Court of Appeal allows appeal in Avon Freeholds…

The Court of Appeal has unanimously allowed the landlord’s appeal against the Upper Tribunal (Lands Chamber) decision that the right to manage its block of flats had been acquired, but agreeing with the Tribunal that an equitable tenant of a long lease in the "registration gap" where there is no corresponding legal tenant is a “qualifying tenant” within the Right to Manage chapter of the Commonhold and Leasehold Reform Act 2002. Both the First-tier Tribunal and the Upper Tribunal were wrong to find that a failure to serve a qualifying tenant with a notice inviting participation (“NIP”) prior to the claim notice did not invalidate that notice. The claim was invalid. The Court of Appeal judgment is here.

Justin Bates KC and Sophie Gibson represented the successful landlord in the Court of Appeal and the Upper Tribunal (Lands Chamber).

Overview

The appeal concerns what the Court accurately describes as two “interesting questions” ([16]) of great interest to property lawyers involved in the right to manage and beyond.

First, whether the lessee under a newly granted long lease, not yet registered at HM Land Registry and therefore effective in equity but not at law, was a “qualifying tenant” within the meaning of the Commonhold and Leasehold Reform Act 2002.

Second, if this lessee is a qualifying tenant, whether the failure to serve her with an NIP invalidated the claim notice subsequently served by the respondent RTM Company.

The Court held that the answer to both questions was “yes”, whereas Judge Cooke in the Upper Tribunal had answered “yes” to the first and “no” to the second.

Analysis and comment

The answer to the second question will be of the most impact. There are very few grounds for a landlord to challenge the acquisition of the no-fault right to manage. Up until the Upper Tribunal decision, it had been thought that one of these grounds was the non-service of an NIP. This is because s.78 requires an RTM company to give an NIP to qualifying tenants who are not yet members of the company, and s.79(2) provides that and a claim notice “may not be given” unless each person has been given that NIP within a specified time period. This had been interpreted previously as meaning that the statute prescribes a consequence with failing to comply with a procedural requirement, such that there was no room for a judge to consider whether on those particular facts Parliament would have intended invalidity to follow.

This seemed to also be the view of the Supreme Court in A1 Properties (Sunderland) Ltd v Tudor Studios RTM Company Ltd [2024] UKSC 27; [2024] 3 WLR 601 but paragraph 69 of its judgment as interpreted by the Upper Tribunal decision cast doubt on that. The Upper Tribunal held that the subject RTM claim was only voidable and not void. The qualifying tenant directly affected by this procedural failure had not herself challenged the validity of the claim, it was the landlord who sought to take advantage of this. It would not be in accordance with Parliamentary intention to allow a freeholder to challenge the claim on this basis. Only this qualifying tenant could have the claim notice declared void. As she had not, the right to manage is not prevented.

The Court of Appeal held at [69] to [88] that the Upper Tribunal was wrong in this respect. Section 79(2) is a precondition to a valid claim and the RTM company will be obliged to start again. The Respondent could and should have served another claim notice, a “simple and obvious course” ([71]) which would have meant a delay of less than a week. Properly interpreted, this is consistent with A1 Properties. There is no room for a R v Soneji [2006] 1 AC 340 fact-sensitive analysis of prejudice where, as here, the language used by Parliament to state the consequence of non-compliance with a procedural requirement is clear, unambiguous and does not produce absurdity ([76-7]). In such circumstances:

“[77]…it is the duty of the court or tribunal to interpret and apply that language accordingly. That is what the rule of law requires, and the court or tribunal would be overstepping its constitutional boundaries if it attempted to substitute for the language of Parliament an interpretation which in its view would produce a more reasonable result on the facts of the individual case before it.”

The Court further held there was “nothing remotely absurd” ([79]) about a rule which requires strict compliance with procedural requirements before a valid claim notice can be given. This is especially the case in the context of the right to manage regime which causes “very significant disruption of complex private contractual arrangements” ([79]). Relatedly, the Court noted at [81] that in A1 Properties the Supreme Court said that “opportunities for obstructive landlords should be ‘kept to a minimum’, not that they can or should be eliminated”.

In terms of the first question, the determination that the long lessee is a “qualifying tenant” provides much needed clarity for both leaseholders and landlords alike about the rights of equitable tenants in the “registration gap” – i.e. the time between the completion of a purchase of land by the execution and delivery of a transfer and its registration at HM Land Registry, until the latter of which the legal estate has not passed to the purchaser. During this “gap” the transfer takes effect only in equity and the homeowner, who may well have moved into the property and started paying ground rent and service charges, is not considered the legal owner.

The ongoing delays at HM Land Registry have given rise to interesting questions from a legal perspective but have caused great frustration for those clients and practitioners who need to know who to serve in order to bring a valid claim.

The Court’s judgment represents a step forward for equitable owners more generally, adding to the growing case law on what these owners can and cannot do pending the completion of the Registry’s administrative steps.

In the Upper Tribunal, the landlord had successfully argued that the tenant of Flat 17 was a “qualifying tenant” within the meaning of section 75 of the 2002 Act. The tenant had been granted a long lease out of a registered freehold estate which needed to be registered to take effect at law: sections 27(1) and 2(b)(i) Land Registration Act 2002. Pending registration the lease was equitable, and “long lease” in section 75(2) is capable of including both legal and equitable leases as per section 112(2) which provides that an “agreement for a lease” – i.e. an equitable lease on the basis of Walsh v Lonsdale (1882) – qualifies. The Tribunal held that this is qualified by the words “where the context permits” in s.112(2) such that where there is both a legal lease and an equitable lease (whether in the sense of an agreement for a lease, or of a granted lease that is registrable and has not yet been registered), the context does not permit that the equitable lessee is the qualifying tenant. In those circumstances the qualifying tenant is the legal lessee.

The Court of Appeal at [55] to [68] upheld and largely endorsed the Upper Tribunal’s decision as one which strikes an appropriate balance between the starting point that qualifying tenancies should normally be ascertainable by a simple search of the Land Register, and the need to cater for at least some categories of equitable tenancies if an unreasonable result is to be avoided. The statutory scheme is at risk of being frustrated if this is not the result. It would be inconsistent with the policy of the legislation and the valuable rights attributed to qualifying tenants to narrow down, without good reason, those who qualify. Judge Cooke was correct to emphasise that the qualifying tenant would be the legal tenant in the case of an assignment of a pre-existing legal lease ([58]). By contrast, the Court noted at [57] it would be absurd if the tenant of Flat 17 were excluded. If her lease had been preceded by an agreement for a lease, she would clearly have qualified on the basis of the express inclusion of such leases by s.112(2) but would have lost this status upon completion of the contract and only regained it upon registration.

As regards the status of equitable tenants in this registration gap, the Court held that:

“[56]…By any normal metric, a tenant under such a lease who has taken possession of the flat on completion and lives there, or perhaps sub-lets it if authorised to do so, is for most practical and economic purposes the owner of that flat and would naturally so describe himself or herself.”

It is expected that this clear exposition of the realities of such individuals will be relied upon in future cases concerning equitable ownership.