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There is No (Gala) Unity!

Landmark RTM Decision on the Extent to Which RTM Applies to External Communal Areas

The right to manage was always going to be a difficult concept to translate into legislation. There are few, if any, statutory rights quite like it. Unlike its predecessors (a claim to acquire the freehold of a house under the Leasehold Reform Act 1967 or a collective enfranchisement claim under the Leasehold Reform, Housing and Urban Development Act 1993), it does not result in a compulsory transfer of property. Rather, it transfers a category of contractual powers, rights and obligations (“management functions”) that exist within a species of contract (long leases of flats) to a bespoke company which exercises a claim on behalf of the leaseholders of various flats in buildings which satisfy certain qualifying conditions.

No wonder then that the legislation gave rise to so many difficulties, documented in detail by the Law Commission in its recent report, Leasehold Home Ownership: Exercising the Right to Manage, which was published on 20th July 2020. They include a failure to properly specify the process for claiming and acquiring the right to manage more than one building, a somewhat convoluted claims process that has resulted in numerous technical challenges by motivated landlords (despite purportedly being a “no fault” right) and a failure to specify what happens to existing contracts to supply services in relation to the building.

One of the most troublesome issues has proven to be the extent to which the RTM company acquires the right to manage communal areas falling outside the building or part of a building to which the claim extends.

Section 72(1) of the Commonhold and Leasehold Reform Act 2002 provides that the premises in respect of which the right to manage is to be exercised consists of a “self-contained building or part of a building with or without appurtenant property” (italics added). “Appurtenant property” is defined at s.112(1) of the 2002 Act: “any garage, outhouse, garden, yard or appurtenances belonging to, or usually enjoyed with, the building or part or flat”. The phrase “appurtenances” is not defined, however. The result was a question that has plagued residential leasehold practitioners since: does an “appurtenance” which is “usually enjoyed with” a building or flat include communal areas that are shared with other flats and buildings?

The first reported decision on this topic was the now infamous Gala Unity v Ariadne Road RTM Company Limited [2011] UKUT 145 (LC). Permission was granted to appeal the Upper Tribunal (Lands Chamber) decision to the Court of Appeal, who agreed with the Upper Tribunal, dismissing the appeal, in Gala Unity v Ariadne Road RTM Company Limited [2012] EWCA Civ 1272.

Gala Unity involved a claim to acquire the right to manage two blocks (as an aside, we now also know that this is wrong – there should have been two RTM companies and two claims; Triplerose v Ninety Broomfield Road RTM Co Ltd [2015] EWCA Civ 282 – however, this point was not argued in Gala Unity, which both benefitted from shared communal areas, including a courtyard, estate road, gardens and free-standing dustbin store. The landlord argued that the claim would only extend to the buildings and any demised property outside the buildings. It would not extend to communal land, over which rights are granted. The RTM company argued the reverse. The Upper Tribunal and the Court of Appeal both agreed with the RTM company: whenever the right to manage had been validly exercised, the RTM company would acquire not only the right to manage the building or part of a building containing the flats, and any property outside the building that is demised to the flat owners, but also communal land over which leaseholders in the building (or part) enjoy rights, including communal land that is shared with other buildings.

This gave rise to a rather significant practical problem: in complex managed estates with multiple blocks and possibly also houses, where the right to manage was only acquired over one block (or some of the blocks), a right to manage claim would result in two or more parties being responsible for the management of the same parcel of land. In such cases, invariably, no party would have the right to recover 100% of their expenses. The Court of Appeal noted, curtly, that:

“The prospect of dual responsibility for the management of some of the appurtenant property in this and other similar cases is not a happy one. As Mr. McGurk submitted, there is the potential for duplication of management effort and for conflict between the "old" management company and the new RTM company in respect of such appurtenant property, but I am not persuaded that these consequences are so grave, or that the end result is so manifestly absurd, that we would be justified in adding a gloss to words – appurtenant property – which are already defined in the Act. It is always open to the parties, if they wish to avoid duplication and/or conflict, to reach an agreement which would make economic sense for all parties (see paragraph 18 of the President's decision); if they are unable to do so, paragraph 17 of the President's decision suggests a means of resolving disputes arising from dual responsibility for maintenance.

Or, to put it more crudely: “we know the outcome will present difficulties, but the parties are just going to have to sort it out between themselves”. And that is exactly what has happened over the decade that followed; at least, where the parties were amenable to a negotiated deal. It is unclear how many agreements were entered into between landlords, RMCs and RTM companies in respect of the management of shared estate parts, but the writer has been involved in quite a few, in addition to a number of cases where no agreement was reached.

Gala Unity has always had its critics, and 2019 saw the first serious attempt to overturn it. FirstPort v Settlers Court RTM Co Ltd [2019] UKUT 243 (LC) concerned a claim to acquire the right to manage a block of 76 flats (Settlers Court), located in an estate comprising ten blocks of varying sizes and a number of houses, together with extensive communal areas, which include accessways, gardens and grounds, and a river wall. Relying on Gala Unity, the RTM company contended that it had acquired the right to manage all of those estate parts. FirstPort (the management company, named in the leases of flats in Settlers Court) disagreed and sought to argue that Gala Unity had been wrongly decided. Unfortunately for FirstPort, the Upper Tribunal is bound by the Court of Appeal unless the latter very obviously erred in law. Consequently, and perhaps unsurprisingly, the Upper Tribunal found in favour of the RTM company. However, permission to appeal was granted and permission to “leapfrog” the Court of Appeal, to the Supreme Court, was also granted.

In a unanimous decision, the Supreme Court found in favour of FirstPort. The RTM company does not acquire the right to manage shared communal areas falling outside the block. It only acquires the right to manage property owned by or exclusively benefitting the occupants of the block. A contrary interpretation creates all sorts of practical problems and legislation should be construed so as to avoid absurd outcomes.

There will be a lot to unpick following this decision. There are likely to be a number of fact specific disputes about the extent to which property exclusively benefits a block; and who gets to manage what parts of the estate. However, the most immediate concern will be the fallout in those cases where RTM companies have been managing shared communal areas (in some cases for many years), and those cases where agreements have been entered into between RTM companies and landlords and/or RMCs, on the (perfectly reasonable, following Gala Unity) assumption that RTM companies acquired the right to manage shared communal areas. To avoid protracted litigation, the parties in those cases would be well advised to enter early discussions with a view to agreeing variations to pre-existing agreements, or possibly entering into new agreements (if no written agreements existed previously).

If you need any assistance with a Right to Manage claim, contact our specialist  Residential Leasehold Team.