The Supreme Court has handed down judgment today in A1 Properties (Sunderland) Ltd v Tudor Studios RTM Company Ltd [2024] UKSC 27. The appeal concerned the effect of the Respondent right to manage company’s failure to serve a claim notice on the Appellant landlord, as required by s. 79(6)(a) of the Commonhold and Leasehold Reform Act 2002 (“CLRA”). The Supreme Court upheld the Upper Tribunal’s decision that the failure did not invalidate the Respondent’s claim to acquire the right to manage.
The issues before the Supreme Court
The Supreme Court defined the issues before it as:
- whether a failure to serve a claim notice on a landlord under s. 79(6)(a) will always invalidate the acquisition of the right to manage; and
- if not, whether the failure to serve the claim notice in this case did so.
It answered “no” to both questions.
However, the Supreme Court’s judgment has wider significance. The appeal raised a more general question of statutory construction. That is the correct approach to ascertaining Parliament’s intention as to the consequences of non-compliance with a statutory procedure when the statute does not expressly state the consequences. The Supreme Court was asked to consider how the approach to this question set out by the House of Lords in R v Soneji [2005] UKHL 49; [2006] 1 AC 340 should be applied in the context of CLRA 2002 and other statutes conferring property or similar rights on a private person. It was also asked to consider whether the Court of Appeal decisions in Elim Court RTM Co Ltd v Avon Freeholds Ltd [2017] EWCA Civ 89; [2018] QB 571 and Osman v Natt [2014] EWCA Civ 1520; [2015] 1 WLR 1536 were correctly decided.
Soneji revisited
In R v Soneji [2006] 1 AC 340, the House of Lords considered the correct approach to ascertaining Parliament’s intention as to the consequences of non-compliance with a statutory procedure in the context of an application for a confiscation order against criminal defendants. The House of Lords noted that courts had historically maintained a distinction between statutory provisions which were mandatory and those which were directory. Breach of a mandatory requirement would invalidate the procedure; breach of a directory requirement would not.
The House of Lords held that it was no longer appropriate to maintain this distinction, which was conclusory rather than explanatory. Instead, “the emphasis out to be on the consequences of non-compliance, and posing the question whether Parliament can fairly be taken to have intended total invalidity” to follow non-compliance. This is ultimately a question of statutory construction.
The application of this principle had been contentious, with the Court of Appeal in Osman v Natt [2015] 1 WLR 1536 holding that statutory procedures could be separated into two categories, with the court’s application of the Soneji approach differing for each. In essence, the Court of Appeal held that a stricter approach to procedural compliance should be adopted in cases where a statute confers a property or similar right on a private person.
In Tudor Studios, the Supreme Court has explained that the point of adopting the revised analytical framework in Soneji was to move away from a rigid category-based approach to evaluating the consequences of a failure to comply with a statutory procedural requirement and to focus instead on:
- the purpose served by the requirement as assessed in light of a detailed analysis of the particular statute; and
- the specific facts of the case, having regard to whether any (and what) prejudice might be caused or whether any injustice might arise if the validity of the statutory process is affirmed notwithstanding the breach of the procedural requirement.
In all cases of non-compliance with a statutory procedure where the consequence is not specified in the statute, the court or tribunal considering the matter must go back to the basic principled approach explained in Soneji, as applied in light of the particular statutory context and the specific facts of the case (para. 61).
In some cases, the purpose served by a particular statutory procedural rule may indicate that Parliament intended that it should operate strictly, as a bright line rule, so that any failure to comply invalidates the procedure which follows. The Supreme Court gave an example of the notice requirements for extending business tenancies under the Landlord and Tenant Act 1954 (para. 62). Often, however, the Soneji approach will not lead to such a clear-cut result. A statutory regime may reflect, and balance, a number of intersecting purposes, both as to substantive outcomes and as to procedural protections inherent in the regime. Soneji itself was such an example, in which the purpose of depriving convicted offenders of the proceeds of their crimes had to be balanced against sufficient compliance with procedural protections available to them before they could be deprived of their property.
In undertaking the Soneji analysis, it is relevant to have regard to the effect which the operation of a statutory process might have on property and contractual rights, and to draw such inferences as to Parliament’s objective intention as might be appropriate in the circumstances (para. 64). However, simply because a statutory procedure effects property rights, does not mean that the wider enquiry indicated by the Soneji approach is unnecessary.
The Supreme Court observed that, in cases where a statutory regime reflects a balance of competing interests, the court may conclude that substantial compliance with a procedural rule is an appropriate way to allow for such a balance to be struck (para. 63). Ultimately, the court should look carefully at the whole of the structure within which the requirement arises and ask what consequence of non-compliance best fits the structure as a whole.
Qualification of Elim Court and Natt v Osman
The appellant’s case was that the Court of Appeal decision in Elim Court was wrong; alternatively, that it could be distinguished on the facts. In Elim Court the RTM company had failed to serve a claim notice on an intermediate landlord with no management responsibilities. The failure to serve the landlord was a breach of s. 79(6)(a). However, the Court of Appeal held that this did not invalidate the right to manage claim. Although the acquisition of the right to manage also transferred to the RTM company the right to grant certain consents, that was not a central feature of the statutory regime. The main purpose of the regime was to decide who should have the right to manage the premises. That purpose was not defeated by a failure to serve a landlord with no management responsibilities.
The Supreme Court disagreed with this reasoning. It noted that where the right to manage is transferred to a RTM company, the effect is that an existing sophisticated contractual regime with multiple aspects and ramifications is subject to significant disruption. The ordinary expectation must be that persons whose property or contract rights are to be taken away or subject to significant qualification should have a fair opportunity in the course of the procedure to be followed before that occurs to raise any arguments of substance they may have to oppose that outcome. Contrary to the view taken in Elim Court, the Supreme Court did not consider that it is sufficient to say that their right to participate may be ignored if they are an intermediate landlord with no power of management. Nevertheless, while the Supreme Court rejected the reasoning in Elim Court, it concluded that the case had been corrected decided (as explained below).
In Osman v Natt, the Court of Appeal was concerned with a failure of a statutory notice to comply with s. 13 of the Leasehold Reform, Housing and Urban Development Act 1993 and whether that failure invalidated a collective enfranchisement claim. Many authorities were cited to the Court of Appeal, including Soneji. Sir Terance Etherton sought to place the authorities into two broad categories:
“(1) those cases in which the decision of a public body is challenged, often involving administrative or public law and judicial review, or which concern procedural requirements for challenging a decision whether by litigation or some other process, and
(2) those cases in which the statute confers a property or similar right on a private person and the issue is whether non-compliance with the statutory requirement precludes that person from acquiring the right in question.”
He concluded that the Court of Appeal authorities showed a consistent approach in relation to statutory requirements to serve a notice as part of the process for a private person to acquire or resist the acquisition of property or similar rights conferred by the statute (category 2 cases). Unlike in category 1 cases, the court never adopted the approach of substantial compliance, and the outcome did not depend on the particular circumstances of the actual parties, such as the state of mind or knowledge of the recipient or the actual prejudice caused by non-compliance on the particular facts of the case.
The Supreme Court considered that in the present statutory context Osman v Natt needed to be to be considered and applied with some caution, particularly in its suggestion that cases where it becomes necessary to infer the intended consequences of non-compliance can for that purpose be divided into distinct and watertight categories and its apparent suggestion that in the category 2 cases the possibility of a middle position as identified in Soneji between outright validity or outright invalidity is excluded. Instead, it is appropriate to go back to the basic principled approach as explained in Soneji, as applied in light of the particular statutory context and the specific facts of the case.
Application to the facts of A1 Properties v Tudor Studios
In Tudor Studios, s. 79(6)(a) required the Respondent to serve a claim notice on the freeholder (“F”), the management company (“MC”) and the Appellant intermediate landlord. The Respondent serve a claim notice on F and MC but failed to serve one on the Appellant. MC served a counter-notice raising objections. The Respondent then applied to the tribunal for a determination pursuant to s. 84(3) that it was entitled to acquire the right to manage. The tribunal ruled against MC’s objections and, except for the failure to serve a claim notice on the Appellant, there was no other objection to the validity of the scheme.
The Supreme Court contrasted this with a theoretical case (case B). In case B, there is a real substantive objection to the scheme, such as a RTM company not being properly constituted under s. 79(4) or (5). There are two landlords entitled to be given a claim notice under s. 79(6)(a), but only one is given one. The landlord given the claim notice decides not to serve a counter-notice. There is therefore deemed to be no dispute as to its entitlement to acquire the right to manage and that right is acquired on the acquisition date set out in the claim notice. The landlord who has not received a claim notice wishes to raise the substantive objection but cannot serve a counter-notice absent service on it of a claim notice.
The Supreme Court considered the crucial difference between the two cases was that, in the present case, the issue as to substantive validity of the scheme made its way to the tribunal by a route sanctioned under the statutory framework, and had then been determined in favour of validity. Therefore, provided the Appellant was offered membership of the RTM company, it had lost nothing of value in the Respondent’s failure to give it a claim notice.
The Supreme Court considered that the simplest way to provide a legal formula to give effect to Parliament’s intention as to the consequences of the failure to give a claim notice under s. 79(6) is that the failure renders the transfer of the right to manage voidable, at the instance of the person who was not given a claim notice, but not void.
It is voidable unless, or until, the tribunal approves the transfer scheme, as the outcome of the resolution of the dispute as to entitlement caused by a counter-notice by a person actually given a claim notice, or as the result of an application by the RTM company under s. 85. If the scheme is disapproved by the tribunal, the RTM company will have to start again in any event.
In evaluating whether a procedural failure under the regime has the effect of invalidating the process, the question to be addressed is whether a relevant party has been deprived of a significant opportunity to have their opposition to the making of an order to transfer the right to manage considered, having regard to (a) what objections they could have raised and would have wished to raise and (b) whether, despite the procedural omission, they in fact had the opportunity to have their objections considered in the course of the process leading to the making of the order to transfer the right to manage.
If there was no substantive objection which they could have raised or would have wished to raise, they have lost nothing of significance so far as the regime is concerned and the inference is that Parliament intended that the transfer of the right to manage should be effective notwithstanding the omission. If their objection has in fact been considered in the process, even though the claim notice was not served at the proper time, again they have lost nothing of significance so far as the regime is concerned and the inference as to Parliament’s intention is the same.
It followed from this reasoning that the result in Elim Court was correct. In that case it was a landlord who had been served with the claim notice who sought to rely on a procedural omission in relation to another, intermediate landlord in order to undermine the transfer of the right to manage. That intermediate landlord, that is the person whose procedural rights had been affected, had not sought to be joined in the proceedings to assert its rights.
Breach of s. 79(6)(a) in other cases
The Supreme Court also considered how other failures to comply with s. 79(6)(a) in different circumstances might be dealt with.
If there is no dispute about the RTM company’s entitlement to acquire the right to manage, the scheme takes effect on the date specified in the claim notice without any need for approval by the tribunal: s. 90(2) and (3). There is deemed to be no dispute about entitlement in the absence of any counter-notice which does not admit entitlement: see ss. 90(3) 84(2)(a).
In case B, where a person with a potentially valid substantive objection has not been served and has been left out of the process, there is no jurisdiction in the tribunal to revisit and undo a transfer of the right to manage which has purportedly occurred by operation of s. 90. The Supreme Court concluded that such a person who has not been served with a claim notice in breach of s. 79(6)(a) has a right to apply to the High Court seeking a declaration as to its rights.
Meanwhile, if the tribunal has made a determination that the right to manage has been acquired, a case B person who has not been able to participate in the procedure and disagrees with the result can seek judicial review of the order of the tribunal and a declaration.
Hence, the Supreme Court concluded that a RTM company cannot simply ignore a required recipient of a claim notice under s. 79(6)(a) with impunity.
Conclusion
The Supreme Court’s decision will be a welcome result for tenants seeking to exercise the right to manage. Such tenants are often faced with a better-resourced landlord with the best legal representation. Such landlords regularly try to prevent the acquisition of the right to manage relying on a range of objections, both procedural and substantive. The Supreme Court’s decision will make it harder for obstructive landlords to succeed on mere procedural grounds when there is no substantive challenge to the eligibility requirements for the acquisition of the right to manage.
The decision also provides more general helpful guidance as to the application of the new approach to statutory construction set out in Soneji in seeking to ascertain Parliament’s intention as to the consequences of non-compliance with other statutory procedures, including its application to statutes conferring property and similar rights. It provides scope to argue for a less strict approach to procedural breaches in such cases in light of the Supreme Court’s qualification of the Court of Appeal’s decision in Natt v Osman.
The full judgment is available here: [https://caselaw.nationalarchives.gov.uk/uksc/2024/27]
Winston Jacob
Lamb Chambers
16 August 2024
