In this Legal Update we delve into the case of Gorrara and others v Kenilworth Court Block E RTM Co Ltd.

Background

This is a case that has rumbled on since 2019 through two appeals and no doubt has cost both sides considerable sums in costs.  It highlights the need for those managing property to:-

• Just do things correctly from the very start and not to “bend” things to fit;

• Understand the lease and the statutory provisions affecting the management processes so that both the contractual and statutory obligations are followed correctly; and

• Not to just accept non compliance just because no one is complaining (yet).

The appellants were the leaseholders of a flat on a development of 52 flats spread across five similar sized blocks (identified as Blocks A - E) and external communal spaces known as Kenilworth Court.   The leaseholders of the five blocks each exercised the right to management their respective blocks between 2003 and 2007.  As you will know, each RTM company acquired the right to manage only the individual block but not the appurtenant property or the other blocks on the wider estate.  The appurtenant property remains in the management of the landlord notwithstanding the existence of the RTM Companies (see here).   

As is all too common with such developments, the leases of the five blocks were written on the basis that each flat contributed to the cost of running the whole estate and so there was no separation by block. This meant that the service charge proportions for each flat were insufficient when the management was amended by the creation of the RTM companies to cover only the each of the blocks run by each RTM Company.  Additionally, it appears that the five RTM companies also took over the management of the appurtenant property from the landlord but over which they had not actual right of management.  As a result of the above, the leaseholder’s service charge proportion of 0.75% was ‘bent’ into the rate of 1.7026%, based upon the ratable value of the unit.

The Lease

Under the lease the service charge was structured as two "on account" payments based upon a budget, with a final payment or credit following the production of an end-of-year Certificate confirming actual expenditure.  As a result of the creation of the RTMs, that Certificate would properly have needed to identify the expenditure on each block individually. Historically the collective RTM companies neglected to produce the end-of-year Certificate and, it appears, placed any surplus into the reserve fund as opposed to crediting that to the individual leaseholders.

The leaseholders did not dispute the on account demands but they did question, in part prompted by the poor condition of their block, Block E, what of the monies paid were being spent on Block E and if indeed works paid for in the on account demands/budget, had in fact been undertaken to their block.

Perhaps unsurprisingly, and here note the final remarks of the Upper Tribunal (“UT”) below, due to the failure of the RTM companies to run the management in accordance with whether the lease or the statutory rules that apply, the RTM company was unable to provide answers to the leaseholder’s questions on accounting for their individual block.  The leaseholder therefore brought their application under s.27A LTA 1985 in the FTT.

The decision in the FTT

The FTT did not, and still have not, dealt with all of the issues raised in the application but did rule on a couple of points which led to the appeal now being considered in this Legal Update.

As stated above, the leaseholders did not dispute the on account demands.  What they sought was a determination that the actual expenditure for their block, a sum not actually demanded as a result of the failure of the RTM to provide the annual Certificate referred to above, and whether that actual expenditure was reasonably incurred, charged at the correct percentage and that charges levied by the RTM were charges for which the leaseholder was liable.  There was also a set off claim resulting from disrepair to the block (although this point remains undetermined).

The FTT dismissed the application.  It considered that because the leaseholders had paid service charges, seemingly without dispute or qualification for many years, that payment of on account charges constituted an admission of due sums and thus precluded challenges to end-of-year charges or the lack of reconciliation. It further considered that the leaseholders were ‘estopped’ from questioning the charges levied by the RTM Company for their block and which related to the management of the appurtenant property (charges outside of the authority of the RTM Company) as that regime had been in place for many years, the leaseholders were well aware of it and had not previously raised objection. 

Upper Tribunal Decision

The Tribunal set aside both points for the following reasons.

Admission by payment

A leaseholder can by s.27A LTA 1985 seek a determination of charges to be paid save where the sums in question have been admitted:-

Section 27A(4)(a) and (5) provide:

(4)          No application under subsection (1) or (3) may be made in respect of a matter which:-

(a)          has been agreed or admitted by the tenant,

(5)          But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.

The FTT had considered that whilst a single payment would not automatically amount to an admission (in the absence of other evidence to the contrary) a continual payment (in this case by monthly instalments over many years) was indicative of admission as to those charges and that any delay in then making application to dispute those charges would be fatal to that claim (seen Cain v London Borough of Islington [2015] UKUT 542 (LC)). 

The UT disagreed both the with FTT and the findings in Cain.  It considered that payment made without objection is not an admission in the absence of evidence to the contrary.  The UT considered that, whilst the on account charges were not actually disputed, it did not follow that that lack of dispute prevented the leaseholder from later seeking a determination on what those on account payments were spent and whether that cost was reasonable.  In the absence of a lack of Certificate for any of the relevant years it was impossible for the leaseholders to know and thus admit to the lawful nature of the actual expenditure and so they cannot be said to have delayed in challenging them either because none have yet been demanded (due to the failure to provide the Certificate as required under the lease).

Charges for the Appurtenant property (the wider estate)

The 2002 Commonhold & Leasehold Reform Act does not provide for an RTM Company to manage the wider estate outside of its block (see here) and so there is no mechanism for the enforcement of such charges even where they have been charged across a multi-block development. 

The Estoppel argument was flawed insofar as (a) it really should not apply to such cases and (b) the reliance of the FTT upon it was incorrect in part as a result of its failure to correctly consider the first point above.

The UT Order therefore allowed the appeal and set aside the FTT findings reverting the matter back to the FTT for a reconsideration of the points.  Of huge significance in this case is the closing remarks of the UT around sense and commerciality:-

“I suggest to the FTT, and it is no more than a suggestion, that it give directions for the determination of all outstanding issues at a single hearing, even if that hearing lasts a fortnight or more, so that all parties are obliged to bite the bullet of looking at this case as a whole and counting the cost of proceeding. I suggest to the parties, and again I can only suggest, that they ask themselves what they would settle for and then try again to settle (I know that mediation has been attempted), in the hope that the parties can move on from this litigation and work towards constructive co-operation”

It is clear that the UT considered that what had resulted from the way in which the management of the whole development had been undertaken and the mistakes made, was a total mess and one that was potentially impossible or prohibitively expensive to unravel.  The UT has, as a result, urged the parties to settle and move forward as to let the matter run on was simply destructive to all residents (with likely no party actually gaining any benefit whatever the result).

Final thoughts

There are a number of lessons arising out of this ruling:-

1. That those advising on creation and management via RTM really do need to consider with their clients:-

   Whether the development is suitable (without some tweaking/agreements in relation to common parts) as the decision in Settlers Court (see links above) as to the extent of what property an RTM takes under its management in that case is borne out again here;

   Whether therefore the RTM Company should make application under s.35/37 LTA to have the leases amended to accommodate the issues arising in relation to managed areas and service charge proportions required from leaseholders as a result of the RTM;

2. Just managing a development “how it has always been managed” does not deem correct historical followed incorrect procedures and it highlights particularly that a failure to address those errors can come back to haunt everyone;

3. That it is hugely important that the lease is read, understood and that it is followed fully with no 'bending' of things to 'fit';

4. The same applies to the statutory provisions that affect how the lease provisions are implemented.

The advice therefore has to be, don’t assume but do get decent quality advice, and if something doesn’t look right then it probably isn’t, so ask before continuing to act.

If you have any queries on this week’s Legal Update, please contact a member of the team on 01435 897297 or info@kdllaw.com.  

Disclaimer

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