First-tier Tribunal Allows Lease Variation for Full Service Charge Recovery

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00AH/LVT/2020/0001 HMCTS code (paper, video, audio) : P: PAPER REMOTE Property : [NAME] 1, 2 & 3, 110 [ADDRESS] [POSTCODE] Applicant : [redacted] : [APPELLANT] Respondents : [redacted] Ms [COUNSEL] V [COUNSEL] ([NAME]

2) Mr [COUNSEL] D [COUNSEL] ([NAME]

3) Representative : In person Type of [NAME] : [NAME] for the variation of leases Tribunal member : Judge N Hawkes London Panel Venue : 10 [ADDRESS] [POSTCODE] Date of decision : 20 May 2020

DECISION

2 Covid-19 pandemic: paper determination This has been a remote determination on the papers which has been consented to by the Applicant and which has not been objected to by any of the Respondents. The form of remote hearing was P:PAPER REMOTE. A face-to- face hearing was not held because it was not practicable and all issues in dispute could be determined on paper. The documents that I was referred to are in a bundle of 99 pages, the contents of which I have noted. The order made is described at the end of these reasons. The [NAME]

1. The Applicant seeks to vary the leases of three [NAME] at 110 [ADDRESS] [POSTCODE] (“[NAME]”), under section 35 of the Landlord and Tenant Act 1987 (“the 1987 Act”).

2. The Tribunal has been informed that [NAME] is a [NAME] which has been converted into three leasehold [NAME].

3. Two applications have been made; one to ensure 100% recovery of service charge expenditure and another to vary the leases to include provision for a reserve fund to be created. At a case management hearing, which took place on 11 February 2020, the two applications were consolidated.

4. The directions of 11 February 2020 (“the Directions”) record that the [NAME] contacted the Tribunal to indicate that they were in agreement with the proposed variations. The [NAME] may have been unaware of the case management hearing because correspondence was sent to solicitors believed to be acting for her who subsequently informed the Tribunal that they were not instructed.

5. The proceedings were stayed on 19 March 2020 due to the covid-19 pandemic. A digital hearing bundle was requested by the Tribunal on 5 May 2020 and, following receipt of this bundle, the matter was listed for a paper determination.

6. The Directions include provision for the Respondents, by 27 March 2020, to send the Applicant a Statement in Reply stating whether they agree to the proposed variations and, if not, setting out the reasons for their objection. The Statements in Reply were also to set out any compensation which would be sought if the proposed variations were to be made. The Applicant was directed to include any Statements in Reply in the hearing bundle.

7. The hearing bundle includes a written statement from the [NAME] of [NAME] 1 in support of the proposed variations. No [NAME] statement in response to the applications is included in the hearing bundle.

3 8. By email dated 12 May 2020, [APPELLANT], which acts for the Applicant, confirmed that the hearing bundle was sent to each of the Respondents both by post and digitally and that the Applicant has not received any objection to the applications from any of the Respondents.

9.

Accordingly, on the basis of the documents before the Tribunal, the [NAME] appear have to agreed to the proposed variations (although written confirmation has only been received from the [NAME] of [NAME] 1 in accordance with the Directions); the proposed variations are not opposed by the [NAME]; and no compensation is sought by any of the Respondents. No [NAME] has been made for the reimbursement of Tribunal fees or for orders under section 20C of the Landlord and Tenant Act 1985 and/or paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002. The Tribunal’s determinations 10. Section 35 of the 1987 Act provides, so far as is material: 35.— [NAME] by party to lease for variation of lease. (1) Any party to a long lease of a [NAME] may make an [NAME] to the appropriate tribunal for an order varying the lease in such manner as is specified in the [NAME]. (2) The grounds on which any such [NAME] may be made are that the lease fails to make satisfactory provision with respect to one or more of the following matters, namely— (a) the repair or maintenance of— (i) the [NAME] in question, or (ii) the building containing the [NAME], or (iii) any land or building which is let to the tenant under the lease or in respect of which rights are conferred on him under it; (b) the insurance of the building containing the [NAME] or of any such land or building as is mentioned in paragraph (a)(iii); (c) the repair or maintenance of any installations (whether they are in the same building as the [NAME] or not) which are reasonably necessary to ensure that [NAME] enjoy a reasonable standard of accommodation;

4 (d) the provision or maintenance of any services which are reasonably necessary to ensure that [NAME] enjoy a reasonable standard of accommodation (whether they are services connected with any such installations or not, and whether they are services provided for the benefit of those [NAME] or services provided for the benefit of the [NAME] of a number of [NAME] including that [NAME]); (e) the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that [NAME] party or of a number of persons who include that [NAME] party; (f) the computation of a service charge payable under the lease; (g) such [NAME] matters as may be prescribed by regulations made by the Secretary of State. (3) For the purposes of subsection (2)(c) and (d) the factors for determining, in relation to the [NAME] of a [NAME], what is a reasonable standard of accommodation may include— (a) factors relating to the safety and security of the [NAME] and its [NAME] and of any common parts of the building containing the [NAME]; and (b) [NAME] factors relating to the condition of any such common parts. (3A) For the purposes of subsection (2)(e) the factors for determining, in relation to a service charge payable under a lease, whether the lease makes satisfactory provision include whether it makes provision for an amount to be payable (by way of interest or otherwise) in respect of a failure to pay the service charge by the due date. (4) For the purposes of subsection (2)(f) a lease fails to make satisfactory provision with respect to the computation of a service charge payable under it if— (a) it provides for any such charge to be a proportion of expenditure incurred, or to be incurred, by or on behalf of the landlord or a superior landlord; and (b) [NAME] of the landlord are also liable under their leases to pay by way of service charges proportions of any such expenditure; and (c) the aggregate of the amounts that would, in any particular case, be payable by reference to the proportions referred to in paragraphs (a)

5 and (b) would either exceed or be less than the whole of any such expenditure. … (8) In this section “service charge” has the meaning given by section 18(1) of the 1985 Act. (9) For the purposes of this section and sections 36 to 39, “appropriate tribunal” means— (a) if one or more of the long leases concerned relates to property in England, the First-tier Tribunal or, where determined by or under Tribunal Procedure Rules, the Upper Tribunal;

11. Section 37 of the 1987 Act includes provision that: 37.— [NAME] by majority of parties for variation of leases. (1) Subject to the following provisions of this section, an [NAME] may be made to the appropriate tribunal in respect of two or more leases for an order varying each of those leases in such manner as is specified in the [NAME]. (2) Those leases must be long leases of [NAME] under which the landlord is the same person, but they need not be leases of [NAME] which are in the same building, nor leases which are drafted in identical terms. (3) The grounds on which an [NAME] may be made under this section are that the object to be achieved by the variation cannot be satisfactorily achieved unless all the leases are varied to the same effect. (4) An [NAME] under this section in respect of any leases may be made by the landlord or any of the tenants under the leases. (5) Any such [NAME] shall only be made if— (a) in a case where the [NAME] is in respect of less than nine leases, all, or all but one, of the parties concerned consent to it; or … (6) For the purposes of subsection (5)— (a) in the case of each lease in respect of which the [NAME] is made, the tenant under the lease shall constitute one of the parties concerned

6 (so that in determining the total number of the parties concerned a person who is the tenant under a number of such leases shall be regarded as constituting a corresponding number of the parties concerned); and (b) the landlord shall also constitute one of the parties concerned.

12. Section 38 of the 1987 Act includes provision that: 38.— Orders varying leases. (1) If, on an [NAME] under section 35, the grounds on which the [NAME] was made are established to the satisfaction of the tribunal, the tribunal may (subject to subsections (6) and (7)) make an order varying the lease specified in the [NAME] in such manner as is specified in the order. … (3) If, on an [NAME] under section 37, the grounds set out in subsection (3) of that section are established to the satisfaction of the tribunal with respect to the leases specified in the [NAME], the tribunal may (subject to subsections (6) and (7)) make an order varying each of those leases in such manner as is specified in the order. (4) The variation specified in an order under subsection (1) or (2) may be either the variation specified in the relevant [NAME] under section 35 or 36 or such [NAME] variation as the tribunal thinks fit. (5) If the grounds referred to in subsection (2) or (3) (as the case may be) are established to the satisfaction of the tribunal with respect to some but not all of the leases specified in the [NAME], the power to make an order under that subsection shall extend to those leases only. (6) A tribunal shall not make an order under this section effecting any variation of a lease if it appears to the tribunal — (a) that the variation would be likely substantially to prejudice— (i) any respondent to the [NAME], or (ii) any person who is not a party to the [NAME], and that an award under subsection (10) would not afford him adequate compensation, or

7 (b) that for any [NAME] reason it would not be reasonable in the circumstances for the variation to be effected. … (8) A tribunal may, instead of [NAME] an order varying a lease in such manner as is specified in the order, make an order directing the parties to the lease to vary it in such manner as is so specified; and accordingly any reference in this Part (however expressed) to an order which effects any variation of a lease or to any variation effected by an order shall include a reference to an order which directs the parties to a lease to effect a variation of it or (as the case may be) a reference to any variation effected in pursuance of such an order. (9) A tribunal may by order direct that a memorandum of any variation of a lease effected by an order under this section shall be endorsed on such documents as are specified in the order. (10) Where a tribunal makes an order under this section varying a lease the tribunal may, if it thinks fit, make an order providing for any party to the lease to pay, to any [NAME] party to the lease or to any [NAME] person, compensation in respect of any loss or disadvantage that the tribunal considers he is likely to suffer as a result of the variation. The [NAME] to enable 100% recovery of service charge expenditure 13. Clause (C)(i) of the Particulars to the lease of [NAME] 2 provides: “During the said term by way of further and additional rent the [NAME] will pay on demand one fifth of the costs and expenses reasonably incurred or to be incurred by the Lessor in complying with the obligations imposed by clause 3(1)(5)(6) and (7) hereof (hereinafter called the service charge …” 14. The Applicant seeks a variation of Clause (C)(i) of the Particulars so as to state (emphasis supplied): “During the said term by way of further and additional rent the [NAME] will pay on demand two fifths of the costs and expenses reasonably incurred or to be incurred by the Lessor in complying with the obligations imposed by clause 3(1)(5)(6) and (7) hereof (hereinafter called the service charge …” 15. In its [NAME], the Applicant states: “There are three [NAME] within the building and the service charge contributions do not add up to 100%. [NAME] 1 is to contribute 2/5. [NAME] 2

8 is to contribute 1/5 and [NAME] 3 is to contribute 1/5. Therefore, there is 1/5 missing annually from the amount which is being collected. We are looking to vary [NAME] 2’s contribution to 2/5 due to the size of [NAME], as it is the same size as [NAME] 1. [NAME] 3 is significantly smaller.” 16. In its Statement of Case, the Applicant states that the proposed variation would enable 100% of the service charge to be collected, as only 80% is currently payable under the terms of the three leases.

17. This is not disputed by the [NAME] and this [NAME] is unopposed.

In all the circumstances, I am satisfied that the lease of [NAME] 2 fails to make satisfactory provision for the computation of service charge and exercise my discretion to direct the relevant parties to make the variation sought by the Applicant. As stated above, no compensation is sought. The [NAME] to vary the leases to make provision for a reserve fund to be created 18. There is currently no provision in the leases for a reserve fund. The Applicant seeks a variation of the [NAME] of all three [NAME] at [NAME] so as to enable a reserve fund to be created.

19. The Applicant seeks a variation to add the following Clause (C)(ii) to each of the three leases: “To contribute such sum as shall be considered reasonably necessary by the Landlord (whose decision shall be final) to provide reserves or sinking funds for items of future expenditure for major works in connection with Clause (1)(5)(6) and (7) hereof.” 20. As regards the proposed words “whose decision shall be final”, it is noted that, pursuant to the provisions of the Landlord and Tenant Act 1985, [NAME] have the right to seek a Tribunal determination in respect of the reasonableness and payability of reserve fund contributions.

21. At page 7 of the [NAME], the Applicant states: “… A reserve fund with a healthy balance will allow the landlord or manager to cover the cost of major works without demanding additional service charges from leaseholders in that particular accounting year. A well-managed reserve fund will also enhance [NAME] as prospective buyers will see this as an advantage over leasehold blocks without a reserve fund. Furthermore, a reserve fund is recommended in the Service Charge Residential Management RICS Code of Practice.”

9 22. In its Statement of Case, the Applicant expands upon these points and, in support of this [NAME], the Applicant relies upon a Major Works and Long-term Maintenance Plan dated February 2020 (“the Maintenance Plan”).

23. The Maintenance Plan records that significant works are required to the common parts of [NAME], in particular, to comply with a Fire Risk Assessment, and to repair, replace and/or maintain the roof, gutters and down pipes, internal decorations, front entrance door, and the intercom system. The Maintenance Plan also states that the external decorations will require attending to in the next couple of years and that the carpets in the communal areas of [NAME] are in poor condition and pose a potential trip hazard. Photographs have been provided.

24. The test which must applied is set out in [NAME] v Morath [2019] UKUT 193 (LC) at [16] (emphasis added): “… the Tribunal will consider whether the wording of the lease as it stands is clear, and whether the term sought to be varied is workable. If it is clear and workable then it is not unsatisfactory. Obviously the question whether the bargain as it stands works in practice has to be considered on the basis of the evidence in each case. But section 35 does not enable the Tribunal to vary a lease on the basis that it imposes unequal burdens, or is expensive or inconvenient. It would be very strange if it did, in view of the law's general resistance to the temptation to interfere in or improve contractual arrangements freely made.” 25. Further, in [COMPANY] v Stride [2019] UKUT 99 (LC) it is stated at [40]: “The fact that the proposed variations are common or standard does not make the original terms unsatisfactory. Equally the fact that different tenants make different contributions does not make the lease unsatisfactory. There is a repairing covenant so this is not a case where there is no obligation to repair. [NAME] is a [NAME] owned company and in the light of [NAME] we accept that there might be circumstances where the lack of adequate contributions from Triplerose could render the lease unsatisfactory. However, that can only be established by evidence. If, for example, the building required a major roof or [NAME] structural repair beyond the means of the members of [NAME], that might constitute the necessary evidence. But there is no such evidence at present.” 26. I agree with the Applicant that there would be significant advantages in building up a reserve fund. However, it is clear from the passages set out above that the Tribunal has no power to vary leases simply to improve the contractual arrangements between the parties; because the proposed variations are standard terms; or because the absence of a reserve fund is inconvenient.

10 27. It is not asserted in the Applicant’s Statement of Case that the clear absence of a reserve fund is “unworkable” and there is no evidence that it is beyond the means of the relevant parties to fund the proposed works in the absence of a reserve fund.

Accordingly, I am not satisfied on the basis of the evidence and submissions before me that the original lease terms are “unsatisfactory” within the meaning of section 35 of the 1987 Act by reason of the absence of any provision for a reserve fund.

28. In its Statement of Case, the Applicant states that the [NAME] also falls under section 37 of the 1987 Act. Written confirmation has, to date, only been received from the [NAME] of one of the three [NAME], in accordance with the Directions, that they consent to the proposed variation. However, there may have been confusion as to whether written confirmation was required because the [NAME] contacted the Tribunal to indicate that they supported the Applicant’s [NAME] prior to the case management hearing.

29.

Accordingly, I will make the further directions which are set out below in order to enable the Applicant to proceed with its [NAME] under section 37 of the 1987 Act. Conclusion 30. The Applicant’s applications under section 35 of the 1987 Act have been determined as preliminary issues: (i) The Applicant and the [NAME] are directed to vary clause (C)(i) of the lease of [NAME] 2 to state: “During the said term by way of further and additional rent the [NAME] will pay on demand two fifths of the costs and expenses reasonably incurred or to be incurred by the Lessor in complying with the obligations imposed by clause 3(1)(5)(6) and (7) hereof (hereinafter called the service charge …” (ii) The Applicant’s [NAME] under section 35 of the 1987 Act to vary the leases of all three [NAME] so as to include provision for a reserve fund is dismissed.

31. If the Applicant wishes to proceed with its [NAME] concerning the reserve fund under section 37 of the 1987 Act, it shall by 5 June 2020 write to the Respondents stating whether it intends to include the words “whose decision shall be final” in the proposed lease variations. If so, it shall also set out the basis for including these words when the [NAME] have the right to apply to the Tribunal for a determination concerning the reasonableness and payability of reserve fund contributions. The

11 Applicant shall also, in this correspondence, seek the Respondents’ written consent to the proposed variations.

32. The Applicant shall by 19 June 2020 file and serve a digital bundle containing written evidence that the requirements of section 37 of the 1987 Act are satisfied or, alternatively, notice of withdrawal of the [NAME] under section 37 of the 1987 Act, pursuant to rule 22 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. Name: Judge N Hawkes Date: 20 May 2020

Rights of appeal By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the tribunal is required to notify the parties about any right of appeal they may have. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written [NAME] for permission must be made to the First- tier Tribunal at the regional office which has been dealing with the case. The [NAME] for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the [NAME]. If the [NAME] is not made within the 28-day time limit, such [NAME] must include a request for an extension of time and the reason for not complying with the 28-day time limit; the tribunal will then look at such reason(s) and decide whether to allow the [NAME] for permission to appeal to proceed, despite not being within the time limit. The [NAME] for permission to appeal must identify the decision of the tribunal to which it relates (i.e. give the date, [NAME] and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking. If the tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).