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What does the decision of the Supreme Court in FirstPort Property Services Limited v Settlers Court RTM Company Limited and others mean for leaseholders?

View profile for Bukola Obadun-Craigs
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Background 

Unlike those living in freehold houses, flat owners need to consider the management of the building they live in and the surrounding communal areas.

Historically, this management was solely the responsibility of the landlord, or in some cases, a management company appointed by the landlord.

In return for agreeing to manage, repair, and maintain the building, the landlord or management company receive a regular payment from the tenants as a service charge.

The Commonhold and Leasehold Reform Act 2002 extended the rights first granted under the Landlord and Tenant Act 1987 and, amongst other things, gave long leasehold tenants the right to manage the building in which they reside, through becoming members of their own management company, known as an ‘RTM company’.

Since 2002, provided a sufficient number of them agree, leaseholders can decide to form an RTM company, and the obligation to manage their building will then automatically pass from the landlord to the company under s.96(2) of the Act.

Gala Unity Ltd v Ariadne Road RTM Co Ltd

A previous Court of Appeal decision in Gala Unity Ltd v Ariadne Road RTM Co Ltd, directly led to the stalemate situation found in this case. Gala Unity held that the rights of management which leaseholders acquire through an RTM company encompass not just management of their building but also of the communal spaces and facilities, even if another entity, such as a landlord or freeholder, has those rights.

FirstPort Property Services Limited v Settlers Court RTM Company Limited and others

This system works well in single blocks of flats, but becomes less efficient where there is a larger estate containing communal spaces and facilities for multiple separate buildings. In this situation, whilst there is no dispute that a particular RTM company has the right to manage the building where its members reside, there is often confusion as to who holds the rights of management of the estate’s communal spaces and facilities. This can lead to both an RTM company and a landlord claiming that they have the right to manage these areas. With their decision in FirstPort Property Services Limited v Settlers Court RTM Company Limited and others, the Supreme Court has attempted to provide an answer to this.

The Appellants in this case, FirstPort who were the freeholder’s managing agents, argued the results of Gala Unity were not workable. They said a better scheme could be arrived at by taking steps such as limiting the definition of ‘appurtenant property’, or focusing on the requirement in s.72 of the 2002 Act that premises must be self-contained.

The Respondents, the RTM company, reasoned that as one of the core aims of the 2002 Act was to give rights to leaseholders, its wording should be widely interpreted in order to achieve those aims. They said landlords and leaseholders could resolve any stand-off with a sensible agreement between them under s.97 of the 2002 Act. They argued that as each side had statutory rights under the 1987 and 2002 Acts, their respective negotiating positions were sufficiently strong that a sensible agreement could be reached in the vast majority of cases.

Lord Briggs, with whom the other Justices unanimously agreed, ultimately decided to allow the appeal in favour of the landlord and their managing agents.

Decision

The most obvious and immediate outcome of this decision is the apparent reduction of the rights of long leasehold tenants in favour of landlords. Long leasehold tenants still have the right to form an RTM company and manage their building, as well any ‘appurtenant’ property, redefined in this case as “nearby physical property over which the occupants of the relevant building (or part) have exclusive rights”. Communal areas shares with other blocks, however, will now be managed by freeholders or landlords.

Some leaseholders might feel the landlord does not keep communal areas at an acceptable standard or they may be unhappy with the cost. Prior to this case, they could set up an RTM company and take over the maintenance, or use the threat of doing so to negotiate a better deal with the landlord. After the Supreme Court’s decision, their ability to do this is lessened.   

What this decision certainly does provide is certainty. Previously, under the precedent set in Gala Unity, the scope for disagreements between landlords and RTM companies was very large, as both held seemingly equal rights to manage the communal spaces and facilities. This is no longer the case.

Therefore, whilst the rights of management enjoyed by leaseholders may have been theoretically diminished, the certainty provided by this decision will be greatly appreciated by most in this sector.

If you have any questions, please contact Bukola Obadun-Craigs, Daniel Skinner, or Chris Wilkes.

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