[2024] UKUT 335 (LC)

The procedural failure in issue in A1 (Sunderland) was the same as that in Elim Court: the RTM company had failed to give a claim notice to an intermediate landlord with no management responsibilities. A joint judgment was given by Lord Briggs and Lord Sales, with whom Lord Hamblen, Lord Leggatt and Lord Stephens agreed. Their lordships discussed the factual background and the statutory regime in the 2002 Act and summarised the Court of Appeal’s decision in Elim Court. At paragraph 57 they stated that the appropriate starting point for analysis is the guidance give in R v Soneji; and, at paragraph 61, that the virtue of the analysis in Soneji was in its move away from a rigid, category-based approach and its focus, instead, on both the purpose of the statutory requirement and on the specific facts of the case. Accordingly, (paragraph 61):

“We therefore consider that in the present statutory context Osman v Natt needs to be considered and applied with some caution, particularly in its suggestion that cases where it becomes necessary to infer the intended consequences of non-compliance can for that purpose be divided into distinct and watertight categories and its apparent suggestion (para 31) that in the second category the possibility of a middle position as identified in Soneji between outright validity or outright invalidity is excluded. Instead, it is appropriate to go back to the basic principled approach as explained in Soneji, as applied in light of the particular statutory context and the specific facts of the case”.

Their lordships went on to explain that a detailed analysis of the consequences of failure to comply with the statute will not always be necessary, because on looking at the purposes of the statute it may be clear that Parliament intended a bright-line rule, regardless of the individual facts. An example is the notice requirements for extending business tenancies under the Landlord and Tenant Act 1954 (paragraph 62). In other cases, there may be more than one statutory purpose: the facilitation of a particular outcome (in Soneji the confiscation of the proceeds of crime) versus the protection of individuals (in Soneji, procedural protection for persons being deprived of property), and in such cases (paragraph 63):

“a more nuanced analysis may be called for. …A test of substantial compliance with a procedural rule may be an appropriate way to allow for such a balance to be struck between competing purposes. If there has been substantial compliance with the rule, so that the purpose served by it has largely (if not completely) been fulfilled, it may more readily be concluded that fulfilment of the competing substantive purpose of the legislation should be given priority.”

Therefore in paragraph 66 their lordships said that “the approach of the Court of Appeal in Elim Court should not be endorsed in full”; the difficulty to which it gave rise was that landlords without management responsibilities would have their right to raise objections to the scheme ignored (paragraph 67). Instead, where the consequences of non-compliance are not set out in the statute – as in Elim Court and as in A1 (Sunderland) itself – the statutory structure had to be carefully analysed to assess what consequence of non-compliance would best fit it (paragraph 68).

Their lordships went on to consider the provisions of sections 78 and 79. They were alive to the fact that while the obligation to give claim notices to all landlords in the building is what Mr Bates KC would call a “true Elim Court case” where the statute does not spell out the consequences of non-compliance, the failure to serve a notice of invitation to participate is not:

“69.

Section 78 requires the RTM company as promoter of the scheme to give a participation notice to all qualifying tenants who have not agreed already to become, or not actually become, members of the RTM company. Section 79(2) provides that until 14 days after that has been done, a claim notice may not be served at all. There will ordinarily be no difficulty in finding or identifying qualifying tenants. The absence of any saving or dispensing provisions of the type found in section 79(7) suggests that this was well understood by Parliament. Section 79(2) imposes a clear consequence of failure in good time to give participation notices: no valid claim notice can be given to anyone. For present purposes we leave aside the difficult question whether this has the further consequence that, if a document purporting to be a claim notice is nonetheless given to another stakeholder, such as a landlord, the landlord could rely upon the failure to give a participation notice to a qualifying tenant in order to object to the validity of the purported transfer of the right to manage which followed, even though that tenant might not in fact have any objection to the scheme which is being promoted which they wish to maintain. We were referred to a decision of the Lands Tribunal in Sinclair Gardens Investments (Kensington) Limited v Oak Investments RTM Co Ltd [2005] RVR 426 and a decision of the Upper Tribunal in Avon Freeholds Limited v Regent Court RTM Co Ltd [2013] UKUT 213 (LC); [2013] L&TR 23 which discussed the consequences of a breach of the procedural requirement in section 79(2) and held in each case that such a breach did not in the circumstances invalidate the transfer of the right to manage which followed, and it was not suggested that they should be overruled; but this was a peripheral part of the debate before us and we prefer to reserve our opinion on whether they were correctly decided.”

That paragraph is obiter (which means that it is not part of the reasoning that led to the Supreme Court’s decision, and so it is not a binding authority) but its relevance to what the Tribunal has to decide in this appeal is obvious and I shall be coming back to it. The emphasis is mine.

Their lordships then set out a detailed analysis of the provisions of the 2002 Act beginning, at paragraph 71, with section 90: where there is no dispute in response to the claim notice the right to manage is transferred automatically without any judicial intervention. It is said that this was expected by Parliament to be the normal outcome, because the substantive (rather than procedural) grounds on which a landlord (or other stakeholder within section 79(6)) can object to the acquisition of the right to manage are very limited indeed: namely, that the RTM company is not properly constituted, that the building does not comply with the requirements of section 72, or that the membership of the RTM company does not comprise at least 50% of the building.

Focusing then on landlords, their right to receive claim notices, and the consequences of their not receiving one, the Supreme Court observed that some landlords cannot be found.

This is a point I touched on when looking at the first issue in the appeal, and the Supreme Court’s comment that “ordinarily” qualifying tenants are easy to identify, by contrast with landlords who may well not be. It is worth pausing to note that it is commonplace for persons who hold long leases of flats to let them on assured shorthold tenancies, having purchased them as an investment. Such tenancies are not registrable and may not be discoverable by the RTM company, and a large number of flats in a block may be so let.

The statute in section 79(7) has provided that “invisible” landlords who really cannot be discovered have no right to receive a claim notice. That means that they cannot challenge the right to manage scheme in the FTT, because only a recipient of a claim notice can serve a counter-notice, and only the service of a counter-notice triggers an application to the FTT (section 84(3)). The Supreme Court took the view that Parliament was content to leave the interests of the “invisible” landlords to be protected by those who are visible and entitled to receive a notice, because the available grounds of objection (being so limited) are not specific to individuals (paragraph 75).

Their lordships considered three hypothetical situations. In case A (paragraph 80) there is a real substantive objection to the scheme, for example the RTM company is not properly constituted. An invisible landlord has no right to challenge the scheme in the FTT because it has no right to receive a claim notice and therefore no right to serve a counter-notice. That is the price of invisibility.

In case B (paragraph 81) a landlord who was not invisible and was entitled to receive a claim notice had not been given one. Yet he had a valid objection to the scheme exactly as in case A. Yet unless another landlord gives a counter notice his objection will go unheard.

Case C, at paragraph 83, was the present case. Again a landlord entitled to receive a claim notice has not been given one; but this time he does not have a substantive ground of objection. His only quarrel with the scheme is that he has not been given a claim notice.

The Supreme Court pointed out that if the failure to comply with section 79(6) is never fatal to the validity of the scheme then B does not have his objection heard, which cannot have been Parliament’s intention (paragraph 85). Yet if the failure to comply is always fatal then in case C, where there is no substantive objection beyond the failure to serve the claim notice, then an equally unacceptable consequence follows:

“85.

… a scheme would founder for the purely procedural reason that a landlord was deprived of the valueless opportunity to make a hopeless objection to the validity of a scheme which has in fact been tested by the tribunal and found to be compliant. That would be contrary to the approach laid down in Soneji.”

Therefore:

“87.

We consider that the simplest way to provide a legal formula to give effect to Parliament's intention as to the consequences of the failure to give a claim notice to a visible landlord or other stakeholder under section 79(6) flowing from analysis in accordance with the approach in Soneji is that the failure renders the transfer of the right to manage voidable, at the instance of the relevant landlord or other stakeholder who was entitled to, but not given, a claim notice, but not void. It is voidable unless, or until, the tribunal approves the transfer scheme, as the outcome of the resolution of the dispute as to entitlement caused by a counter-notice by a person actually given a claim notice, or as the result of an application by the RTM company under section 85. If the scheme is disapproved by the tribunal, the RTM company will have to start again in any event.

88.

Of course, a consequence that the scheme is only rendered voidable is that the person with the right to seek avoidance can disclaim or otherwise abandon that right whereas, if it rendered the scheme void, the subsequent conduct of the relevant landlord or stakeholder would be irrelevant. There are numerous indications in this part of the CLRA that persons with a right to object should be able to waive that right. There is no jurisdiction in the tribunal to revisit and undo a transfer of the right to manage which has purportedly occurred as a result of the operation of section 90 or a determination of the tribunal, so the way in which a challenge would be brought would be by proceedings in the High Court simply seeking a declaration of rights (in the former situation) or seeking judicial review of the order of the tribunal and a declaration (in the latter). Since the exercise of a right to avoid is generally subject to equitable considerations, delay or other unconscionable conduct of the relevant landlord or other stakeholder could lead to the right to avoid being lost, or refused as a matter of discretion.”

To summarise: where a person (“P”) entitled to be given a claim notice is not given one, P and only P may challenge the acquisition of the right to manage. Not having been given a claim notice it has no right to serve a counter-notice so as to prompt an application to the FTT, but it can apply to the court for a declaration that the right to manage has not been validly acquired under section 90. Where there have been proceedings in the FTT and an order has already been made in favour of the RTM company then P can seek judicial review of the order (subject to the strict time limits applicable to judicial review).

A further possibility is that where another landlord has served a counter-notice and there are proceedings in the FTT then P could be joined as an interested party. How the FTT would approach P’s case, and what the High Court might do on an application to have the acquisition of the right to manage avoided, is (if I have understood correctly) set out in paragraphs 91 and 92:

“91.

In our view, in evaluating whether a procedural failure under the regime has the effect of invalidating the process, the question to be addressed is whether a relevant party has been deprived of a significant opportunity to have their opposition to the making of an order to transfer the right to manage considered, having regard to (a) what objections they could have raised and would have wished to raise and (b) whether, despite the procedural omission, they in fact had the opportunity to have their objections considered in the course of the process leading to the making of the order to transfer the right to manage. If there was no substantive objection which they could have raised or would have wished to raise, they have lost nothing of significance so far as the regime is concerned and the inference is that Parliament intended that the transfer of the right to manage should be effective notwithstanding the omission. If their objection has in fact been considered in the process, even though the claim notice was not served at the proper time, again they have lost nothing of significance so far as the regime is concerned and the inference as to Parliament's intention is the same.

In other words, the FTT or the court in considering the effect of the failure to serve P would ask whether P actually had a substantive objection to the scheme (such as the RTM company being properly constituted) and consider that objection.

Central to the Supreme Court’s approach is that only P can object to a failure to give a notice to P:

And at paragraph 98:

“the purpose of the legislative scheme as explained in the Consultation Paper --includes the objective that opportunities for obstructive landlords to thwart the transfer of the right to manage should be kept to a minimum. The procedural requirements have not been included to create traps for the unwary, nor to afford unwarranted opportunities for obstruction on the part of objecting landlords who have not themselves been significantly affected by any particular omission to comply with them.”

Their lordships also commented on the argument that failure to comply with section 79(6) should invalidate the claim notice on the basis that it is easy for the RTM company to start again:

“There is no guarantee that a RTM company will be in funds to be able to afford to make multiple applications. A RTM company might be formed by just two tenants, or a small group of tenants, with limited resources. The company may be counting on being put in funds to carry out the management functions only once the right to manage is transferred to it. Therefore, to impose on a RTM company an obligation to re-start the process if it happens to omit to comply with any procedural requirement would tend to undermine to an unwarranted degree the ability of tenants and RTM companies to pursue the remedy in respect of problems regarding the management of their building which Parliament intended should be available to them. It is only where a landlord or other stakeholder can show that it has lost a right to assert an objection which has substantive force in the context of the legislative scheme that it may be inferred that the transfer of the right to manage should be voidable and capable of being set aside by the person affected.”

Following the Supreme Court’s decision, failure to comply with section 79(6) is not necessarily fatal to the acquisition of the right to manage. The person who should have been served, and no-one else, can apply to the court to have the acquisition set aside; alternatively if there are proceedings before the FTT it may be joined as an interested party and raise its objection there. A final option if the FTT has already made an order is for P to seek judicial review of the order.

This is a big change in the law, because it not only takes us back to the reasoning in Soneji in terms of the law’s response to procedural failures, but also means that only a person directly affected by a procedural failure can complain of it.

The approach taken in A1 (Sunderland) is readily applicable to other procedural failings of which the consequences are not specified in the statute (whether the 2002 Act and its provisions relating to the right to manage, or other statutes providing for other processes). But the Supreme Court expressly left unresolved the “difficult question” of a failure to comply with section 79(2) which it said (obiter) specifies the consequences of non-compliance. And that is the difficult question I now have to resolve.