Articles

Validity of Notices—Where Are We Now?

7th March 2022

The case of Eastern Pyramid Group Corp SA v Spire House RTM Co Ltd [2021] EWCA Civ 1658 is the latest in a steady stream of decisions on the consequences of failing to strictly comply with statutory procedure. In the context of landlord and tenant claims, landlords have all too often sought to rely on technical defects to try and defeat leaseholders’ attempts to exercise their rights. This has been particularly prevalent in leasehold enfranchisement claims (where tenants are seeking to compulsorily acquire the freehold of their building or an extended lease from their landlord) and right to manage claims (where leaseholders wish to take over the management of their block). The legislation governing these procedures is technical and complex giving ample opportunity for the leaseholders to slip up. The Law Commission has recognised the need for reform, but until the proposed changes become law, landlords will, no doubt, continue to try and put tenants off exercising their rights by making the process as expensive and drawn out as possible. Hopefully the decision in Eastern Pyramid will dampen the enthusiasm for taking technical points a little.

The decision

The decision in Eastern Pyramid Group Corp SA v Spire House RTM Co Ltd [2021] EWCA Civ 1658 involved a right to manage claim. The right to manage was introduced by the Commonhold and Leasehold Reform Act 2002 to give leaseholders the right to take over the landlord’s management functions without having to buy the building or prove fault on the part of the landlord. The procedure in the 2002 Act was intended to be a simple process but it has proved to be anything but. The prevalence of “prescribed” requirements provides reluctant landlords with ample opportunities to dispute the validity of notices or exploit minor technical errors in the procedure. In large blocks, the sheer volume of documentation which needs to be served increases the chances of a mistake being made. Given that the right to manage is meant to be a “no fault” procedure and most of the rules are for the protection of qualifying tenants, it is difficult to see what purpose some of these strict requirements serve.

The facts in Eastern Pyramid are simple. On 18 March 2019, the RTM Co served a claim notice on the appellant seeking to exercise the right to manage. On 29 April 2019, the appellant sent a counter-notice claiming that the notice failed to comply with various provisions in the 2002 Act and that, therefore, the RTM Co was not entitled to acquire the right to manage. On checking the rules, the RTM Co decided that, for various reasons, the first claim notice might indeed be invalid. Rather than argue the matter, the RTM Co decided to withdraw the first notice and serve a new improved second notice. A letter withdrawing the first notice and serving the new notice was duly sent to the appellant landlord on 17 June. On 18 June 2019, the RTM Co wrote to each of the qualifying tenants notifying them that the first notice had been withdrawn and a new notice served. On 24 July, the appellant served a second negative counter-notice claiming that the second claim notice was also invalid for the same reasons as it claimed the first notice had been invalid. However, there was one additional ground relied on and it was this ground which reached the Court of Appeal.

The landlord’s argument was that the first notice was not withdrawn until all those who required to be given a notice of withdrawal had been served. As the qualifying tenants were not notified of the withdrawal until 19 June, the first claim on the landlord was still “live” on 18 June when the second notice was served thereby rendering the second notice invalid by virtue of s.81(3).
The fact that the landlord did not know when the qualifying tenants were served until disclosure in the Tribunal proceedings (based on other alleged grounds of invalidity) and that the statute makes no provision for the landlord to be notified of the date on which other recipients were served did not, according to the landlord, affect the technical deficiency.

The 2002 Act

Section 81 of the Act provides, so far as is material:

“(3) Where any premises have been specified in a claim notice, no subsequent claim notice which specifies:
(a) the premises, or
(b) any premises containing or contained in the premises may be given so long as the earlier claim notice continues in force.

(4) Where a claim notice is given by a RTM company it continues in force from the relevant date until the right to manage is acquired by the company unless it has previously:
(a) been withdrawn or deemed to be withdrawn by virtue of any provision of this Chapter, or
(b) ceased to have effect by reason of any other provision of this Chapter.”

The appellant argued that the second claim notice could not be given when it was because the first claim notice had not been properly withdrawn in accordance with the requirements of s.86 of the Act which provides:

“(1) A RTM company which has given a claim notice in relation to any premises may, at any time before it acquires the right to manage the premises, withdraw the claim notice by giving a notice to that effect (referred to in this Chapter as a ‘notice of withdrawal’).

(2) A notice of withdrawal must be given to each person who is:
(a) landlord under a lease of the whole or any part of the premises,
(b) party to such a lease otherwise than as a landlord or tenant
(c) a manager appointed under Part 2 of the 1987 Act to act in relation to the premises, or any premises containing or contained in the premises, or
(d) the qualifying tenant of a flat contained in the premises.”

The appellant’s case was that, until all these people had been served, the notice was not withdrawn. As the Court of Appeal pointed out, as there is no obligation in the 2002 Act to tell all the parties in these categories that the other parties had been served, this would mean that the landlord would have no way of knowing exactly when the claim notice was withdrawn.

The arguments

The landlord had two strings to its bow. The first was that the RTM Co had successfully withdrawn the first notice in compliance with s.86 but not until 19 June by which time it was too late to save the second claim notice. There was, therefore, no “defect”. The RTM Co said that this could not be right because it necessarily led to the result that the validity of an act on one date was capable of being undermined by an act later in time. The Court of Appeal agreed. Birss LJ concluded that, if the notice of withdrawal served on the landlord on 17 June was effective, it could not be rendered ineffective by what happened afterwards. Equally, the fact that the notice to the qualifying tenants was, on the landlord’s case, only a day late, did not make the RTM Co’s position better than a case in which the withdrawal notice was never given to the qualifying tenants at all. The landlord’s first argument was, therefore, rejected.
This left the landlord’s second argument which was that, as there had been a failure in compliance, that failure was fatal to the claim because the notice of withdrawal was so important to the statutory scheme. The relevant requirement was contained in the 2002 Act itself and could have been easily remedied by serving another notice. This argument takes us back to the principles concerning failures of compliance first set out in Natt v Osman [2014] EWCA Civ 1520; [2015] 1 W.L.R. 1536 and expanded in Elim Court RTM Co Ltd v Avon Freeholds Ltd [2017] EWCA Civ 89; [2018] Q.B. 571; [2017] L. & T.R. 15.

The principles

Natt v Osman was a collective enfranchisement case. The error in that case was that the notice of claim stated that there were three flats in the block and gave the names and addresses of the tenants of those three flats. There were, in fact, four flats and the names and addresses of the tenants of the fourth flat had been omitted from the notice in breach of s.13 of the Leasehold Reform Housing and Urban Development Act 1993. In deciding whether this defect was fatal to the validity of the notice, the Court of Appeal stated:

  • The old idea of distinguishing between directory and mandatory requirements in notices was no longer the law.
  • There are two categories of case, one concerning public bodies and public law in which substantial compliance may be sufficient. The other concerned the acquisition of private rights, where there is no such concept. The notice either complies or it does not.
  • In the case of private rights (which includes right to manage and enfranchisement claims), the question is what the effect of the non-compliance is. This is a matter of statutory construction in the light of the statutory scheme as a whole. Did the legislature intend the error to render the notice wholly valid or wholly invalid?

In Natt, the Court of Appeal found that the number of leaseholders went to the heart of the statutory scheme and that the notice was invalid.
The Elim Court case, on the other hand, addressed a number of requirements under the 2002 Act concerning the notice of participation including a provision in s.78(5)(b) of the Act which provides for copies of the articles of association to be made available for inspection on at least three days, including a Saturday or Sunday. In considering the various defects, Lewison LJ set out some further guidance on how the Natt principles should be applied. These were:

  • The fundamental question is the role and importance of the relevant step in the context of the procedure as a whole. Thus, if the scheme requires information, there is a difference between missing information of critical importance and missing ancillary information. There may be a distinction between jurisdictional requirements on the one hand and purely procedural requirements on the other.
  • Useful pointers are:
    — whether the step is provided for in particular terms in the statute or only in general terms;
    — whether the requirement is in the primary legislation or in subordinate legislation; and
    — whether the person taking the step can immediately do it again if the impugned attempt is invalid.
  • While there is force in the point that landlords need certainty, this cannot be carried too far because that would mean any deviation from what was prescribed would invalidate the whole procedure, and that is not the law.

In Spire House, Birss LJ added two further points to these principles. First, he said that the legislator can be taken to have assumed that the courts would take a realistic and pragmatic approach in determining the significance of different steps in a procedural scheme laid down by statute. A result which is impractical or unrealistic is unlikely to be what was intended. Secondly, the pointers referred to in Elim are just that, and cannot be put too high. Taken to the extreme, the first and second pointers could be taken to imply that, if the relevant provision is clearly and specifically set out in the primary legislation, then breach of it must lead to invalidity.

The outcome

Applying these principles to the facts in Spire House, the Court of Appeal found that there was a difference in the importance of serving a notice of withdrawal on the landlord and any managers (i.e. the persons referred to in s.86(2)(a) to (c)) as compared to the qualifying tenants. The former alerted the landlord that the claim had been abandoned and failure to serve a notice of withdrawal on the landlord would have been fatal. However, the notice to the qualifying tenants was merely for information purposes. Failure to notify the qualifying tenants did not, therefore, invalidate the
new claim.
The outcome is, therefore, a win for the respondent. However, in the context of a no-fault procedure where there was no doubt that the RTM Co and the premises qualified for the right to manage, one must question the motivation for the appeal. In the words of Martin Rodger QC in the case of Assethold Ltd v 63 Holmes Road (London) RTM Co Ltd [2020] UKUT 228 (LC):

“There must inevitably be a strong suspicion that the appeal has been brought in the hope of delaying the acquisition of the right to manage, rather than with any expectation of defeating it altogether.”

On that front, the appellant succeeded.

The future

The Law Commission has recognised that the current right to manage procedure is not working. Proposals have been put forward for a new scheme removing some of the elephant traps. In particular, the requirement to serve notices inviting participation, which has proved to be especially cumbersome, will be abolished. Although a notice of claim will still be required, the landlord’s scope for objecting will be significantly curtailed. Rather than adopting blanket “prove it” style
objections, landlords will be required to state and explain exactly what their objections are in their counter-notice and should generally not be permitted to raise new arguments at a later stage (as the landlord did in Spire House).
The final report was published on 21 July 2020 and makes sensible recommendations which will streamline the current procedure. Unfortunately, Parliament has been rather busy since then and it remains to be seen when there will be time to discuss the proposals.

The law is stated as at 7 December 2021.

First published in the Landlord & Tenant Issue in February 2022.

Team: Nicola Muir
Expertise: Landlord & Tenant

Disclaimer

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/ or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

 

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