Danescroft RTM Co Ltd v Inspired Holdings Ltd and another

  Right to manage – Commonhold and Leasehold Reform Act 2002 – RTM company – RTM company applying to acquire right to manage residential estate on behalf of tenants of flats – Whether precluded from qualifying as RTM company on ground that prior RTM company already in existence in relation to the premises – Section 73(4) of 2002 Act – Whether section 73(4) applying where prior RTM company in question formed by landlord     The applicant was an RTM company formed in August 2012 for the purpose of acquiring the right to manage a residential estate on behalf of the tenants of flats therein pursuant to Chapter 1 of Part 2 of the Commonhold and Leasehold Reform Act 2002. The estate comprised 65 flats in five blocks. The first respondent owned the freehold of the entire estate, save for some garages that were owned by the second respondent.     In October 2012, the applicant served five separate notices under section 80 of the Act, one for each of the five blocks, claiming to acquire the right to manage. By its counternotice, the first respondent asserted that, by virtue of section 73(4) of the Act, the applicant could not qualify as an RTM company within section 73(2) since another RTM company already existed in relation to the relevant premises. The other company in question was connected to the first respondent and had been formed by it in April 2013 with the object, under its articles of association, of acquiring the right to manage the estate.     The applicant applied for a determination that it was entitled to acquire the right to manage the estate. It contended that section 73(4) should be construed purposively to apply only where there was a genuine prior RTM company formed to enable tenants to acquire the right to manage; it claimed that the company formed by the first respondent was merely a device to defeat the tenants’ entitlement and that the relevant parts of its articles of association were a sham. The first respondent argued that section 73(4) should be construed literally and that it did not prevent a landlord from forming a RTM company, which it might legitimately wish to do in order to relieve itself of the burden of managing a property.     Held: The application was allowed. (1) The purpose of the legislation is to enable tenants to become “enfranchised” by acquiring the right to manage. The language of Chapter 1 of Part 2 to the 2002 Act is solely concerned with the mechanics by which tenants can acquire that right and makes no mention of the landlord also being able to acquire the right to manage. The landlord will invariably have that right already, by virtue of the relevant lease; an application to acquire the right to manage is frequently based on the dissatisfaction of tenants with the landlord’s management of the property. Where an RTM company is already in existence in relation to premises, section 73(4) acts as an absolute bar to any other RTM being recognised as such under section 73(2) of the 2002 Act. If it were construed literally, section 73(4) would enable an offending landlord to form a RTM company before the tenants did so, in order to defeat the tenants’ claim to acquire the right to manage. That would lead to an absurd result and could not have been the purpose of the legislation. Accordingly, section 73(4) should be construed purposively to give effect to the legislation and its purpose of enabling tenants to acquiring the right to manage. It could not have been intended that a landlord should be able to take advantage of section 73(4) in order to defeat any claim by tenants to acquire that right. The company formed by the first respondent had been intended for the sole purpose of defeating the applicant’s claim to acquire the right to manage. In those circumstances, the first respondent could not rely on section 73(4) to defeat the application. The applicant was entitled to acquire the right to manage.     Per curiam : It is arguable that no RTM company formed by a landlord can ever be an RTM company within the meaning of section 73(2) of the 2002 Act. The situation envisaged by section 73(4) is the prevention of multiple and competing claims by rival RTM companies formed by tenants in properties that are subject to extensive leasehold interests.     This was the hearing of an application by the applicant, Danescroft RTM Co Ltd, under section 84(3) of the Commonhold and Leasehold Reform Act 2002, for a determination that it was entitled to acquire the right to manage certain property of which the respondents, Inspired Holdings Ltd and Eagil Trust Co Ltd, were the landlords.     Mr Nathaniel Duckworth (instructed by Dean Wilson LLP, of Brighton) appeared for the applicant; Simon Serota, of Wallace LLP, represented the respondents.   Judgment:   Introduction   1. This is an application made by the Applicant pursuant to section 84(3) of the Commonhold and Leasehold Reform Act 2002 (as amended) (“the Act”) for a determination that it was on the relevant date entitled to acquire the right to manage the property known as Blocks 1–8, 9–24, 24–40, 41–56 and 57–64 Danescroft, Brent Street, London, NW4 2QH (“Danescroft”).   2. The Tribunal was told that the residential estate known as Danescroft is comprised of 65 residential flats, which are contained in five separate blocks. With the exception of one of the blocks of garages on the estate, which is owned by the Second Respondent, the freehold interest is held by the First Respondent.   3. On or about 31 October 2012, the Applicant company served five separate notices of claim under section 80 of the Act claiming to acquire the right to manage in -respect of the five blocks on the estate.   4. On or about 31 October 2012, the First Respondent served a counter notice in respect of each claim notice denying that the Applicant was entitled to acquire the right to manage by reasons of section 73(4) of the Act, which provides:     “…a company is not a RTM company in relation to premises if another company is already a RTM company in relation to the premises or to any premises containing or contained in the premises.”   5. It was common ground that the Applicant company was incorporated on 31 August 2012. On 13 April 2012, a company known as Brent Street RTM Company Ltd (“Brent Street”) was incorporated having as its object the acquisition of the right to manage Danescroft. 6. By an application dated 14 November 2012, the Applicant applied for a determination of the right to manage the property. On 20 November 2012 the Tribunal issued Directions in this matter.   Hearing   7. The hearing in this matter to place on 20 February 2013. The applicant was represented by Mr Nathaniel Duckworth of Counsel. The first respondent was represented by Mr Simon Serota, a Solicitor. The second respondent did not attend and was not represented.     Procedural   8. Mr Serota invited the Tribunal not to determine this application until such time as the appeal against the earlier LVT decision regarding Lyttelton Court RTM Co Ltd v Fencott Ltd (LON/OOAC/LRM/2012/0005) had been decided. In that case it was held that a RTM company formed to deal with the estate comprised of three separate blocks was not an RTM company within the meaning of section 73 of the Act. By analogy, Mr Serota contended that the position was the same here and than an RTM company could not manage more than one block. However, he accepted that it was an arguable point.   9. The Tribunal declined to defer the hearing of this matter for a number of reasons. Firstly, the decision in Lyttelton Court does not bind this Tribunal. The Tribunal also considered the decision, strictly on its facts, simply decided that a single notice of claim had to be served in relation to each block of flats on an estate with multiple blocks to acquire the right to manage. Secondly, it was not inevitable that the appeal in Lyttelton Court would succeed and to adjourn the hearing would simply result in delay. Thirdly, for the reasons set out below, it was not open to the first respondent to take this point.   10. By a letter dated 17 December 2012, the first respondent’s solicitors expressly reserved the right to argue at the hearing, relying upon the decision in Lyttelton Court, that the applicant company was not a RTM company within the meaning of section 73(2).   11. The submission made by Mr Duckworth in relation to this matter was that if this ground of opposition had not been set out in the first respondent’s counter notice, it was not open to it to later to rely on additional grounds. This was in fact the identical submission made by Mr Serota in the LVT decision regarding Dawlin RTM Ltd v Oakhill Park Estate (Hampstead) Ltd (LON/OOAG/LEE/2005/0012). In reply, Mr Serota simply stated that the point had not been strictly considered in the Oakhill decision.   12. Section 84(2)(b) of the Act expressly sets out the requirements of a counter notice served in reply to a claim notice. This provides:     “(2) A counter notice is a notice containing a statement either- (a) … (b) alleging that, by reason of a specified provision of this Chapter (our emphasis), the RTM company was on that date not so entitled. ”   13. In the Tribunal’s judgement, the meaning of section 84(2)(b) could not be clearer. If a landlord is going to rely on one or more of the statutory provisions in Chapter 1 of the Act, it is obliged to set these out in the counter notice. It follows, that if this does not occur, the landlord is not subsequently, entitled, as Mr Duckworth correctly submitted, to take any point arising from section 73(2) of the Act. Otherwise, as Mr Serota succinctly put it in Oakhill it would “make a nonsense of the legislation”.     Section 73(4)   14. By a letter dated 31 January 2013, the first respondent’s solicitors conceded that its client and Brent Street were connected companies. The applicant generally complained that Brent Street was entirely bogus and had been incorporated by persons associated with the First Respondent as a device to defeat the tenants’ entitlement to acquire the right to manage. In other words, Brent Street was not a genuine RTM company.   15. Against this background, Mr Duckworth made two submissions. Firstly, that section 73(4) of the Act should be construed purposively to include a genuine prior RTM company, as to a bogus one. Secondly, that the Tribunal should conclude that para 4 of the Articles of Association of Brent Street is sham provision and, therefore, it did not qualify as a prior RTM company within the meaning of section 73(4).   16. As to the interpretation of section 73(4), Mr Duckworth relied on various principles of construction set out in Bennion on Statutory Interpretation. These are:   that construction of enactments should give effect to the legislative intention and these is a presumption that the legislator intended that common sense should be used when construing the enactment.   it is a principle of legal policy that the law should be just and the (Tribunal) should strive to adopt a construction that would lead to unfairness.   there is presumption that a statute falls to be given a purposive construction and to do so the (Tribunal) may depart from the literal meaning of the words and may, when necessary, adopt a strained construction.   there is a presumption against absurdity   there is a presumption against evasion.         17. Mr Duckworth accepted that a literal reading of section 73(4) of the Act would favour the first respondent. However, if this construction were adopted, it would lead to absurd and unjust results and contravene the principles of construction set out above. For example, a landlord who forms a RTM company whose objects include the acquisition of the right to manage before the tenants could do so would effectively disenfranchise tenants from doing so. This could also extend to the disqualification of tenants from acquiring the right to manage in relation to multiple blocks/estates.* 18. Mr Duckworth went on to argue that these difficulties could not be overcome by the tenants becoming members of the landlord’s RTM company under section 74(1) of the Act. For example, where the company relates to one or more blocks, the tenants might never acquire an overall majority.   19. A further construction proposed by Mr Duckworth is that section 73(4) could be read as a moratorium on further RTM companies where there is a bonafide prior RTM company in place. This would also give effect to the principles and presumptions of statutory construction set out above.   20. Further and in the alternative, Mr Duckworth submitted that, as Brent Street was a sham company, it did not qualify as a RTM company within the meaning of section 73(2) of the Act.   21. Mr Serota submitted that section 73(4) should be construed literally and does not prevent a landlord from forming a RTM company. He may wish to do so to legitimately relieve himself of the burden of managing a property and any such company should not be regarded as being a sham. There was nothing to prevent one or more tenants from becoming a member of the company. In addition, a RTM company would, in effect, take over the landlord’s covenants and in so doing would offer it a degree of protection.     Decision   22. This case raises a novel and potentially important point of law. It is whether a landlord can form a RTM company to acquire the right to manage a property before any qualifying tenants can form their own RTM company and then seek to rely on section 73(4) of the Act. The section acts as an absolute statutory bar to any other RTM company being recognised as such under section 73(2) the Act and, on the facts of this case, thereby preventing the Applicant from acquiring the right to manage Danecroft. Consequently, the qualifying tenants and members of the Applicant company would be “disenfranchised” in this way. Both parties said that this point of law does not appear to have been the subject matter of any earlier decision, whether here or above, and there are no authorities available.   23. When considering this matter, the Tribunal had regard to the purpose of this legislation. Undoubtedly, it was intended by Parliament that qualifying tenants could become “enfranchised” by acquiring the right manage. The language of Chapter 1 of the Act is solely concerned with the mechanics whereby tenants can do so. There is no mention anywhere in the legislation of the landlord being able to also acquire the right to manage. Presumably, this is because this right already exists to the landlord by virtue of the lease, which invariably confers this right on the landlord.   24. Furthermore, and perhaps a more compelling reason, is that an application to acquire the right to manage is frequently based on the dissatisfaction on the part of the participating tenants with the landlord’s management of the property concerned. If section 73(4) were to be construed literally, the offending landlord could form a RTM company prior to any RTM company formed by the tenants to defeat their claim to acquire the right to manage and continue with the (bad) management of the property. This would lead to an absurd result and could not have been the purpose of this legislation.   25. The Tribunal rejected Mr Serota’s submission that one or more tenants could theoretically apply to become members of a landlord’s RTM company as being unrealistic and which ignored the practical reality of the landlord and tenant relationship. In the Tribunal’s experience, no landlord voluntarily relinquishes the management of a property, possibly for commercial reasons. This legislation was intended to provide tenants with a form a “compulsory acquisition” of the right to manage. If a landlord was entitled to rely on section 73(4), it could either simply ignore any application by a tenant to become a member or there might be an insufficient number of tenant members to exercise control over the management of the property.   26. Accordingly for the reasons stated above, the Tribunal agreed with the submissions made by Mr Duckworth that section 73(4) of the Act had to be construed purposively to give effect to the legislation, namely, to enable tenants to acquire the right to manage. It follows that it could not have been intended that a landlord could take advantage of section 73(4) with a view to defeating any claim by a tenants RTM company to acquire the right to manage. Although the point was not raised or argued before the Tribunal, it is arguable whether any RTM company formed by a landlord can ever be an RIM company within the meaning of section 73(2) of the Act if a purposive construction is applied to the relevant statutory provisions. In the Tribunal’s judgement, the situation envisaged by section 73(4) was to prevent the multiplicity and competing claims of rival RTM companies formed by tenants in properties subject to extensive leasehold interests.   27. The Tribunal, therefore, concluded that the first respondent could not rely on section 73(4) of the Act to prevent the applicant company from acquiring the right to manage. The Tribunal had no doubt that the RTM company formed by the first respondent was intended for the sole purpose of defeating the applicant’s claim to acquire that right.   28. Pursuant to section 90(4) of the Act, the Tribunal determined that the applicant shall acquire the right to manage three months from the date of this decision.     The application was allowed.   * See Gala Unity Ltd v Ariadne Road RTM Co Ltd [2012] EWCA Civ 1372.