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Failure to comply with statutory notice requirements - The Court of Appeal addresses the correct approach to non-compliance with the right to manage legislation

A party serves a notice seeking to acquire a property or similar right but fails to comply with the strict requirements of the statute. Does it invalidate the notice? The Court of Appeal considers this question for the first time in relation to the right to manage legislation

In Elim Court RTM Co Ltd v Avon Freeholds Ltd [2017] EWCA Civ 89, the Court of Appeal (Arden LJ, Lewison LJ and Proudman J) considered the court’s approach to the consequences of a failure to comply strictly with the statutory notice procedure for the acquisition of the right to manage. Winston Jacob, a barrister at Lamb Chambers, represented the successful Appellant in the Court of Appeal.

The statutory scheme

Chapter 1 of Part 2 of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) makes provision for the acquisition and exercise of a statutory right to manage certain premises containing flats owned by qualifying tenants. The right may be acquired by a right to manage (“RTM”) company controlled by at least half of the qualifying tenants.

In order to acquire the right to manage, the RTM company must first serve a notice of invitation to participate on any qualifying tenants who are not already members of the company. The RTM company must then wait at least 14 days before serving a claim notice on certain categories of person, including landlords of the whole or any part of the premises. Provided certain qualifying rules are met and the statutory procedure is followed, an RTM company will then acquire the right to manage without having to prove fault on the part of the landlord or pay the landlord any compensation.

Section 84 of the 2002 Act entitles any person served with a claim notice to serve a counter-notice denying that the RTM company is entitled to exercise the right to manage by virtue of a provision of Chapter 1 of Part 2 of the 2002 Act. If a recipient of the claim notice does so, the RTM company may apply to the relevant tribunal for a determination that it was entitled to exercise the right to manage.

Sections 78 and 79 of the 2002 Act and regulations made under them set out detailed provisions in relation to the content and service of notices of invitation to participate and claim notices.

In this case, some of the residents of Elim Court in Plymouth had set up the Appellant company in order to seek to exercise the right to manage their block of flats. They had served notices of invitation to participate and claim notices. The Respondent, the freeholder of the block, had served a counter-notice objecting to their obtaining the right to manage, alleging that the statutory notice procedures had not been properly complied with. The Appellant applied to the Leasehold Valuation Tribunal (“LVT”) for a determination that it was entitled to exercise the right to manage.

The LVT held that the Appellant had failed to comply with the statutory notice requirements and that it was therefore not entitled to acquire the right to manage. On appeal, the Upper Tribunal upheld this decision. The Appellant appealed again to the Court of Appeal.

The issues in the case

There were three issues before the Court of Appeal. They were as follows:

The Saturday/Sunday issue:

This revolved around a requirement in the 2002 Act as to the contents of the notice of invitation to participate. Section 78(4) requires the notice of invitation to participate to either be accompanied by a copy of the RTM company’s articles of association or else contain a statement in accordance with s. 78(5). Section 78(5) states that such a statement must:

“(a) specify a place (in England or Wales) at which the articles of association may be inspected,

(b) specify as the times at which they may be inspected periods of at least two hours on each of at least three days (including a Saturday or Sunday or both) within the seven days beginning with the day following that on which the notice is given,

(c) specify a place (in England or Wales) at which, at any time within those seven days, a copy of the articles of association may be ordered, and

(d) specify a fee for the provision of an ordered copy, not exceeding the reasonable cost of providing it.”

The RTM company had included in the notice of invitation to participate a statement that the articles of association could be inspected on a Monday, Tuesday and Wednesday between 10 am and midday. The Respondent argued that this did not comply with s. 78(5)(b). It argued that the words in brackets “including a Saturday or Sunday or both” meant that an RTM company had to offer inspection on at least one day on the weekend. The Appellant argued that the words were permissive; i.e. they permitted the RTM company to offer inspection on a Saturday or Sunday or both but did not oblige it to provide inspection on the weekend.

The Signature issue:

Section 80(9) of the 2002 Act states that a claim notice must comply with such requirements about the form of claim notices as may be prescribed by regulations. The Right to Manage (Prescribed Particulars and Forms) (England) Regulations 2010 (“the Forms Regulations”) prescribe a form of claim notice. The prescribed form (contained in Schedule 2 to the Forms Regulations) ends with the following:

“Signed by authority of the company,

[Signature of authorised member or officer]

[Insert date]”

The claim notice served by the Appellant was in the prescribed form. It was signed as follows:

“Signed by authority of the company,

[manuscript signature of Mr Joiner]

RTMF Secretarial, Company Secretary

3rd July 2012]”.

The signatory, Mr Joiner, was a director of a company, the Right to Manage Federation Ltd. That company was itself the company secretary of the Appellant company. It used the trading name RTMF Secretarial. It was common ground that Mr Joiner personally had the Appellant’s authority to sign the claim notice on behalf of the Appellant.

The Respondent argued that Mr Joiner’s signature of the claim notice had purported to be the signature of the Right to Manage Federation Ltd. That signature did not comply with s. 44 of the Companies Act 2006, which requires a signature on behalf of a company to be either by two signatories or by a director of the company in the presence of a witness.

The Appellant argued that Mr Joiner’s signature did not purport to be that of a company. It was a signature by an individual with authority to sign and it was therefore a valid signature.

The Consequences issue:

The Appellant accepted before the Court of Appeal that it had failed to serve a claim notice on one intermediate landlord of the premises. It was common ground that the intermediate lease was an equity release vehicle used by the occupational tenants to obtain money from the intermediate landlord equity release company. It was further accepted that the intermediate landlord was unlikely to have any management functions relating to the premises.

The Court of Appeal was asked to decide the consequences of the Appellant’s failure to serve the intermediate landlord. Furthermore, were the Appellant to lose on the Saturday/Sunday issue and/or Signature issue, the Court of Appeal was asked to decide the consequences of the Appellant’s failure to offer inspection on a weekend and/or its failure to properly sign the claim notice.

The Respondent argued that each such failure to comply with the strict requirements of the statutory scheme invalidated the Appellant’s claim to exercise the right to manage. The Respondent argued that none of the alleged contraventions were sufficiently serious to invalidate its right to manage claim.

The decision of the Court of Appeal

The court dealt relatively swiftly with the Saturday/Sunday issue and the Signature issue.

Lewison LJ (with whom Arden LJ and Proudman J agreed) held that on its proper interpretation s. 78(5)(b) required an RTM company to offer inspection on at least one day on the weekend. He agreed with the Upper Tribunal that the purpose of the requirement was to facilitate that inspection of articles of association of the RTM company by working tenants. He also agreed that any period of seven days would necessarily include a Saturday and Sunday. Without the parenthesis it would have been optional for the RTM company to offer inspection on the weekend. The purpose of the parenthesis must therefore have been to restrict that freedom.

As to the Signature issue, he considered that the Respondent’s argument was technical in the extreme. He noted that there was no requirement in the Act that the claim notice be signed. Further, there was no explicit requirement in the Forms Regulations. The requirement was inferential, based on the existence of the words in the prescribed form.

He rejected the Respondent’s argument for the same reasons as the Upper Tribunal. These were that Mr Joiner’s signature neither purported to be that of a company, nor could it as a matter of law be that of a company. The claim notice was in fact signed by an individual, Mr Joiner, who was authorised to give the claim notice on behalf of the Appellant. In addition, the Court of Appeal relied on the principle that where a notice is capable of two interpretations, one of which will lead to the conclusion that it is valid, and the other to the conclusion that it is invalid, the former interpretation should be preferred.

The Court of Appeal went on to consider the court’s general approach to the consequences of failing to comply with statutory notice provisions. It noted that Osman v Natt [2015] 1 WLR 1536 was the most recent authoritative consideration of the applicable principles. In Osman v Natt, Etherton C had drawn a distinction between two broad categories of case:

  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.

In the first category of case, substantial compliance with the statutory provisions may be good enough. In the second it cannot; the court merely interprets the notice to see whether it actually complies with the strict requirements of the statute; if it does not, then the court, as a matter of statutory interpretation, either holds the notice to be wholly valid or wholly invalid.

The Court of Appeal held that the acquisition of the right to manage under the 2002 Act fell into the secondary category in Natt v Osman. Therefore, strict compliance with the statutory scheme was required and substantial compliance was not good enough. However, it did not follow that if a case fell within the second category every defect in a notice or in the procedure, however, trivial, invalidated the notice. The court nevertheless had to decide as a matter of statutory construction whether the notice is “wholly valid or wholly invalid”.

In considering the question of validity, although the court should not inquire into the question whether prejudice had been caused on the particular facts of the actual case (Osman at [32]) that does not mean that prejudice in a generic sense is irrelevant. An example of the latter consideration was the Court of Appeal decision in 7 Strathray Gardens Ltd v Pointstar Shipping & Finance Ltd [2005] HLR 20.

The Court of Appeal also noted that nothing in Osman v Natt had cast doubt on the approach of  Sir Stanley Burnton in Newbold v Coal Authority [2014] 1 WLR 1288 at [70] that:

“… it may be that even non-compliance with a requirement is not fatal. In all such cases, it is necessary to consider the words of the statute or contract, in the light of its subject matter, the background, the purpose of the requirement, if that is known or determined, and the actual or possible effect of non-compliance on the parties.”

Turning to the 2002 Act itself, the court noted that the only persons entitled to object to the exercise of the right to manage were landlords, parties to the lease who were neither landlord nor tenant, and court appointed managers. In the majority of cases these were persons who were likely to have management responsibilities. In the context of the right to manage legislation, the Court of Appeal therefore considered that the focus must be on whether Parliament intended that a landlord (or other person entitled to serve a counter-notice) could successfully contend that the defect in the relevant notice was fatal to its validity.

In applying the above principles to the issues in the case, the court held that neither the failure to comply with s. 78(5)(b) nor the failure to serve the intermediate landlord had invalidated the Appellant’s statutory notices. Further, if it were wrong on the Signature issue, it concluded that that breach would similarly not result in invalidity.

As to the failure to comply with s. 78(5)(b), the court noted that the articles of association were available by post on payment of a modest fee. Furthermore, the Appellant had offered physical inspection on two valid days and on a third day (albeit not on a weekend). Although it might not have been legally relevant, it was hard to imagine why any of the qualifying tenants would make a round trip of nearly 500 miles from Plymouth to Uckfield to inspect the articles rather than requesting a copy by post.  The court concluded that the absence of one day at the weekend for a possible (and probably theoretical) physical inspection of the articles was a trivial failure of compliance. It held that a failure by the RTM company to comply precisely with the requirements for a notice of intention to participate did not automatically invalidate all subsequent steps; and the particular failure would not have done so in this case.

Lewison LJ held that, if he were wrong about the Signature issue, he would have no hesitation in saying that the consequences of non-compliance were not fatal to the validity of the notice if the claim notice were signed by someone who was actually authorised by the RTM company to sign it. He rejected the suggestion that, even if there were an inferential requirement contained within the rubric of the prescribed form as to the signature of the claim form, Parliament must have intended that a failure to comply precisely with that requirement would invalidate the notice.

He further held that the failure to serve the claim notice on the intermediate landlord of a single flat with no management responsibilities did not invalidate the notice. It was important to note that the primary persons affected by the right to manage were those with management responsibilities. Although the acquisition of the right to manage might involve a transfer of non-management functions from the intermediate landlord to the RTM company (such as the ability to give consents under the lease) this was ancillary to the primary objective of the legislation which is to enable an RTM company, simply and cheaply, to acquire the right to manage; and to avoid both duplication of effort and administrative untidiness once it has been acquired.

Furthermore, ss. 79(7) and 85 of the 2002 Act envisage circumstances in which the claim notice would be given to some but not all landlords and yet the right to manage could nevertheless be acquired. The court therefore had to take it that the mere fact that a claim notice was not given to all those entitled to receive one would not invalidate the claim notice without more. It could not be said that giving a claim notice to everyone entitled to receive it was necessarily an essential feature of the statutory scheme.

The appeal was therefore allowed and the court concluded that the Appellant was entitled to acquire the right to manage.

The author’s view:

The decision is a welcome one for RTM companies, who are often faced with technical challenges raised by landlords who wish to prevent them from gaining the right to manage. Relatively minor mistakes in the statutory procedures can often be made and the Court of Appeal’s approach may enable more RTM companies to survive such challenges in future.

The decision may also have wider implications. Osman v Natt created two categories of case in which statutory provisions are breached. In respect of the second category - those cases in which a statute confers a property or similar right on a private person and they fail to comply strictly with the statutory notice requirements for claiming that right – it had rejected the concept of substantial compliance being good enough and offered a fairly hard-line approach to non-compliance. The Court of Appeal in this case has confirmed that while substantial compliance is not good enough the court must still consider a wide range of factors to decide if Parliament intended the non-compliance to result in invalidity. Furthermore, while the court should not inquire into the question whether prejudice had been caused on the particular facts of the actual case, prejudice in a generic sense is relevant.

It remains to be seen how the tribunals and courts approach the second category of case in Osman v Natt in future and whether Elim Court v Avon Freeholds will result in a more relaxed approach to procedural defects or if its approach will be confined to the right to manage legislation.

 

Winston Jacob's profile can be viewed here

Winston Jacob / 24th Feb 2017


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