The right to manage and equitable interests

The right to manage and equitable interests
January 24, 2025

Tenants of flats were given the right to have a manager appointed, to take over the landlord’s management of the building in which the flats were situated, in the Landlord and Tenant Act 1987 but only if they could prove fault on the part of the landlord or managing agents. In order to make it easier for the tenants to wrest control of the management of the building from their landlord, the Commonhold and Leasehold Reform Act 2002 (CLRA 2002) gave the tenants of flats the right to have the management of the building transferred to a company controlled by them as of right, without having to prove any default on the part of the landlord.

Although on the face of it managing a block of flats would appear to be a thankless and unprofitable task, some landlords have nonetheless managed to ensure that management of a block of flats remains a profit centre, and hence something they are loath to give up. This might explain the number of cases involving highly technical points regarding the procedure for the acquisition of right to manage (RTM) rights as set out in the CLRA 2002. Two recent cases have involved equitable interests and raise the question of whether a landlord with only an equitable interest in the reversion can be treated as the landlord for the purposes of the CLRA 2002, and whether a tenant with only an equitable interest in a flat should be treated as the tenant.

The position with regards to the landlord is relatively straightforward. In the Court of Appeal (CA) decision in 159-167 Prince of Wales Road RTM Company Ltd v Assethold Ltd [2024] EWCA Civ 1544, the CA held that Assethold, who had only an equitable interest in the freehold of the building, was not the landlord for the purposes of the CLRA 2002. Assethold had purchased both the freehold of the building and a 999 year headlease in October 2019 but, for reasons best known to itself, had not registered the transfer of either at HM Land Registry by the time the RTM company served its notice of claim in June 2021. As a result, when the notice of claim was served and the application to the First-tier Tribunal (FTT) made, neither transfer had taken effect at law. Assethold nonetheless claimed that it was the landlord, in an effort to claim £14,747.22 in costs following the RTM company’s withdrawal of its application to the FTT. The Court of Appeal rejected that argument, holding that only the owner of the legal title (that is the entity registered as the freeholder at the Land Registry) could be the landlord.

It follows, therefore, that during the registration gap between the purchase of the reversion and the registration of the new landlord at the Land Registry as the legal owner of the reversionary interest, it is the old landlord and not the new landlord who will be treated as the landlord for the purposes of the CLRA 2002. This makes life easy for tenants, as it means that they can rely upon Land Registry searches to establish who the landlord is, assuming the reversionary interest is registered in the first place.

The position with regard to tenants under equitable tenancies is rather more nuanced. This was considered by the Upper Tribunal (UT) in the case of Avon Freeholds Limited v Cresta Court E RTM Co Ltd [2024] UKUT 335 (LC), a decision which was referred to with apparent approval by the CA in the Prince of Wales Road decision. The UT noted that there were two distinct circumstances in which an equitable interest in a lease might arise during a registration gap where a leasehold interest is concerned.

The first is where there is an existing legal leasehold interest registered at HM Land Registry which is transferred to an assignee. In the period between the assignment of the lease and the registration of the assignee as proprietor of the leasehold interest, the assignee has a beneficial interest in the flat but the assignor remains the legal owner. In those circumstances, the UT held, there can be only one tenant and that must be the legal owner (the assignor who has sold the flat to the unregistered assignee) and not the person who has only an equitable interest in the flat.

The second is where a new lease of a flat has been granted, but the leasehold interest created by the lease has not been registered. If the estate out of which the lease is granted is unregistered then a legal leasehold interest will arise initially, but the lease is required to be registered within two months of its grant by virtue of section 6(4) of the Land Registration Act 2002 (LRA 2002) and if it is not registered within two months then it will cease to take effect in law but will take effect only as an equitable lease. If the estate out of which the lease is granted is registered then no legal leasehold interest arises until registration, and until registration the lease will only take effect in equity.

In those circumstances there is no legal leasehold interest created by the lease, in contrast to the situation which arises during the registration gap between the sale of an existing leasehold interest and registration, where there is a legal interest held by the seller and a beneficial equitable interest held by the buyer and where the legal interest held by the seller takes priority. Where there is a lease which remains unregistered after it has been granted, there is no legal interest, only the equitable leasehold interest, and the UT held that in those circumstances the equitable lessee was the tenant for the purposes of the RTM procedure.

Ultimately, in the Avon Freeholds case, the distinction made no difference. In that case, a tenant of a flat had been granted a lease which had not been registered in time and which took effect only as an equitable lease. The lessee was nonetheless the tenant of the flat for the purposes of the RTM provisions of the CLRA 2002 but they had not been served with a notice to participate. The RTM company had therefore failed to comply with the statutory procedure set out in the CLRA 2002.

However, on 16 August 2024, shortly before the decision in Avon Freeholds was handed down, the Supreme Court had given its decision in A1 Properties (Sunderland) Ltd v Tudor Studios RTM Company Ltd [2024] UKSC 27. Applying the Supreme Court decision, the UT held that the RTM company’s acquisition of the right to manage was nonetheless valid despite the procedural irregularity in failing to serve a notice of participation on the equitable lessee. But that, as the old saying goes, is another story.

This article was first published in Practical Law here.

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