Over Taylor Biggs

Morshead Management Limited owned the freehold of a block of 104 flats.  The share capital of the Company is divided into 104 shares, each worth £1.  Each flat owner held one share and was required to transfer the share to a new owner if the flat were sold.

The Management Company had separate means of recovering its costs for managing the building.  The Articles of Association allowed the Company to require shareholders to pay into a sinking fund and the Lease of the flats required tenants to pay a Service Charge, which also included payments into a sinking fund.

In January 2001, an independent manager had been appointed under Section 24 Landlord Act 1987.  For three years the manager collected Service Charge payments whilst the Company made demands for sinking fund contributions in accordance with the Articles of Association.  Neither the independent manager nor the Management Company had control over the other's activities.

In October 2000, the Company demanded a contribution from the corporate Tenant of two flats, in its capacity as shareholder.  The amount demanded was more than £7,000 for each of the two flats and the Tenant did not pay.

In 2001, to rectify a shortfall in the Management Accounts, the independent manager demanded Service Charge from the Tenant in accordance with its Lease.  These amounts were more than £8,000 for each of the two flats.

The independent manager told the Tenant the payment made to the manager and the sums due to the Company under the Articles of Association would be set off one against the other.  The Tenant paid the sums demanded by the independent manager assuming this set off would mean there was no longer a debt to the Management Company.  No set off was made until two years later when the independent manager's appointment ended and Service Charge payments that he had collected were then credited to the Management Company's account.

The case came to Court primarily because of the refusal of the Management Company to recognise a change in ownership when the two flats in question came to be sold.  It refused to issue new share certificates to the new owner, claiming that the debt to the Management Company was still outstanding.  The Tenant argued that the Management Company had failed to complete the set off and was, therefore, acting in bad faith. 

The Court held that the Management Company did have an ability to refuse to register the transfer of shares because it was not ultimately in the best interests of the Management Company.  That decision was one to be reached by the Directors of the Management Company and not by the Court.

It was recognised the dispute had arisen because of the complicated background of claims by the Management Company for payments from flat owners both in the capacity as tenants and as shareholders.  Many tenants had refused to pay both sums and it was clearly envisaged that sums payable in each capacity would be set off one against the other.

However, the crucial point was that at the date of the Management Company's refusal to register the share transfers, no set off had been made.  The Tenant was therefore liable to the Management Company in its capacity as a shareholder.

The Court was not willing to take into account a previous long history of antagonism leading to litigation between the Management Company and the Tenant.  The Management Company had consistently applied its policy of refusing to register share transfers as a means of enforcing payment of debts.  This was regarded by the Court as a rational approach and one which could not be criticised.

The decision therefore emphasises the need for tenants to be aware of obligations that they may have, both under the Lease and as a shareholder, owning a share in the freehold of the building. 

It is important to identify in advance any disputes that may result in the refusal to register a transfer of shares.  Normally, this risk can be reduced by making as wide as possible range of checks and pre-contract enquiries, including investigations and enquiries of both the Seller and the Management Company to establish what obligations will arise both as a tenant and as a shareholder and whether the Articles of Association of the Management Company entitles them to collect management costs independently of the Lease or through refusal to register a share transfer. 

Attempts should be made to establish whether a Seller or the Management Company is aware of any reason why the Management Company may refuse to register a share transfer or refuse to issue a new share certificate.