Management orders and service charges

Section 24 of the Landlord and Tenant Act 1987 gives the Tribunal power to appoint a manager.  This is subject to being satisfied that certain grounds are made out and that it’s just and convenient to make the Order, or where the Tribunal is satisfied that other circumstances exist which make it just and convenient for the Order to the made.

Management orders are, by their very nature, draconian: they deprive a landlord of their proprietary right to manage their property.

Where the Tribunal has been persuaded to make a management order, what the status of the monies paid by lessees to the manager?  Are they service charges within the meaning of section 18 of the Landlord and Tenant Act 1985, or is the appointment of a manager a self-contained regime meaning the monies paid are not service charges within the meaning of section 18, and not, therefore, subject to the protections under sections 18 to 30.

And, importantly, what happens to any arrears once the management order comes to an end?  Are these recoverable? And, if so, who’s got the ability to recover them?

These were the kind of questions under consideration by the Upper Tribunal in Chaun-Hui and ors v K Group Holdings Inc and ors [2019] UKUT 371 (LC).

 

Background

Back in 2011, the former Leasehold Valuation Tribunal appointed a manager under section 24 of the Landlord and Tenant Act 1987 in relation to Alford House.

At the time, Alford House was in a state of disrepair, with disputes over its management and service charges going back over 20 years.

The leases for the residential flats were tripartite, being made between landlord, maintenance trustee and leaseholder.

The management order ended on 30 June 2013.

During the order, service charge arrears had accumulated as a result of continued non-payment on the part of leaseholders.

When the management order finished, management of Alford House reverted to the maintenance trustee. In a bid to enable the maintenance trustee to pursue the arrears, the manager purported to assign those arrears by way of deed of assignment.

This resulted in the management trustee bringing proceedings for the arrears in the sum of £1,030,337.31. This included arrears which had accrued during the manager’s appointment.

The claim was unsurprisingly transferred to the First Tier Tribunal (Property Chamber) by the County Court.

 

Proceedings in the FTT

When the matter came round to trial in September 2018, the leaseholders argued that the deed of assignment (between the former manager and maintenance trustee) was of no effect. They argued that the maintenance trustee was not entitled to recover sums owing to the manager which had arisen during the management order.

It seems there were issues with how this had been pleaded, and the maintenance trustee argued that this point had not been properly pleaded by the leaseholders. The FTT agreed, and declined to determine the issue.

It was perhaps no surprise that the leaseholders were granted permission to appeal on the basis the case raised a “point of general significance regarding the powers of tribunal appointed managers and the status of sums claimed by them but not paid by the end of their appointment”.

 

Issues on appeal

Broadly speaking, there were two issues for the Upper Tribunal to determine on appeal:

  1. whether it’s possible to assign service charge arrears which have accrued under a management order.
  2. whether the FTT had erred in its findings regarding the matter not being properly pleaded.

 

Decision of the Upper Tribunal

On behalf of the leaseholders, it was argued that the appointment of a manager is a self-contained regime. They argued that a management order forms the entire basis of a manager’s functions and powers. And that, accordingly, monies paid under a management order are not service charges within the meaning of section 18.

The maintenance trustee argued that the rights and liabilities incidental to the appointment of a manager are vested in that manager personally. The appointment of a manager is, generally speaking, a personal one.

Accordingly, the maintenance trustee argued that the manager was perfectly entitled to assign any debts.

The Upper Tribunal took a rather different view, disagreeing with both leaseholders and maintenance trustee.

So far as the “labelling” of the sums paid to the manager is concerned, the Upper Tribunal found that these are service charges within the meaning of section 18.  Although the charges are recovered under the management order, they are paid under the lease.

On the issue of whether or not the debts can be assigned, the Upper Tribunal and that there was no need for a deed of assignment. The ability on the part of the maintenance trustee to recover payments due under the lease was suspended by the management order, rather than being extinguished.

The Upper Tribunal also gave some guidance on the procedure that should be followed by the FTT when a party seeks to amend or alter their pleaded case at the eleventh hour.

 

Commentary

This decision makes clear that payments under a management order are made by reference to a lease, and are therefore service charges falling within sections 18 to 30 of Landlord and Tenant Act 1985.

When a management order comes to an end, it’s not necessary to assign the ability to recover any service charge arrears which have accrued during the manager’s appointment.

 

 

28 December 2019

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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