JB Leitch’s Katie Edwards looks at how ongoing & recent case law will impact property management in 2020.

Looking to the year ahead, landlords and management companies should be aware of ongoing case law that may well impact the management of their estates and buildings. 

At JB Leitch, we have seen recent cases that have highlighted significant management issues and we recognise that it is yet to be seen how the outcome of these cases will develop in the higher courts – or indeed, how they will alter management on a practical basis going forward. 

In this article, we take a close look at two important cases which will undoubtedly alter the stance of landlords and/or management companies in respect of their management obligations in 2020.

Absolute Covenants and Consent

Absolute covenants within a lease are a complete prohibition preventing a lessee from doing certain things. An example of a common absolute covenant is the prevention of a lessee from carrying out any alterations to their demise. 

Notably, an absolute covenant does not provide for consent to be granted at all. 

This, however, causes a multitude of issues for landlords and management companies where a lessee wishes to carry out works which will potentially breach an alterations covenant of this nature and may be at odds with the landlord’s obligation to other lessees to enforce covenants if a licence is granted.

The recent case of Duval v 11–13 Randolf Crescent Ltd [2018] EWCA Civ 2298 considered the effect of a landlord granting consent to an absolute covenant whereby all of the leases at the development contained covenants that the landlord would enforce any breach of lease against another lessee (as lessees are unlikely to be able to enforce covenants against each other).

In essence, if the landlord granted a licence for alterations, it would then be unable to enforce the absolute covenant at the request of another lessee and would therefore be in breach of its own obligations to the other lessee.

So, where does this leave us in respect of necessary works which could leave the landlord and/or management company exposed to claims from other lessees?

The Court of Appeal in the Duval case, provides some guidance with this. 

The Court of Appeal noted that if a licence had already been granted, and the works had been carried out, the other lessee’s remedy would be damages from the landlord for breach of the enforcement covenant which, depending upon the extent of the works, would be unlikely to be substantial in most cases. 

If the licence is yet to be granted and works have not been carried out, the lessee may be entitled to an injunction to prevent the licence from being granted.

Clearly this is impractical for all parties involved. How can a lessee carry out works to their demise as some absolute covenants may be breached with essential works to plumbing and electrics? How does this effect the lessee’s obligations in respect of repair? Can the lessee be compelled to repair when such a repair may breach their covenant to not alter?

It should be noted that if consent were to be considered, where an absolute covenant is contained within a lease, the terms of any licence to be agreed must be carefully drafted in order to prevent any other terms of the lease being breached, as an irregularity may prevent the licence being enforced. Additionally, the landlord and manager must be careful that they do not breach their obligations within another lease at the development.

The position by the Court of Appeal in Duval will be difficult to implement on a practical level for all parties to a lease. Understandably, the decision has been appealed to the Supreme Court and we eagerly await the outcome of the hearing which took place on 10 October 2019.

Management of Shared Services

Where there are estate common areas and a number of separate blocks, a successful application from the lessees of one block to exercise their Right to Manage (RTM) can also create a number of complex property management problems. 

On a large estate, the usual management involves a service charge scheme with schedules for each block:  “the block charges” and/or a contribution to the “estate charges”. However, the provisions of the leases and the Commonhold and Leasehold Reform Act 2002 (CLRA) can be at odds with one another and create a potential overlapping of responsibilities.

Specifically, Section 96 CLRA provides that the functions of the RTM company relate to services, repairs, maintenance, improvements, insurance and management within all qualifying leases, which will in most cases include the estate areas as well as the block itself.

Therefore, a question is how much of the estate can the RTM company manage, when the landlord/management company have obligations to other lessees not contained in the RTM block?

The leading case on this issue is Gala Unity v Ariadne Road Management Company Ltd (2012) All ER (D) 237 (Oct) which confirms that the RTM company take over the management of all appurtenant property within the leases including the wider estate. Gala Unity confirms that parties should come to an arrangement between themselves in respect of management of overlapping areas however this is not always possible.

The recent case of Firstport Property Services Ltd v Settlers Court RTM Company Ltd [2019] UKUT 243 (LC) sought clarity regarding the extent of “appurtenant property” within CLRA on the basis that the decision made by the Court of Appeal in Gala Unity was decided ‘per incuriam’ i.e. with a lack of due regard to the law or the facts. The Upper Tribunal upheld the decision in Gala Unity, but we await to see if the decision will be appealed to the Court of Appeal for further clarity.

More and more developments are experiencing the problems of shared or duplicated management functions as a result of RTM companies and it is clear that Gala Unity does not give guidance which can be used on a practical level in the event that agreements cannot be reached.

In both the management of shared services and consents around covenants, it is apparent that the issues raise many questions and require clear guidance.  With regard to the cases discussed, we will continue to watch the appeal process closely as the practical implications for landlords and managing agents, in the very near future, could be considerable.