Octagon Overseas Ltd & Others v Coates  UKUT 190 (LC)
1st June 2017
Tanfield members Christopher Heather QC and Amanda Gourlay acted for the respondent in this case.
The Upper Tribunal allowed an appeal against a decision of the FTT not to vary the terms of a management order in circumstances where some of the terms of that order put the freeholder in breach of its obligations to a third party under a loan agreement.
This matter arose in hard-fought litigation between the lessees of the residential flats located on the Canary Riverside Estate against the freeholder of the estate (Octagon) and the management company under the various residential leases (CREM).
The lessees said that the estate had been poorly managed for many years. In September 2016, the FTT appointed Mr Alan Coates as manager of the estate under the power conferred by s.24 of the Landlord and Tenant Act 1987. An application for permission to appeal that order was refused by the Upper Tribunal shortly thereafter.
Nevertheless, Octagon and CREM made a further application to the FTT to vary the term of Mr Coates’ appointment. Octagon and CREM relied on the fact that the management order made Mr Coates responsible for insuring the estate. However, this would place CREM in breach of its obligations under a loan agreement with Santander, which required CREM to insure the estate itself and to report to Santander quarterly that its obligations had been complied with. A breach of the loan agreement, it was said, would entitled Santander to call in the loan in the sum of £40 million.
The issue for determination was whether the predicament in which CREM found itself justified varying the terms of the management order.
The FTT refused to vary the terms of the management order and directed Mr Coates to take out the necessary insurance but to comply with all of the obligations contained in the loan agreement.
Decision on appeal
The Upper Tribunal held that the FTT was wrong to refuse to vary the terms of the management order.
First, the FTT had not made any firm decision as to whether the management order would cause CREM to breach its obligations to Santander, and nor had it assessed the likely consequences of any such breach nor the degree of risk to which it had exposed CREM. Instead, the FTT had taken the “naïve and commercially insensitive” view that if Santander was concerned about the terms of management order then it would have both objected to the same and appeared before the FTT to make representations.
Secondly, the FTT had not considered whether the insurance of the estate was related to the grounds for appointing a manager. In this case, the lessees had made no criticism in their section 22 notice of the insurance arrangements. Moreover, the FTT appeared to consider that the insurance arrangements were appropriate because they had recommended that Mr Coates place the same insurance in the future as had previously been placed by CREM. Although the mere fact that lessees have not complained about the exercise of a particular management function will not prevent the FTT from transferring that function to a manager (and indeed it will often be impractical to divide functions) the fact that there has been no complaint ought to be something that the FTT takes into account.
Thirdly, the FTT had not fully considered whether it was possible to provide the protection of the manager in relation to the insurance whilst still acting consistently with the obligations in the loan agreement. For example, whilst in this case the lessees were concerned that CREM had not properly dealt with claims made under the insurance policy, this could be rectified in the management order by permitting Mr Coates to deal directly with the insurer in relation to claims management instead of bluntly removing the obligation to place insurance from CREM entirely.
The application was remitted to the FTT to reconsider the terms of Mr Coates’ appointment.