COMMENT Chuan-Hui and others v K Group Holdings Inc and others [2021] EWCA Civ 403; [2021] PLSCS 58 (known as Aldford House) is the Court of Appeal’s latest decision in which it deciphers parliament’s intention in the Landlord and Tenant Act 1987.
The 1987 Act has been described as “ill-drafted, complicated and confused” (by Sir Nicolas Browne-Wilkinson VC in Denetower Ltd v Toop [1991] 1 EGLR 84), a criticism which was described as “understated” by Sir Thomas Bingham MR in Belvedere Court Management Ltd v Frogmore Developments Ltd [1996] 1 EGLR 59, who went on to observe that “…one could wish that the Act provided as many answers as it raised problems”. Although those criticisms were focused on Part I, which deals with a tenant’s right of first refusal to acquire the landlord’s interest, they can be said to apply with equal force to Part II, which was the subject matter of this appeal.
Management orders
Part II of the 1987 Act gives tenants the right to apply to the First-tier Tribunal (or the Leasehold Valuation Tribunal in Wales) for an order that a tribunal-appointed manager should run their building in place of their landlord. The FTT’s powers under Part II are quite wide-ranging and even allow it to give the manager the right to do something that the landlord is not entitled to do under the lease. For example, the manager might be empowered to carry out improvements. Managers are appointed for a fixed period under a management order.
Aldford House was about a block of flats on Park Lane, W1, where a group of tenants owed substantial arrears of service charges, which, at one stage, exceeded £1m. In the FTT all manner of issues were in dispute, but by the time it reached the Upper Tribunal and then the Court of Appeal, the focus was on whether arrears that had accumulated during the appointment of a manager could be recovered by the maintenance trustee (a third party to the leases which carried out the management and repair obligations). After his appointment had expired, the manager assigned by deed the right to sue for the arrears to the trustee, which duly sued for them in the County Court (along with the other arrears that had accumulated). The trustee and the landlord (with whom the tenants had also covenanted to pay the service charges) argued, in the absence of an order from the tribunal directing what should happen to the arrears, the assignment by deed was effective at law. In the FTT, the issue was never resolved because it was found the tenants had not put the question in issue by pleading that the sums were not owed to the trustee.
However, on appeal, the appellant tenants argued that only the FTT could direct what happens to arrears accrued during the manager’s appointment, and, perhaps most controversially, that the payments under a management order were not “service charges” within the meaning of section 18 of the Landlord and Tenant Act 1985 but were subject to a wholly separate regime.
Dismissing the appeal, the Court of Appeal decided that:
(i) Payments made to a manager under a management order are “service charges” within the meaning of section 18 of the Landlord and Tenant Act 1985.
(ii) The right of a manager to recover payments from the tenants is derived from the tribunal’s management order but is superimposed on the existing contractual framework of the lease. The contractual obligations of the parties remain in place, subject to the terms of the management order, and are not disapplied or modified.
(iii) Where the terms of the management order and the lease conflict, it is the management order that prevails.
(iv) At the conclusion of the term of the management order, the arrears owed by tenants for service charges during the manager’s appointment are automatically revested in the landlord (or whoever is entitled to recover the service charge).
(v) This can be distinguished from the situation of a surplus at the end of the manager’s appointment, where the manager should prepare an account and, if necessary, seek direction from the tribunal (Kol v Bowring [2015] UKUT 530 (LC) applied).
(vi) Accordingly, the landlord (within the meaning of section 30 of the 1985 Act) was entitled to sue on the arrears that accrued during the manager’s appointment without a further direction of the tribunal or an assignment of the debt.
The implications
This is a welcome decision because it puts beyond doubt the notion that the management order completely displaced the leases of the flats. In practice, this led to the drafting of ever more complicated management orders that effectively reinvented the wheel. There will be times when the lease terms are inadequate and the FTT must insert a power into the management order that allows the manager to do something the landlord cannot. However, those terms should be in addition to or exceptions to the normal lease terms.
It is a shame that the Court of Appeal did not go further and put beyond doubt that surplus balances should automatically be paid to the landlord by the manager in the absence of a different order by the FTT. The same logic ought to apply to surpluses as well as arrears, with the manager providing an account of both at the end of his or her appointment.
Notwithstanding this, the court’s decision simplifies what was becoming an unnecessarily complex procedure. It would be a welcome development if the president of the FTT (Property Chamber), who heard the appeal in the Upper Tribunal, issued a practice direction with a pro forma management order which uses the lease as the framework and requires, as a bare minimum, provisions for an account at the beginning and the end of the management period. This will avoid the all-too-familiar last-minute drafting of management orders where mistakes are made, and important provisions are omitted.
Michael Walsh is a barrister at Tanfield Chambers. He acted for the respondents in Aldford House
