The Upper Tribunal was asked to consider whether a management order conferred powers on the manager to demand contributions to a reserve fund for future expenditure and the scope of the order by reference to the lease provisions.
The case concerned Northwood Hall, an aging eight-storey block of flats constructed in mid 1930s and consisting of 194 flats. The central heating and hot water system was the main point of dispute between the leaseholders and the freeholder as it was originally designed with a communal gas fired boiler in the basement used to distribute hot water and central heating via risers into individual flats. This type of heating and hot water system was notoriously expensive to maintain and eventually had to be replaced, at large costs. Not surprisingly, this generated a large number of disputes between the leaseholders and the freeholder.
The freeholder managed the block until 2011 when a Right to Manage Company (RTM) took over. Plans to replace the aging heating and hot water system began in 2014 and it was handled initially by the RTM. However, the project became stagnant due to in-fighting between rival factions over control of the RTM, so, quite unusually, in 2016, the freeholder applied to the First-Tier Tribunal under s24 Landlord and Tenant Act 1987 to appoint Mr Taylor as manager of the block. The FTT granted a Management Order, appointing Mr Taylor as manager for a duration of 3 years, which was subsequently varied in early 2017. In September 2019, the Order expired and neither parties applied to have it extended.
Under the terms of the Management Order, Mr Taylor was granted “all such powers and rights as may be necessary and convenient and in accordance with the Leases to carry out the management functions” of the freeholder. The Management Order went on to list a significant number of specific powers and rights, such as:
- preparing annual service charge budgets
- demanding and collecting service charges and any other payments due
- maintaining the existing reserve funds and continuing with prudent provision for the same.
A reserve fund of approximately £1.75m existed prior to the manager’s appointment, having been collected by the RTM’s managing agents.
As the Management Order granted rights and powers by reference to the leases, it is important to note that the leases made provisions for maintaining a reserve fund, to be included in the actual expenditure as “such reasonable anticipated expenditure which is of a periodic or recurring nature as the Lessors or their Managing Agents may in their sole discretion allocate to the financial year in questions as being fair and reasonable in the circumstances”.
However, in a very unexpected turn of events, during proceedings in the County Court in April 2019, it was agreed during submissions (and conceded by counsel for Mr Taylor) that the lease contained no provision for maintaining a reserve fund.
Proceedings before the Tribunal
Mr Taylor applied to the FTT for a retrospective determination of payability and reasonableness of service charges, including contributions to the reserve fund, for the year 2017/18. These proceedings were expressly conducted on the basis that both the lessees and Mr Taylor agreed that the lease did not include provisions for a reserve fund. The FTT found that the Management Order did allow for the manager to operate a reserve fund and determined that the sum of £1.4m demanded for the reserve fund was reasonable (split into a £200k demand for “long term expenditure” for decorations, lighting etc. and a £1.2m demand for fire safety works).
Nonetheless, the FTT found that the sums demanded were in fact unrecoverable because the parties agreed that the manager failed to make valid demands for the service charges, in addition to the fact that, by the time of the hearing in the FTT, the Management Order had in fact expired, Mr Taylor’s appointment had not been renewed and the management of the building reverted to the freeholder. Very surprisingly, the lessees appealed to the Upper Tribunal for consideration of the proper constructions of the Management Order.
In their decision, the Upper Tribunal referred to the Court of Appeal case of Maunder Taylor v Blaquiere  where it was held that the functions of a tribunal appointed manager were not limited to the terms of the lease. It held that, under the provisions of the Management Order, the manager’s power to maintain a reserve fund was not free-standing, but arose out of the right to manage the existing reserve fund and “to continue with prudent provision of the same”. Given that the RTM had previously collected reserve funds and that a substantial capital project was required to remedy the defects with the service installations in the building, the FTT was correct to determine that the Management Order intended for the manager to collect further funds for the reserve.
The Upper Tribunal also rejected the lessees’ submission that the Management Order was ambiguous regarding provisions for a reserve fund. It held that, as the Management Order made reference to rights and powers arising out of the lease and given that, on interpreting the lease, it allowed for a reserve fund by reference to anticipated expenditure in the actuals, there were sufficient provisions made for maintaining a reserve fund, albeit it was bound by the County Court finding of the parties lease interpretation.
Whilst the Upper Tribunal held that the provisions of the lease enabled the manager to collect for the reserve fund and that the Management Order did confer the power to run such a reserve fund, ultimately the exercise was an academic one as the sums were not validly demanded (as agreed between the parties). The appeal was, for all intents and purposes, a very expensive exercise in interpreting the provisions of the Management Order and leases.
Furthermore, whilst the Upper Tribunal accepted that the parties were bound by their own interpretation of the lease within the County Court proceedings, there was nothing to stop the freeholder from operating a reserve fund and seeking to recover relevant contributions from lessees as they were not party to any of the proceedings and, as such, the agreed lease interpretation was not binding on the freeholder.