Solutions on the horizon

The right to manage was introduced in 2002 to give leaseholders the ability to take over the landlord’s management functions without having to buy the building. The procedure in the Commonhold and Leasehold Reform Act 2002 was intended to be a simple “non-fault” process, but it has proved to be anything but. Two recent cases illustrate the pitfalls of the current scheme. However, things may be set to change. On 21 July 2020, the Law Commission published its report, Leasehold home ownership: exercising the right to manage, which proposes wholesale reform with the aim of making the procedure simpler, quicker and more flexible.  The current acquisition process In simple terms, the existing procedure involves the following steps: 1 Set up an RTM company with prescribed form articles and memorandum. 2 The RTM company serves a prescribed form of “notice inviting participation” on all qualifying tenants not already members of the RTM company. 3 The RTM company serves a claim notice on any landlords or other relevant parties (such as managers that may be a party to a tripartite lease). On the date of service, qualifying tenants representing at least half of the flats in the premises must be members of the RTM company. A copy of the claim notice must also be served on all the qualifying tenants. 4 The landlord or any third party may serve a counter-notice either affirming the claim (“positive counter-notice”) or disputing it (“negative counter-notice”). If the RTM company wishes to contest a negative counter-notice and persevere with the claim, it must apply to the tribunal for a determination.  5 If no counter-notice is served, the RTM company acquires the RTM on the date specified as the proposed acquisition date in the claim notice. The prevalence of “prescribed” requirements provides reluctant landlords with ample scope for disputing the validity of notices or exploiting minor technical errors in the procedure. In large blocks, the sheer volume of documentation which needs to be served increases the chances of mistakes. This means that the current rules have been used (by some landlords) as an avenue for obfuscation and delay, as neatly illustrated by two recent decisions. The first case The writers of this article represented the RTM company in Eastern Pyramid Group Corporation SA v Spire House RTM Company Ltd [2020] UKUT 0199, which concerned whether a claim notice had been validly withdrawn. On 18 March 2019, the RTM company served a claim notice on the appellant seeking to exercise the right to manage. On 29 April, the appellant sent a negative counter-notice claiming (without knowing) that the claim notice did not comply with a number of provisions of the 2002 Act. Rather than argue the matter, the RTM company simply served a new notice correcting the errors in the first. A letter withdrawing the first notice and serving the new notice was sent to the appellant landlord on 17 June. On 24 July, the appellant served another negative counter-notice to the second claim notice, stating that it was invalid for the same reasons as the first. However, the appellant also claimed that the second notice was invalid because the first notice had not been validly withdrawn in accordance with section 81(3) of the Act, which provides that no notice may be served while another claim notice remains in force. The landlord’s first argument turned on a minor typographical error in the covering letter to the second notice. Although there seems little doubt that the landlord itself understood that the letter was intended to withdraw the first notice and replace it with the second, the landlord claimed that the “reasonable recipient” (see Mannai Investment Co Ltd v Eagle Star Assurance Co Ltd [1997] UKHL 19) of the notice would not have so understood. The Upper Tribunal (Lands Chamber) concluded that the reasonable recipient would have understood the letter. The landlord raised a further technical argument, which only arose at the first hearing and which again illustrates the scope for obfuscation provided by the 2002 Act. Section 86(2) provides that a notice of withdrawal must to be given to each person who is (a) a landlord (b) party to a lease otherwise than as landlord or tenant (c) a manager appointed under Part 2 of the Landlord and Tenant Act 1987 or (d) the qualifying tenant of a flat contained in the premises – potentially a large number of people, some of whom may be impossible to find. In Eastern Pyramid, all of the necessary recipients were served, but some one day later than the landlord. The appellant argued that this meant the second notice served on the landlord was invalid. The UT rejected this argument too, finding that it could not have been parliament’s intention to allow a landlord to rely on an alleged defect which it did not know about and which did not affect it. The landlord is now seeking permission to appeal this latter point to the Court of Appeal, creating further delay and cost. The second case Assethold Ltd v 63 Holmes Road (London) RTM Company Ltd [2020] UKUT 228 (LC); [2020] PLSCS 142 illustrates the practice of landlords relying on matters which they don’t know about and may well not affect them. After service of the claim form, the landlord requested extensive documentation from the RTM company to see whether it had complied with all the conditions in the Act. The RTM company argued it was under no obligation to provide this information and refused to do so.  As in Eastern Pyramid, without knowing whether the criteria in the Act had been met or not, the landlord served a negative counter-notice containing positive assertions that various conditions had not been fulfilled, including failure to serve valid notices inviting participation and the RTM company not having the required membership. Following determination of the RTM application in the RTM company’s favour, the freeholder appealed on the basis that the First-tier Tribunal’s directions should have required disclosure of the requested documents. While the UT accepted this argument, it noted that nowhere in the grounds of appeal or written submissions had the landlord identified any argument that it was prevented from making to the FTT that might have produced a different outcome.  Martin Rodger QC said: “There must inevitably be a strong suspicion that the appeal has been brought in the hope of delaying the acquisition of the right to manage, rather than with any expectation of defeating it altogether.”  Given that the RTM is a “right” which will eventually be acquired if the qualifying criteria are met, this “strong suspicion” is present in many of the cases where landlords take technical points whose main aim appears to be to cause maximum delay and expense with a view to frightening leaseholders off making a claim. The Law Commission’s proposals The Law Commission proposes simplifying the current procedure and removing some of the elephant traps. The requirement to serve notices inviting participation has proved to be particularly cumbersome and is proposed to be abolished (with the claim notice highlighting the ability to join the RTM company instead). This requirement was intended to benefit non-participating tenants, but is regularly exploited by landlords as a means of challenging the validity of claims.  It is also proposed that all notices should be capable of being served by e-mail and that claim notices are to be signed by or on behalf of an RTM company with an electronic signature if appropriate. The RTM companies would, under the new rules proposed, only be required to serve the freeholder, who will be responsible for passing notices on to relevant intermediate landlords.  Service on certain categories of address will also be deemed to have been effective. Importantly, rather than adopting blanket “prove it” style objections (as in Assethold and Eastern Pyramid), landlords (and other relevant parties) will be required to state and explain exactly what their objections are in their counter-notice and should generally not be permitted to raise new arguments at a later stage (as the landlord did in Eastern Pyramid). The validity of RTM notices may only be challenged if they fall short of prescribed requirements relevant to the underlying purposes of those notices. At present, the burden of the costs of an RTM claim falls on the leaseholders and creates an unequal playing field. In particular, in disputes, if the tribunal decides that the RTM company is not entitled to acquire the RTM, the RTM company is liable for the landlord’s reasonable costs. However, the landlord is not required to pay the RTM company’s costs if the landlord is unsuccessful. It is proposed that in future each party should bear its own costs in any tribunal proceedings, subject to the usual rules on unreasonable conduct.  All of these measures are welcome and are likely to make claiming the RTM a much more attractive option with more predictable outcomes and reduced cost, time and effort. Cases like Eastern Pyramid and Assethold would become of only historic interest. All that is necessary now is for parliament to find time to discuss the proposals. Nicola Muir is a barrister at Tanfield Chambers and Anna Phillips is a legal director at Foot Anstey Image © JacLou DL/Pixabay