The optics of redeveloping property

Laura Checkley and Katie de Kauwe consider a landlord's right to develop versus a company's right to manage

Landlords are all too familiar with the idea of disputes with tenants over building works. But what happens when a landlord's right to develop is pitted against a RTM company's right to manage?

In Francia Properties Limited v Aristou, the Central London County Court held that a landlord was entitled to build a new flat on the roof of an RTM building provided it adopts all reasonable steps to minimise disturbance to the company's management functions.

The case concerned a building called 'The Optic', owned by Francia Properties Limited (the claimant). The building, comprised of eight flats, the roof, as well as other common parts, was retained by the claimant. A RTM company (the defendant) acquired the right to manage the building in 2014 under the Commonhold and Leasehold Reform Act 2002. In 2015, the claimant obtained planning permission for a flat on the roof. Subsequently, it sought a part 8 declaration that it was entitled to undertake those works.

Section 96(2) of the Act provides that, when the right to manage is exercised, 'management functions' of the landlord become functions of the RTM company. Section 97(2) of the Act goes on to say, a landlord 'is not entitled to do anything which an RTM company is required or empowered to do under the lease'.

The defendant argued that the legislation prohibited the claimant from developing the roof, because the redevelopment would unlawfully interfere with its management functions, it being common ground that the management functions extended to the roof.

The court did not agree. Constructing a new dwelling was not a management function: it was not something that an RTM company is 'required or empowered' to do under the Act. While the defendant was required/empowered to manage the roof, and that management would inevitably be affected by the works, there was nothing in the Act to prohibit that. There was no evidence that parliament's intention was that the Act should nullify a landlord's right to develop.

The court also considered human rights legislation in reaching its decision. The Human Rights Act 1998 incorporates the European Convention of Human Rights (ECHR) into domestic law. Under section 3(1), where possible, primary and subordinate legislation must be read and given effect in a way that is compatible with the ECHR. The court found that it was possible to interpret the Act in a manner consistent with the convention.

If the defendant's interpretation of the Act was correct, prohibiting the landlord from undertaking the development might infringe its right to peacefully enjoy its possessions (article 1, protocol 1). The court considered that there might be cases where the effect on the landlord was large, but the effect on the RTM's management function slight.

In such circumstances, it is likely that the interference would be regarded as disproportionate, in the absence of any compensation to the landlord. However, on the basis that it found in favour of the claimant, it did not need to decide the point in this case.

The claimant was therefore granted a declaration to the effect that the acquisition of the right to manage by the defendant did not prevent the claimant from developing the roof, provided that it took all reasonable steps to minimise disturbance to the management functions of the defendant both during and after the works.

A relatively encouraging result for landlords, the court nevertheless made clear that each development would need to be considered on a case-by-case basis. Moreover, it added a caveat that there may be some developments which are so significant that a landlord cannot be said to have taken all reasonable steps to limit disturbance. As such, there will still need to be a balancing exercise undertaken between the landlord's and RTM company's rights.

Although only a first instance decision, the case provides useful guidance on resolving conflict between landlords and RTM companies. However, the defendant has been granted permission to appeal to the Court of Appeal. As such, for the time being, it remains to be seen if eight flats will become nine or if RTM buildings will prove no-go areas for landlord developments.

Laura Checkley is a partner and Katie de Kauwe is a trainee solicitor in the real estate dispute resolution team at Pemberton Greenish @pg_law