NOTE - On appeal to the Court of Appeal, who ruled at the end of July 2023, the decision set out in this Legal Update was reversed. See here our Legal Update from 1 August 2023 which confirms the latest (and opposite) outcome of that appeal.

This week’s legal update considers the ability (or lack!) of a right to manage company (or any other party that is not a Landlord such as a residents’ management company) to seek a determination from the First-Tier Tribunal (“the FTT”) that a leaseholder has breached a covenant or condition of their lease.

The case concerned is Eastpoint Block A RTM Company Limited v Otubaga that was decided on appeal to the Upper-Tribunal. The case considered whether the FTT was correct to strike out proceedings as it did not have jurisdiction under the relevant Act to make the determination of breach sought by the Applicant RTM Company.

The statutory position

Section 168 of the Commonhold and Leasehold Reform Act 2022 (“CLRA”) reads as follows:

“168 No forfeiture notice before determination of breach

(1)    A landlord under a long lease of a dwelling may not serve a notice under section 146 (2) o the Law of Property Act 1925 (c20)(restriction on forfeiture) in respect of a breach by a tenant of a covenant or condition in the lease unless subsection (2) is satisfied.

(2)    This subsection is satisfied if- (a) it has been finally determined on an application under subsection (4) that the breach has occurred…

(3)    ….

(4)    A landlord under a long lease of a dwelling may make an application to [the appropriate tribunal] for a determination that a breach of covenant or condition in the lease has occurred”

In summary, S168 CLRA is a restriction on a Landlord’s right of forfeiture which cannot be exercised unless and until a breach of lease has been determined upon making an application to the appropriate tribunal. “Appropriate tribunal” means the FTT or, where determined by or under Tribunal Procedure Rules, the Upper-Tribunal.

In terms of RTM Companies, S100 CLRA says:

“(1) …

(2) Transferred tenant covenants are enforceable by the RTM Company, as well as by any other person by whom they are enforceable apart from this section, in the same manner as they are enforceable by any other person.

(3) But the RTM Company may not exercise any function of re-entry or forfeiture.”

It is apparent that the drafting of the two sections, S100 on the one hand and S168 on the other, is quite different in referring in the first instance specifically to the RTM Company and in second instance to the “landlord”, with no mention at all of the RTM Company.

The statutory position was clearly at the forefront of the Judge’s mind when considering the instant case as can be seen below.

The background

On 25 October 2021, the RTM Company sought a determination from the FTT under Section 168(4) CLRA that Mr Otubaga, a leaseholder within the building managed by the RTM Company, had breached two of the covenants in the lease of his flat. The allegations of breach concerned the leaseholder using his flat from which to conduct a business and that he was permitting a subtenant to cause a nuisance (“the Breaches”).  

Upon consideration of the application, the FTT struck out the RTM Company’s case without having given consideration to the Breaches on the basis that it had no jurisdiction to consider the application because an RTM Company is not a landlord for the purposes of S168(4) CLRA. The FTT granted permission to the RTM Company to appeal the striking out of the FTT proceedings.

The RTM Company made a number of arguments on appeal but the Upper Tribunal was quick to reject them, making two short points that dealt with the dismissal of the appeal.

1. An application under S168(4) CLRA may only be made by a “landlord” as is clear from the opening wording of the statute. S168 is a restriction on the landlord’s ability to serve a notice under Section 146 of the Law of Property Act 1925 as a prelude to forfeiture which is an action that is only available to a landlord. To be clear, an RTM Company cannot forfeit a lease as that does not form part of the management functions transferred to it under S96 CLRA; and 

2. It confirmed that when the RTM Company acquires the right to manage, it does not become a landlord.

The Upper Tribunal said that the FTT approached the issue by asking itself whether the RTM Company’s application under S168(4) CLRA amounted to enforcement of a covenant that fell within the remit of the RTM Company’s enforcement powers under S100 CLRA, or whether it formed part and parcel of steps taken to forfeit the lease. The FTT decided that an application under S168(4) CLRA was not one of enforcement but was a pre-condition of forfeiture.

Whilst the Upper Tribunal did not disagree with FTT approach, they put it in more simple terms by setting out that only a landlord may make an application under S168(4) CLRA and an RTM Company is not a landlord.     

In concluding, the Upper-Tribunal also considered the effect of S101 CLRA that requires an RTM Company to monitor and report to the landlord in respect of any non-compliance by a leaseholder. The premise of S101 CLRA is for the landlord to be kept informed of any breaches of covenant - it does not require the RTM Company to take action of its own accord.   

Conclusion

When considering the wording of S100 and S168 CLRA, it does seem quite astounding that the matter reached the Upper Tribunal, but the decision has provided clarity to those involved in the field of residential leasehold management and non-landlord parties burdened with the enforcement of covenants contained in a lease.

Whilst, S168 CLRA is strictly reserved for applications to be made by a landlord, that is not to say that an RTM Company cannot enforce the terms of a lease against a defaulting leaseholder at all under S100 CLRA.  An RTM Company would still be entitled to apply for a declaration in the Court, as distinct from the appropriate tribunal, that the lease has been breached but to also ask for an injunction in order to enforce a breach of covenant.

However, before embarking upon such steps to enforce a breach of covenant by an RTM Company, it would be worthwhile reporting the alleged breach to the landlord to ascertain what steps, if any, they will take. Unless the landlord considers there to be a reasonable prospect of forfeiting the lease and obtaining a windfall, the likelihood is that the landlord will either ask for an indemnity for costs from the RTM Company to enforce the breach or, it will do nothing and place any onus to enforce back upon the RTM Company albeit they are not necessarily forced to act.

For more information, please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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