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Wearing the right hat: the importance of considering the rights and obligations of each party in whose capacity one acts and pleading the case accordingly

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28th September 2023

Jonathan Upton looks at the recent case of Alma Property Management Ltd v Crompton which illustrates the importance of considering the rights and obligations of each party in whose capacity one acts and pleading the case accordingly.

In Alma Property Management Ltd v Crompton [2023] EWCA Civ 849 the Court of Appeal held that fixed charge receivers were acting within their powers by taking a lease of property to assist with a sale of the charged asset.

The appellant (Alma) was the freehold owner of North Tower in Salford, a 23-storey building comprising 96 flats above a hotel.  The lessee of a lease of the common parts was responsible for repairing the building.

The defendants were two insolvency professionals who had been appointed as receivers when Alma defaulted on a loan secured against the freehold. During the course of the receivership, a lease of the common parts was disclaimed. Without this lease, the obligation to provide services (including the repair of the building) and the service charge machinery could not function. As a result, the receivers obtained an order vesting the common parts lease in them, so that they could pass it on to a purchaser and preserve the value of the freehold on a sale.

Before the receivers completed a sale, Alma redeemed the charge and the receivership came to an end. By mistake, however, the receivers remained registered as the proprietors of the common parts lease (and therefore personally liable on its covenants).

A few years later, Alma brought a claim against the receivers (as tenants) for an order for specific performance of the repairing obligations in the lease of the common parts.  The receivers resisted the claim and sought consent to assign the common parts lease to a company controlled by the lessees of the flats in the building.  Alma consented but only on condition that the receivers entered into an  authorised guarantee agreement which they were not willing to do. The receivers therefore counterclaimed for a declaration that consent had been unreasonably withheld to the proposed assignment.

At first instance, Fancourt J rejected various arguments advanced by Alma that, on the proper interpretation of para 17 of Schedule 1 to the Insolvency Act 1986, (i) taking the lease was not the exercise of a power “in relation to” the freehold; (ii) obtaining a vesting order was not “taking a lease or tenancy”; and (iii) the lease was not “required or convenient for the business of the company”.  Fancourt J held that the receivers had taken the lease in the exercise of their powers as receivers and they were therefore entitled to indemnities from Alma in respect of their liabilities under the lease.  On that basis, specific performance was refused and it was declared that consent to the assignment had been unreasonably withheld.

On appeal, Alma sought to advance two new arguments, both of which were dismissed.  First, it was argued that “Property” in paragraph 17 meant physical premises, not an estate in land.  The Court of Appeal held that that the powers in Schedule 1 to the Insolvency Act 1986 should be construed broadly and, on this basis, it was sufficient that the lease was required or convenient for the business in question.

Alma’s second point was in connection with the counterclaim.  On redemption of the charge and discharge of the receivership, the receivers  became bare trustees for Alma.  Alma argued that the receivers’ duty as trustees was to give effect to Alma’s wishes and, unless Alma wished them to assign the lease, they should simply have held it.  It was accepted on behalf of the receivers that Alma might have had an arguable defence to the counterclaim on the basis that that the declaratory relief sought in the counterclaim was an equitable remedy; and that the court may refuse such relief if any assignment would be a breach of trust.

Alma’s difficulty was that none of this had been pleaded or argued at trial.  Alma occupied two positions in relation to the common parts lease: on the one hand it was the landlord; on the it was the beneficiary under a trust of the lease. As Nugee LJ put it: “It is necessary to keep these two capacities distinct … The only argument was whether Alma as landlord was reasonably entitled to require that the Receivers enter into authorised guarantee agreements. Since that was the issue, the Court was simply not concerned with the rights and wrongs of the matter as between trustee and beneficiary; it was only concerned with the rights and wrongs of the matter as between landlord and tenant.”  The Court did not allow the point to be taken for the first time on appeal.

Similar issues often arise in the context of disputes between leaseholders who are also shareholders of a lessee-owned freehold or management company.  In Morshead Mansions Ltd v Mactra Properties Ltd [2006] EWCA Civ 492 it was held that, although there was some overlap between the parties’ relationship as landlord and tenant and their relationship as company and shareholder, there was a practical distinction between the two.  In that case, a consent order between parties was final as to claims arising from a dispute between them in their capacities as landlord and tenant but did not prohibit claims arising from their relationship as company and shareholder.

These cases illustrate, where a party wears more than one ‘hat’, the importance of considering the rights and obligations of that party in each capacity and pleading the case accordingly.

This article first appeared in the Estates Gazette.

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