In Avon Freeholds Limited v Cresta Court E RTM Company Ltd [2024] UKUT 335 (LC) the Upper Tribunal (UT) considered whether a leaseholder under a newly granted long lease, although not yet registered at HM Land Registry (an equitable leaseholder), is a qualifying tenant for the purposes of the Commonhold and Leasehold Reform Act 2002 (CLARA). If so, does the failure to serve a notice inviting participation on the equitable leaseholder invalidate a claim notice served by the RTM company?
In considering the decision, the UT had regard to the recent Supreme Court judgment in A1 Properties (Sunderland) Ltd v Tudor Studios.
CLARA sets out specific statutory requirements for serving notices on both qualifying tenants and landlords for the purposes of acquiring the right to manage. In the timeline of notices, a first notice inviting all qualifying tenants to participate must be sent by the proposed RTM company to those qualifying tenants. Then, at least 14 days later a second claim notice is served by the RTM company on the landlord under section 79 of CLARA.
The UT considered whether for the purposes of section 75 CLARA an equitable leaseholder could be deemed to be a qualifying tenant of a long lease. If so, the RTM Company is required to serve a notice of invitation to participate in accordance with section 78 of CLARA on such leaseholder.
The appellant (landlord) was appealing against a decision of the first-tier tribunal. In this case, the defendant (RTM Company) who had served the second of the notices referred to above on the Landlord to acquire the right to manage the property. The Landlord disputed that the respondent was entitled to acquire the right to manage; as a notice inviting participation had not been given to one of the leaseholders. That person's lease was granted in April 2020, but the leasehold title was not registered until after service of the claim notice. The reasons for non-registration were not clear; the UT did not take this into account when coming to the decision.
It is well established from Section 27 of the Land Registration Rules 2002, that where a lease is granted out of a registered estate such lease does not take effect in law until the lease is registered. Where a legal lease is not registered with HM Land Registry, then it takes place as an equitable lease. Therefore, the UT had no issue in finding that the leaseholder who did not receive a notice of participation was an equitable leaseholder.
The question the UT was asked to decide on was whether an equitable leaseholder was a qualifying leaseholder for the purposes of CLARA and if so, whether the failure to give the leaseholder notice inviting participation invalidated the right to manage claim. The UT ultimately decided that, for the purposes of section 75 of CLARA, an equitable lease can be a long lease (and therefore the leaseholder is a qualifying tenant), but only in circumstances where there was no legal lease. Where there is a legal lease and an equitable lease, the legal leaseholder would be the qualifying tenant. The clarification from the UT that an existing legal leaseholder would be a qualifying tenant (even where an equitable lease is in existence), serves as a useful reminder of the importance of checking the legal title to a property at the Land Registry before serving notice.
The UT then considered the second question: what is the effect of the failure to serve a notice inviting participate, in accordance with sections 78 and 79(2) of the CLARA, on a qualifying tenant. The UT found that although the notice was voidable for failure to comply with CLARA, it was not for the landlord to make the challenge.
The UT held that the validity of the notice could only be challenged by the qualifying tenant who was directly impacted by the failure to serve the notice. As the qualifying tenant did not challenge the claim notice, the RTM Company was entitled to acquire the right to manage the property.
The landlord was therefore successful on the first issue – that an equitable tenant can be a qualifying tenant – however, this did not change the ultimate outcome as the notice was, whilst potentially voidable, was not in fact void.
This case makes it clear that a landlord cannot take advantage of an error on the part of an RTM Company in the acquisition process where the default doesn't directly impact upon the landlord. The only person who can challenge the notice in such circumstances, is the person who was entitled to be served with the notice.
The case also raises questions on landlord's ability to object to the right to manage. However, it also raises the practical questions as to how those impacted persons can challenge the entitlement; only those served with a claim notice in accordance with section 79(6) (which doesn't include the equitable leaseholder) are entitled to serve a counter notice (which wouldn't include the equitable leaseholder) disputing the entitlement of the RTM Company to acquire the right to manage.
