Landlord’s flat and Right to Manage – who gets the profit?

 The decision in Churchill Retirement Living v Hampton Lodge RTM Company Limited

David Peachey was recently successful in an appeal to the Upper Tribunal dealing with whether or not income from a guest suite in a residential development should be credited to the service charge. The case was Churchill Retirement Living Limited v Hampton Lodge RTM Company Limited [2026] UKUT 164 (LC).

The appeal concerned Hampton Lodge, a block of 39 retirement flats of which the appellant is the freeholder. The flats are restricted to residents aged 55 and over. As is common in developments of this kind, the landlord provides a guest room which residents may book, on payment of a fee, for visiting family or friends to stay overnight.

The flat leases gave the leaseholders the right to use various common facilities “if provided”. That included use of the guest bedroom subject to the payment to the Landlord of the charges for such use which the Landlord may in its discretion from time to time impose.”

The central issue in the appeal was the charge imposed by the landlord when residents book that room. This became an issue when management of the development passed from the landlord, Churchill Retirement Living, to a right to manage company.

The statutory background of the case was as follows. Under the Commonhold and Leasehold Reform Act 2002 (“the Act”), leaseholders of flats may form a company (known as an RTM or right to manage company) and acquire the right to manage their building.

The landlord need not have done anything wrong. If the statutory procedure is properly followed, the right to manage can be acquired, although the landlord may challenge whether the procedure has in fact been complied with.

Against that background, the respondent RTM company was formed in October 2023. The route to acquisition was disputed but, eventually, the RTM company obtained the right to manage Hampton Lodge and has managed the building through agents ever since.

Section 94 of the Act provides for the situation where, prior to the date the RTM company takes over, the landlord has received service charges from leaseholders which it has not yet spent in providing services. The Act calls these “accrued uncommitted service charges”. Unsurprisingly, accrued uncommitted service charges must be paid over to the RTM company. The landlord can retain sums which have not been paid but which relate to costs incurred before the acquisition date.

A dispute arose about the amount of these charges, and the RTM company applied to the First Tier Tribunal (“FTT”) for a determination of the sums due to it from the landlord under s.94.

Before the First-tier Tribunal, the RTM company’s argument began with a simple point: the leaseholders were already paying, through the service charge, for the repair, maintenance and management of the guest room. Furthremore, historically, any income generated by that room had been credited back to the service charge account.

To support that argument, the RTM company relied on Warwickshire Hamlets Ltd v Gedden. The FTT did not engage with that case in any detail, but it formed an important part of the background to the argument.

In Warwickshire Hamlets, the lease expressly said that payments made by residents for the use of the guest room were to be credited against the maintenance expenses before each leaseholder’s proportion was calculated. The dispute in Warwickshire Hamlets was centred on another issue, but the wording about guest-room income was nevertheless relied on by the RTM company here.

Against that background, the RTM company argued that the landlord was not entitled to keep the income from the guest room. The lease, they said, treated the booking charge as a way of offsetting the leaseholders’ own contribution, through the service charge, to the upkeep of that guest room.

The FTT accepted that submission. It reasoned that the guest suite was not space retained by the landlord for its own purposes, but a facility the leaseholders were entitled to use, and that the payment was better understood as a licence fee rather than as rent. The FTT also considered that, because the repair, maintenance and management of the guest suite formed part of the transferred management functions, the fees paid for its use should also pass to the RTM company. On that basis, the FTT held that the sum of £1,050 was an accrued uncommitted service charge payable by the landlord to the RTM company.

That may seem like a relatively small sum, but the RTM’s insistence that it was entitled to credit the guest room licence fees to the service charges could have obvious ramifications for future guest room income.

The landlord appealed to the Upper Tribunal and the matter came before Judge Elizabeth Cooke. Citing the familiar case of Arnold v Britton [2015] AC 36, she rejected the RTM company’s argument that there was any special rule of construction for service charges. Focusing on the wording of the lease, she observed that arguments about construction of a lease are only relevant where there is ambiguity. Here, she found “there is simply no ambiguous wording to be construed.”

Judge Cooke went on to say that none of the arguments raised by the respondent RTM company were the slightest bit relevant to the question of whether the guest room income should be credited against the service charge. The meaning of the leases in this respect was perfectly clear.

The Upper Tribunal noted that the leases contained express provision for other monies received by the landlord to be credited to the service charge, for example insurance monies. Judge Cooke accepted the appellant’s argument that where the parties to the lease intended to provide for monies belonging to the landlord to be credited to the service charge, they had stated so expressly. That was not the case with the charge for use of the guest room, and therefore no term to that effect could be implied.

Comment

This case shows how easily a tribunal can fall into error on the basis of cases involving superficially similar lease provisions. It reminds us all that whatever principles of construction might apply, each lease is different and, unless there is ambiguity, the lease generally means what it says.

Article by David Peachey