First-tier Tribunal Allows Lease Variation for Service Charges

OUTCOME: Allowed

© CROWN COPYRIGHT

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : LON/00AE/LVT/2024/0004 Property : 24 and 24A [ADDRESS] [POSTCODE] Applicants : [redacted] (2) and [COUNSEL] [NAME] (3) Representative :

None

Respondents : [redacted] Type of Application :

For the variation of leases under Section 35 Landlord and Tenant Act 1987

Tribunal Member :

Judge P [NAME] of Decision : 7 August 2024

DECISION

Description of hearing

This has been a remote hearing on the papers. An oral hearing was not held because the Applicants requested an oral hearing, the Respondents did not object, and the tribunal was satisfied that the application could be considered on the papers alone.

2 Decision of the tribunal

Pursuant to section 38(1) of the Landlord and Tenant Act 1987 (“the 1987 Act”), the tribunal hereby orders the variation of: (a) the lease of [ADDRESS] dated 8 June 2000 and made between [COMPANY] (1) and [NAME] (2) and (b) the lease of [ADDRESS] dated 8 June 2000 and made between [COMPANY] (1) and [NAME] (2) in each case in the manner listed in the Schedule hereto. Introduction 1. The tribunal has received an application pursuant to section 35 of the 1987 Act for a variation of each of the two long leases at the Property.

2. The Property contains 2 maisonettes, both held on long leases. The lower maisonette is known as [ADDRESS] (“No.24”) and the leasehold title is currently owned by [NAME] [NAME]. The upper maisonette is known as [ADDRESS] (“No.24A”) and the leasehold title is currently jointly owned by [NAME] and [NAME].

3. The freehold title to the Property is currently owned by [COMPANY], whose sole director is [NAME] [NAME]. The mortgagee of No.24A, the [COMPANY] (“[NAME]”), has asked to be – and has been – joined to these proceedings as a Respondent. Applicants’ summary of background 4. Leases were granted for terms of 99 years in respect of No.24A and No.24 in 1970 and 1978 respectively. At that time, the freehold title included both 22 and [ADDRESS], and the Applicants assume that leases were also granted in respect of two maisonettes at [ADDRESS]. The 99-year leases include a description of “the Building known as 22 and [ADDRESS]”, and require each leaseholder to contribute a quarter share of the freeholder’s costs of inter alia insuring and maintaining the building.

5. In February 2000, the freehold title was transferred to [COMPANY], with the owners of the maisonettes (No.24 and No.24A) taking shares in the company. There are currently two shares in [COMPANY], which are owned by [NAME] and [NAME] [NAME], who are leaseholders of No.24A and No.24 respectively. In June 2000,

3 deeds of surrender and regrant were executed, extending the terms of the leases from 99 to 999 years.

6. The register entries for the freehold title show that [ADDRESS] was removed from the freehold title on 1 August 2006. The charges register shows that the freehold title to [ADDRESS] is now subject only to the two leases at No.24 and No.24A. However, no action has been taken to vary these remaining two leases, either to amend their service charge percentages from one quarter to one half of the landlord’s costs or to change the description of the building to remove the reference to [ADDRESS]. As a consequence, the aggregated service charge percentages for the remaining two leases to which the freehold title is subject amount to only 50%. This leaves the landlord unable to enforce payment of the full costs of insuring and maintaining the building, albeit that such enforcement has not been necessary prior to 2022. The issues 7. The Applicants are applying under section 35 of the 1987 Act for the following variations: • A variation to clause 2(2) of the original leases of both No.24 and No.24A to increase the service charge percentages from 25% to 50%, so that the aggregated contributions amount to 100% of the landlord’s costs, the variation to be backdated to 1 August 2006 which is the date on which [ADDRESS] was removed from the title. • The insertion of a new clause in each lease allowing the landlord to recover interest on late payments. • The correction of an erroneous cross-reference in the original lease of No.24 to enable the landlord to enforce payment of service charges.

8. All of the Applicants support all of the above proposed variations. [NAME], joint leaseholder of No.24A with [NAME] [NAME], has not commented on the proposed variations. It is unclear from the information before me whether (a) [NAME], when agreeing to the proposed variations, intended to express agreement on behalf of both her and Mr [NAME] or whether (b) Mr [NAME] has simply chosen not to express a view. Either way, there is no evidence before me that [NAME] is opposed to the proposed variations. 9. [NAME] has expressed a view on the proposed variations. It agrees with them save as follows:

4 • The proposed variation to clause 2(2) of the original leases should only take effect from the date of the tribunal’s determination (for the reason set out in paragraph 11 below). • The proposed clause relating to the recovery of interest should be amended to make it clearer. • The definition of 'the building' set out in clause 1 of the original leases to No.24 and No.24A should also be amended so that 'the building' is henceforth defined in both leases as '[ADDRESS] N.W.10' and not as '22 and [ADDRESS] N.W.10'.

10. The Applicants state in response to [NAME]’s submissions that they agree with and wish to adopt [NAME]’s proposed variation to the definition of ‘the building’. 11. [NAME] object to the Applicants’ request to backdate the variation of clause 2(2) of the original leases on the ground that this would permit the landlord to pursue backdated arrears of an unknown amount. In response, the Applicants argue that the operation of section 20B of the Landlord and Tenant Act 1985 would protect the leaseholders from any attempt by the landlord to recover backdated payments prior to the service charge year 2022/23. In any event, the landlord confirms that there are no arrears on the leaseholder service charge accounts for either maisonette for any years prior to the service charge year 2022/23 (on the basis of each maisonette paying 50%). The Applicants add that if the tribunal determines that the variation of clause 2(2) of the original leases can only take effect from the date of determination of the application, the landlord would then be unable to enforce full recovery of costs incurred in the service charge years 2022/23 and 2023/24. 12. [NAME]'s objection to the wording of the proposed new clause allowing recovery of interest for late payment of the landlord's costs, the Applicants agree with [NAME] that the proposed wording for the new clause 2(25) lacks clarity, and they propose the following alternative wording or such other alternative drafting as the tribunal considers appropriate in substitution: "[NAME] shall pay to [NAME] interest at the rate of 3% above the Bank of England base rate on any balance of any payment due to [NAME] which remains unpaid for more than 30 days after it is due to [NAME], such interest to be to be applied to the amount outstanding and charged on a daily basis at that rate, accruing until payment is received". Relevant legislation 13. Below are the relevant parts of section 35 and 38 of the 1987 Act.

5 Section 35 (1) Any party to a long lease of a flat may make an application to the appropriate tribunal for an order varying the lease in such manner as is specified in the application. (2) The grounds on which any such application may be made are that the lease fails to make satisfactory provision with respect to one or more of the following matters, namely … (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 other party … (f) the computation of a service charge payable under the lease … (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) other tenants 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) and (b) would either exceed or be less than the whole of any such expenditure. Section 38 (1) If, on an application under section 35, the grounds on which the application was made are established to the satisfaction of the tribunal, the tribunal may … make an order varying the lease specified in the application in such manner as is 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 other party to the lease or to any other 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 tribunal’s analysis and conclusions 14. The facts in this case are uncontested.

6 Charging of interest 15. Neither of the leases contains a provision entitling the landlord to charge interest on late payments of service charge. Under section 35(2)(e) of the 1987 Act as expanded on in section 35(3A), a person can apply for a variation to a lease if the lease “fails to make satisfactory provision with respect to … the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him” and the factors for determining whether the lease makes satisfactory provision in this regard “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”.

16. Applying the above statutory provisions, the absence of a clause allowing the landlord to charge interest on late payment of service charge is a failure which allows the tribunal to order a variation of the lease to include such a clause. No objections have been raised to the inclusion of such a provision and I am satisfied that it is appropriate to do so.

17. The wording proposed by the Applicants, after intervention from [NAME], is as follows: "[NAME] shall pay to [NAME] interest at the rate of 3% above the Bank of England base rate on any balance of any payment due to [NAME] which remains unpaid for more than 30 days after it is due to [NAME], such interest to be to be applied to the amount outstanding and charged on a daily basis at that rate, accruing until payment is received".

18. In the absence of any objections or obvious errors, I am satisfied that the above wording (including the rate of interest) is acceptable. Computation of service charge 19. There are two maisonettes and, for the reasons set out in the Applicants’ summary of the background to this application, the lease of each maisonette provides for the leaseholder to pay a quarter share of the costs incurred by the landlord in providing the services, which obviously leaves a shortfall of 50% as there are no other units within the Property which could contribute towards service charge costs.

20. Under section 35(2)(f) of the 1987 Act, a person can apply for a variation to a lease if the lease “fails to make satisfactory provision with respect to … the computation of a service charge payable under the lease”. Under section 35(4), for the purposes of section 35(2)(f) a lease fails to make satisfactory provision with respect to the computation of a service charge payable under it if there is at least one

7 other tenant and the aggregate percentage payable by all (or in this case both) tenants does not equal 100%.

21. Applying the above statutory provisions, the fact that the service charge percentages under the two leases do not add up to 100% constitutes a failure which allows the tribunal to order a variation of the lease to remedy the position so that the aggregate percentage is 100%. No objections have been raised to (a) the making of such a variation in principle or (b) to increasing the percentage payable under each lease to 50%, and I am satisfied that it is appropriate to do so. I am also satisfied that the proposed method of achieving this – by replacing the word “quarter” with the word “half” in clause 2(2) of each original lease is appropriate.

22. The Applicants also wish to delete the last four and a half lines of clause 2(2) of the original leases, presumably on the basis that they are no longer relevant. Whilst I agree that they are no longer relevant, this tribunal does not have the power to order this deletion, as the rationale for such a deletion does not fall within section 35(2) of the 1987 Act. Therefore, this aspect of the application is refused in the sense that the tribunal cannot order this variation, but it is nevertheless open to the parties to agree it amongst themselves if they wish to do so.

23. As regards whether the variation to the service charge computation should be backdated to 1 August 2006, I have considered the Applicants’ and [NAME]’s respective arguments and prefer those of the Applicants. As they submit, section 20B of the Landlord and Tenant Act 1985 will prevent the landlord from making a claim in respect of costs incurred more than 18 months previously where no valid demand or notification has already been served, and the Applicants are in agreement that there are no arrears prior to 2022/23. It is, in my view, legitimate to seek the backdating of this provision so that (if it needs to) the landlord can enforce full recovery of costs incurred in the service charge years 2022/23 and 2023/24. This is particularly the case in circumstances such as these where nobody is claiming that the change from 25% to 50% is controversial and where the leaseholders have already been paying 50% in practice. Correction of erroneous cross-reference in original lease of No.24 24. In relation to the lease of No.24, the Applicants wish the reference to “Clause 4” in paragraph 1 of the Third Schedule to be amended to “Clause 3”, and the stated purpose of this proposed amendment is to enable the landlord to enforce payment of service charges.

25. I note that paragraph 1 of the Third Schedule relates to the costs and expenses incurred by the landlord pursuant to its covenants to carry out repairs and other services. The cross-reference to “Clause 4” is patently wrong as it is Clause 3 that contains the landlord’s covenants. It is

8 understandable that the Applicants should want lease provisions that make sense and as this particular provision helps to define the costs to which the tenant contributes I accept that it falls within section 35(2)(e) of the 1987 Act in that it relates to “the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him” and that it fails to make satisfactory provision in this regard.

26. No objections have been made to this proposed variation and I am satisfied that the variation should be made. Amendment to definition of building 27. At the instigation of [NAME], the Applicants request that the definition of 'the building' set out in clause 1 of the original leases to No.24 and No.24A be amended so that 'the building' is henceforth defined in both leases as '[ADDRESS]' and not as '22 and [ADDRESS]'. This is obviously a sensible amendment as it reflects the reality, but does the tribunal have the power to order the variation? In my view it does, as this erroneous reference to 22 and [ADDRESS] is directly connected to the issue with the service charge computation and therefore can and should be seen as part of the variation of the percentages to make the service charge provisions as a whole both workable and coherent. On that basis I am satisfied that it would be appropriate to order this variation. Date from which variations are to take effect 28. As stated above, the variation of the service charge percentages is to take effect from 1 August 2006. All other variations are to take effect from the date of this determination as no other date has been proposed and I see no reason to choose a different date on the basis of the information before me. Section 38(10)

29. No person has made an application for compensation pursuant to section 38(10) of the 1987 Act and there is no basis on the information before for ordering any such compensation. Cost applications 30. There have been no cost applications.

9 Name: Judge P [NAME]: 7 August 2024

RIGHTS OF APPEAL

A. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber) a written application for permission must be made to the First-tier Tribunal at the regional office dealing with the case.

B. The application for permission to appeal must arrive at the regional office within 28 days after the Tribunal sends written reasons for the decision to the person making the application.

C. If the application is not made within the 28 day time limit, such application must include a request for extension of time and the reason for not complying with the 28 day time limit; the Tribunal will then look at such reason and decide whether to allow the application for permission to appeal to proceed despite not being within the time limit.

D. The application for permission to appeal must identify the decision of the Tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal, and state the result the party making the application is seeking.

10 SCHEDULE

VARIATIONS ORDERED BY THE TRIBUNAL AND DATE FROM WHICH THEY TAKE EFFECT

1 References to clause numbers below are to clause numbers in the original 99 year leases which have been incorporated by reference into the 999 year leases of [ADDRESS] and [ADDRESS] respectively. 2 The variations below each apply to both the lease of [ADDRESS] and the lease of [ADDRESS], except for the variation set out in paragraph 6 below. 3 In the seventh line of clause 1, the phrase “22 and [ADDRESS]” to be amended to read “[ADDRESS]”. This variation to take effect from the date of this determination. 4 In the first line of clause 2(2) replace the word “quarter” with the word “half”. This variation to take effect from 1 August 2006. 5 Insert a new clause 2(25) as follows: "[NAME] shall pay to [NAME] interest at the rate of 3% above the Bank of England base rate on any balance of any payment due to [NAME] which remains unpaid for more than 30 days after it is due to [NAME], such interest to be to be applied to the amount outstanding and charged on a daily basis at that rate, accruing until payment is received". This variation to take effect from the date of this determination. 6 In relation to the lease of [ADDRESS] only, amend paragraph 1 of the Third Schedule by amending the phrase “Clause 4” on the second line to read “Clause 3”. This variation to take effect from the date of this determination.