In our Legal Update from April 2023 (found here), we reported on the case of Eastpoint Block A RTM Company Limited v Otubaga [2022] UKUT 319 (LC), in which the Upper Tribunal agreed with the FTT that a Right to Manage (“RTM”) company does not have the power to seek a determination of a breach of lease under Section 168 of the Commonhold and Leasehold Reform Act 2002 (“CLRA”).

The RTM company appealed that decision and the Court of Appeal’s judgment was handed down just last week. A full copy of the judgment, hot off the press, can be found here - spoiler alert, the Court of Appeal disagreed with the Upper Tribunal and found in favour of the RTM company!

Recap - why it matters

Section 168 of CLRA restricts the ability of a landlord to serve notice under Section 146 of the Law of Property Act 1925 as a precursor to forfeiture of a residential lease, until the breach has been determined by a Tribunal or the lessee has admitted the breach. There is a similar provision in Section 81 of the Housing Act 1996 which specially applies where the breach in question relates to non-payment of service charges, although is not relevant for present purposes. 

A RTM company will take-over the “management functions” of the landlord (or any third-party management company under the lease) following acquisition of the right to manage, pursuant to Section 96 of CLRA.  The Act is clear that the RTM company does not acquire the right to forfeit a lease where a leaseholder is in breach, as the RTM company has no proprietary interest.  The right to forfeit a lease remains the power of the landlord only.  The RTM company can nonetheless enforce tenant covenants contained within the lease. The question is, how do they do that. 

In Eastpoint Block A RTM Company Limited v Otubaga [2023] EWCA Civ 879, the RTM company sought a determination under Section 168 that the lessee was in breach of his lease because he was using the premises to conduct a business and by permitting a subtenant to cause nuisance to other occupiers of the block. The Upper Tribunal agreed with the FTT that it did not have jurisdiction to consider the application, as the RTM company was unable to make an application under Section 168, on the basis that:

1. Given the specific wording in Section 168, an application can only be made by a “landlord”. Section 168 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; and

2. When the RTM Company acquires the right to manage, it does not become a landlord.

The Court of Appeal’s decision

The Court of Appeal was not persuaded that enforcement of the lease, in this instance relating to the use of the property, related to the “management functions” which transferred to the RTM company by virtue of Section 96 of CLRA. This was particularly the case given that, under Section 97(2), the landlord (or any third party management company in the lease) is actually prohibited from doing anything the RTM company is empowered to do under Section 96 (except with the agreement of the RTM company).  This would mean that the landlord would be prohibited from enforcing such a breach, in circumstances in which the landlord might have a legitimate interest in seeing the terms of the lease complied with, given its proprietary interest in the building and in the reversion.

However, the Court of Appeal agreed that Section 100(2) gives a RTM company the power to enforce a breach by making a Section 168 application. Section 100(2) gives a RTM company the power to enforce “untransferred tenant covenants”, e.g. those outside the scope of Section 96. By contrast to Section 97(2), Section 100(2) does not remove the power of the landlord to enforce such breaches; both the RTM company and the landlord are entitled to enforce the covenants "in the same manner".

Therefore, the Court of Appeal concluded that, the fact that Section 168(4) expressly says that a “landlord” may make an application for a determination of the breach, does not preclude the RTM company making such an application. The RTM company has the power to enforce “in the same manner” as the landlord (except by way of forfeiture).

The Court of Appeal disagreed with the Upper Tribunal and the FTT that a Section 168 application is "on the forfeiture side of the line”. The fact that a determination under Section 168 is a necessary precondition to proceedings for forfeiture of a residential lease does not mean that such an application itself amounts to proceedings for forfeiture, which only a landlord can bring. Indeed, once armed with a Section 168 determination it does not necessarily follow that forfeiture action will be taken, but such a determination may be used as a basis for other remedies, depending on the specific circumstances of the case.

Conclusion

The Court of Appeal was, one might say rightly, persuaded by practical and policy reasons to allow a RTM company to enforce a breach of the lease by making an application under Section 168 of CLRA. Whilst other enforcement routes may be available to a RTM company faced with a leaseholder in breach of their lease depending on the circumstances, Section 168 will often be a sensible route given the specialist jurisdiction of the Tribunal to determine a breach of a residential lease. Thankfully the Court of Appeal has now confirmed that such an option would be available to a RTM company.

If you have any queries regarding this week’s Legal Update or require advice on your options to enforce a breach of a residential lease, please feel free to contact a member of our specialist team on 01435 897297 or info@kdllaw.com.

Disclaimer

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