Right to Manage: Whether a Leaseholder Was Classed as a Qualifying Tenant During the “Registration Gap” (Avon Freeholds Limited v Cresta Court E RTM Company Ltd – 2024)

Where a lease has been recently granted and is not yet registered at the Land Registry, can the leaseholder be classed as a qualifying tenant under the Commonhold and Leasehold Reform Act 2002 Chapter 2 Part 1? And, if the leaseholder is a qualifying tenant, does a failure to serve the leaseholder with a notice of invitation to participate invalidate the RTM Company’s claim notice?

The background

Avon Freeholds Limited v Cresta Court E RTM Company Ltd [2024] concerned numbers 7-26 Cresta Court, a self-contained part of a building. A claim notice was issued on 21 January 2022 by the RTM Company to the freeholder applicant of its intention to acquire the right to manage the property. A counter-notice was served to contest the claim, and the RTM Company made an application to the FTT. The freeholder challenged the claim in the FTT on the basis that notice of invitation to participate in the action had not been served on the leaseholder of flat 17, and that therefore the claim notice was invalid.

The lease of flat 17 had been granted in April 2020 but registration had not been completed when the claim notice was served. 14 days before the claim notice was served – and on the date the notice was served – the leaseholder therefore held an equitable lease of the flat, but no legal lease existed.

The First-tier Tribunal found that the leaseholder of flat 17 was a qualifying tenant on the grounds that s.112(2) of the CLRA 2022 defines “lease” as including an agreement for a lease, which is an equitable lease. However, the FTT did not conclude that the failure to serve the invitation to participate invalidated the notice in its entirety because the RTM Company could not have had knowledge of the existence of the lease. Having not been notified about the grant of the lease, the only way the RTM Company could have identified it is by following up a note on the freehold title about pending applications. As a result, the claim notice was deemed to be valid.

It is notable that the leaseholder in question supported the right to manage claim.

The freeholder appealed in the Upper Tribunal.

The decision

The Upper Tribunal found that the leaseholder had been a qualifying tenant at the relevant time, and had been entitled to receive service of a s.78 notice of intention. However, failure to serve the claim notice on the leaseholder did not invalidate the RTM claim, albeit that this was decided on different grounds to those of the FTT.

The RTM Company stated that it did not need to serve notice on the leaseholder, arguing that she was not a legal tenant and therefore not a “qualifying tenant” for the purposes of the CLRA 2002. Its alternative argument stated that its failure to serve the invitation to participate on the leaseholder was not fatal to its claim.

The recent Supreme Court decision in A1 Properties (Sunderland) Ltd v Tudor Studios RTM Co. Ltd was of relevance to the UT’s judgment in this case, and in fact the UT – with the consent of the parties – delayed handing down its judgment until the A1 Properties decision was released. The Supreme Court found that a failure to serve notice on the appellant in that case did not invalidate the claim because the appellant had lost nothing of significance, marking a notable shift in the courts’ approach to the strict adherence to statutory requirements relating to notices.

The UT concluded that an equitable tenant could be a qualifying tenant where there was no existing legal tenant, and that the equitable leaseholder in this case should have been served with the notice of invitation to participate. However, the RTM Company’s claim was not invalidated by the failure to serve. The leaseholder was entitled to seek a declaration that the claim notice was invalid, and could seek other remedies such as being joined into proceedings, but the UT stated that a landlord could not take advantage of such a failure to serve to support its defence against the right to manage claim.

In this case, the leaseholder supported the claim for rights to manage and accordingly the UT deemed the notice valid.

Advice and action for landlords

The notable decisions in both this case and in A1 Properties in recent months change the landscape in relation to non-compliance with statutory requirements, confirming that a failure to meet certain procedural elements will not necessarily be fatal to a claim for rights to manage.

Landlords seeking to rely on non-compliance points when opposing claims may find that this is no longer sufficient for a claim to fail, as wider issues are considered such as whether a party has been deprived of property or contractual rights as a result of the failure. As in this case, a landlord cannot rely solely on the failure of an RTM Company to follow procedural requirements to oppose an application where there is no other valid objection and where leaseholders support the application.