FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company Ltd and others (Respondents) [2022] UKSC 1 (Firstport) which addresses the scope of RTM rights. The case itself tackles the impact of the controversial Court of Appeal Gala Unity Ltd v Ariadne Road RTM Co Ltd[2012] EWCA Civ 1372 (Gala Unity) ruling, and provides an answer as to whether the management rights of an RTM company, can extend to include managing the wider estate.

What is the ‘Right to Manage’ (RTM)?

In 2002, Parliament passed the Commonhold and Leasehold Reform Act 2002 which gave flat leaseholders who met a specific criterion, the right to manage premises if they consist of a self-contained building or self-contained part of a building. The leaseholders exercise this right by grouping together and forming what is known as a Right to Manage company. When formed, the RTM company becomes empowered and responsible for the services, repairs, maintenance, improvements, insurance and management of their building, unless an agreement states otherwise.

When an RTM has been successfully created, they are not only responsible for the leaseholders building, but also property exclusively used by the leaseholders of that building.

Significantly, the creation of RTMs allowed leaseholders to assume a right normally held by landlords. Statute does not require for the landlord to be at fault. So, it does not matter whether the landlord is a ‘good’ or ‘bad’ landlord. Having said that, leaseholders often do this in circumstances where they are not satisfied with the management of the property, and/or the service charges for managing said property are too expensive. 

Practical Difficulties Created by RTMs in Estates:

The operation of RTM’s has led to practical difficulties, especially in estates with several blocks of flats on it. In such situations, there are often parts of the estate which are not exclusive to any specific block of flats, and are in fact for the use of anyone on the estate, such as gardens, car parks, garages and so on.

For leaseholders who are managed by an RTM company, the case of Gala Unity, held that the RTM company is not only responsible for the management of their specific block of flats, but they automatically become responsible for the wider estate.

However, for the blocks of flats which are not under the management of an RTM company, the existing landlord or existing management company still have management obligations to service the wider estate on behalf of those leaseholders.

Under Gala Unity, this meant that RTM companies and landlords found themselves in a predicament where they provided the same services, on the same estate, albeit on behalf of different people (in the absence of a binding agreement). So, if an RTM company and landlord did not communicate with each other (which is not unusual, particularly if the landlord opposed the creation of an RTM), then it resulted in practical difficulties such as, duplication of work. Namely, double cleaning, double spending, double counting. It also created conflict where both parties disagreed with how another party was managing the wider estate, or confusion over who was responsible for managing it, or disagreement as to where they could recoup the costs of managing the wider estate.

FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company Ltd and others (Respondents) [2022] UKSC 1

The practical difficulties of an RTM on an estate were at the forefront of Firstport. Specifically, whether the existing management company still had a right to manage the wider estate? And if so, were they allowed to demand service charges from RTM leaseholders?

Background

In November 2014, an RTM company known as Settlers Court RTM Company Ltd (the respondents) acquired the rights to manage a block of flats called Settlers Court which was situated on the Virginia Quay Estate, London E14.

The appellants, are a management company called Firstport Property Services Limited (Firstport) who managed a block of flats on the same estate and provided the wider estate services as well.

Despite the establishment of an RTM, Firstport continued to provide wider estate services as they were obliged to do so for the other blocks on the estate. By continuing to provide those services, leaseholders managed by the RTM company also reaped the benefit of them doing so. Firstport demanded that RTM leaseholders pay service charges to Firstport for the benefit of their estate services.

The estate services included: the maintenance of the communal areas such as the garden (including the river wall), secure parking control systems, CCTV camera installations, and the concierge and management facilities.

Several leaseholders at Settlers Court disputed the costs of those services, and refused to pay (which led to substantial arrears), on the basis that the RTM company were responsible for the management of the wider estate, not the appellant. Due to this change in management, they argued that they were not required to pay the appellants for the service provided, albeit receiving the benefit of those services.

First Instance: The First-tier Tribunal

In 2018, the First Tier Tribunal ruled that it was bound by the Court of Appeal case of Gala Unity, which concluded that RTM companies also received the right to manage the wider estate.

As such, the managing functions no longer sat with Firstport. Therefore, they could not recoup service charges from leaseholders who were managed by an RTM company.

Upper Tribunal

The appellants conceded that they could not distinguish their case from that of Gala Unity. So, they attempted to argue that Gala Unity was per incuriam (decided with a lack of regard to the law or the facts).

Although the Upper Tribunal accepted that Gala Unity created practical difficulties for those involved in estate management, it nonetheless ruled that the ruling in Gala Unity was not demonstrably wrong.

Significantly, although the Upper Tribunal dismissed the appeal, they did issue a ‘leapfrog’ certificate allowing the appellants to appeal directly to the Supreme Court. This was the first ‘leapfrog’ certificate issued in the history of the Upper Tribunal.

Supreme Court Judgment

On 12th January 2022, the Supreme Court handed down their judgment in FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company Ltd and others (Respondents) [2022] UKSC 1.

The Supreme Court unanimously ruled in favour of the appellants and allowed the appeal. It was held that RTM companies do not attain management rights over the wider estate, and thereby overturned Gala Unity.

The Supreme Court looked closely at the purpose of the Act, what was intended by the drafters, and scrutinised various definitions. It held that the RTM scheme was developed so that the RTM could have exclusive rights to manage the premises (the block of flats). Managing shared estate facilities did not fall into the “premises” in which an RTM could be exercised. If management rights were extended to include estate services, practically, this would force (and has forced) the RTM company to share managing estate services with another manager, and doing so would go against the spirit of the Act. Gala Unity’s ruling created “insuperable problems if those functions are construed to include management of shared estate facilities” (para [36]). In effect, the court reasoned that construing the Act in such a way, would be taking away rights from those who lived on other blocks on the same estate, who will have the right to insist under their leases, that the only the landlord or existing management company are to manage the wider estate facilities. As stated by the Supreme Court, taking away this right, would be a “very strong thing” to do (para [36]).

Moreover, the court held that those living on the estate who are not subject to an RTM, deserve to have the estate services managed exclusively by the manager stated in their leases. Particularly as those from the other blocks have “no privity of contract or estate with the lessees who own the RTM company, or with the RTM company itself, which would enable them to exercise any influence on how that management is conducted, or to hold the RTM company to account” (para [36]).

The court was very aware of the “absurd and unworkable” (para [54]) practical difficulties created by Gala Unity which was brought to the court’s attention not only through the parties, but via the intervener (ARMA) who’s membership included both managing agents like the appellants, as well as RTM companies, like the respondent.

The Supreme Court concluded that “these absurdities are avoided if the functions of the RTM company do not extend to the estate facilities” (para [61]). They thereby ruled that the management functions of the wider estate do not pass on to the RTM company, as a result, Firstport remain the managers and are able to recoup the full costs spent on managing the wider estate.

Impact

The Supreme Court overruled what had been an uncomfortable status quo for over 9 years. This outcome will no doubt be welcomed by many parties, including those involved in estate management, but also the Law Commission who proposed overruling Gala Unity in their 2019 consultation paper titled: Leasehold home ownership: exercising the right to manage, and their 2020 report.

The ruling has provided refreshing clarity into the Right to Manage scheme. Importantly, there is clarity as to what costs can be recouped and by whom. To state an obvious fact – managing estates are expensive. If uncertainty in the law was allowed to remain, then a managing company such as Firstport, but one with much – smaller – pockets would not have been able to absorb a 15% shortfall (£379,702.78) for several years due to Settlers Court declining to pay estate charges. Landlords and estate management companies now have certainty that, when they provide wider estate services, they can recoup the costs from those on the estate including RTM leaseholders, as opposed to potentially only being able to recoup 85% of the costs (as in the case of Firstport prior to the ruling).  Equally, RTM companies such as Settlers Court would not have to manage an expensive estate while only potentially receiving 15% of the costs from RTM leaseholders who they have a direct relationship with.

The court remained silent as to how landlords or management companies who are already in management agreements with RTMs, should proceed in light of the Supreme Court ruling. However, for those landlords or management companies who ignored the Gala Unity ruling by continuing to manage the wider estate without involvement from the RTM company, they are now on firmer legal ground, as their position has become legitimised.

Going forward, parties on both sides of the aisle will no longer feel pressure to make futile attempts to sew acrimonious relationships back together. Freeholders and landlords do not have to fear that management standards will drop due to a change in management, which in turn, could have opened the door to complaints, and if standards severely decreased, then risk reputational damage. They no longer have to fear that the wider estate, which is intended to cater to all who live on it, will be mismanaged by leaseholders who may have only intended to manage their own block, as opposed to a very big estate. In fact, it may in some estates, particularly smaller ones, spur on an increase of leaseholders registering for RTMs, as they now have certainty that they will be unencumbered from dealing with managing the wider estate.

However, there will be some leaseholders who will not welcome the ruling, and will view it as a rowing back of tenants’ rights. Particularly, if the attraction of forming an RTM is to reduce costs, but the bulk of those costs stem from expensive estate charges e.g., a river wall situated next to the O2, then the judgment may be viewed as removing the sting or blunting the effectiveness of RTMs. Nevertheless, the clarity provided in the judgment, and the resolution of practical difficulties overrides this and adds weight to support the ruling made. It is a great improvement from the status quo which allowed for leaseholders who, (as revealed at 1.44 of the Law Commission Report Summary (Law Com No 393 (Summary) ), may not be as well-equipped in information or in finances to take on the burden of managing what in some cases may be very large estates, and to do so to the same quality as the previous managers. They say, heavy is the head that wears the crown, well, heavy are the finances for those who manage an estate.

The ruling has no doubt buoyed landlord and estate management companies, as it asserts their right to manage the entirety of the wider estate, and receive payment for those services including from RTM leaseholders. The power struggle between landlords and tenants has been a long running saga, and although this ruling has allowed landlords to retain some power, it should be noted, that absolute power corrupts absolutely. Therefore, landlords should be wary of exuberant estate service costs, so as not to inadvertently instigate the formation of more RTMs by leaseholders in an attempt to regain power and reduce costs.

 

Esther Bukoye is a first six pupil at Park Square Barristers under the supervision of Matthew Harding