Property Development: Interpretation of management company obligations in transfers of freehold properties (Mostyn House Estate Management Co Ltd v Youde – 2022)

Where a property is redeveloped and let to leaseholders on leases, were the terms of the leases admissible as evidence in proceedings concerning the interpretation of freehold transfers?

The background

In Mostyn House Estate Management Co Ltd v Youde [2022], a former school building and site was redeveloped, with a range of flats and new build houses sold to residential occupiers on standard form leases and transfers.

The site was managed by three management companies:

1. Leaseholder members – the company was a party to the leases (“Company A”);
2. Freeholder members – the company was a party to the transfers (“Company B”); and
3. Leaseholder and freeholder members, controlled by leaseholders – the company was a party to both leases and transfers (“Company C”).

Management companies in each case were obliged to deliver services, the costs of which were recoverable from leaseholders or freeholders through service or rent charges. Company C was able to recover costs from leaseholders and freeholders.

In the leases and transfers, Companies A and B covenanted to repair ‘Retained Parts’, to protect and maintain original features within Retained Parts and to comply with the Section 106 agreement.

Company C brought an application for a declaration that, under the freehold transfers, it was to maintain the listed school buildings containing leaseholders’ flats and could require freeholders to contribute towards the costs of doing so. Company C’s obligation contained in freehold transfers was to “maintain and manage the Communal Areas and Communal Facilities in accordance with the requirements of the Section 106 agreement and to comply generally with the obligations detailed in the Section 106 Agreement”. Expenditure could be incurred “in compliance with the requirements of the Section 106 Agreement…”.

Obligations were contained in the Section 106 agreements for the developer to continue the future maintenance and management of the building, keeping it in a good state of repair, but did not envisage an arrangement comprising three separate management companies. The Court of Appeal considered three issues:

1. Whether the terms of the leases could be admissible to aid interpretation of the transfers;
2. Whether terms contained in the transfers gave Company C the right to claim maintenance costs from freeholders; and
3. Whether the declaration should be made.

The decision

The Court of Appeal found that Company C was not responsible for the maintenance of the building, and therefore a declaration was not made entitling Company C to claim costs for such maintenance from freeholders.

The Court found that the terms of the leases were not admissible, disagreeing with the first instance judgment. Some transfers were made before the grant of any leases, and so the parties could not have benefited from understanding of this interpretation at the point the transfers were made. The Court dismissed an argument that the terms of the leases would have nevertheless been available to freehold purchasers – no evidence was presented in this regard, and leases were not found to be public documents at the time of completion of transfers.

The Court of Appeal referenced Arnold v Britton [2015], finding that transfers could not carry different meanings before and after the grant of transfers.

The Court of Appeal did agree with the earlier court’s conclusion that Company C’s repair and maintenance obligations were the same as Companies A and B, but the ability to recover costs depended on which of the three companies carried out the works. The companies’ obligations and service charges were structured according to whether works were undertaken to the freehold areas of the estate or to the whole development, including the leasehold parts.

Company B was responsible for maintenance of the exterior and structure of the school buildings, and had ‘step in’ and other rights in respect of maintenance of the Retained Parts, but Company C did not benefit from such rights. Company C could only acquire such rights where Company B had failed to meet its Section 106 agreement conditions.

Advice and action for landlords

This decision looks at how the courts may approach interpretation of leases and transfers in a complex mixed estate.

Where one document (“Document A”) is granted before others (“Document B”) – in this case, transfers granted before leases – the court will not admit the terms of Document B when interpreting Document A on the basis that it was not a publicly available document at the time Document A was granted.

Developers and landlords are advised to plan from the outset how estate management will be structured, ensuring that terms are contained in the relevant Section 106 agreements and planned throughout an estate’s leasehold and freehold titles to avoid any potential for double- or under-charging.