First-tier Tribunal Rejects Request to Vary Leases

OUTCOME: Dismissed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case Reference : LON/ooBK/LVL/2023/0006 Property : 56 [ADDRESS] [POSTCODE] Applicant : [redacted] : Ms [COUNSEL] of counsel Respondent : [redacted] those opposing the [NAME] : (1) Mr [COUNSEL] in person (2) Mr [COUNSEL] of counsel Type of [NAME] : [NAME] by Applicant for variation of leases Tribunal Members : Judge S [NAME] Mr K Ridgeway MRICS

Date and Venue of Hearing

: 08 [ADDRESS] [POSTCODE] Date of Written Reasons

: 20 March 2024

DECISION

Determination

1. The Tribunal determines the Leases should not be varied and the [NAME] fails. Introduction

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2. 56 [ADDRESS] [POSTCODE] (“the Building”) is situated in a long tree-lined avenue, almost wholly made up of four storey stucco fronted terraced houses. It has been described as the "most spacious and dignified avenue" in Bayswater and "unrivalled in its class in London or even Great Britain".

3. The Building is divided into 11 self-contained flats (“the Flats”). Each of the Flats is held under a long lease (“the Leases”).

4. The [NAME] of the Building is 56 [COMPANY] (“the [NAME]”). It is a [NAME] owned company, with each Flat owner owning one share in it.

5. In an appendix to this decision there is to be found a list of the lessees (“the Lessees”) of the Flats in the Building, together with the number of their respective flats. Each of the Lessees owns one flat, apart from Mr [NAME] who owns two flats.

6. At the heart of these proceedings is an unfortunate dispute between (1) Mr [NAME] (Flats 9 and 11) and Mr [NAME] (Flat 3), on the one hand and (2) the other 8 Lessees, on the other hand (“the RTM Lessees”).

7. In 2018, the 8 RTM Lessees successfully applied for a right to manage the Building through a right to manage company (“the RTM Company”). The members of the RTM Company are accordingly the RTM Lessees. Mr [NAME] and Mr [NAME] alone are not members of the RTM Company.

8. Since 2018 Mr [NAME] and Mr [NAME] have refused to pay any service charges. This, the RTM Lessees say, is unjustified and has starved the RTM of the funds necessary to carry out major works and maintenance to the Building.

9. On the other hand, Mr [NAME] and Mr [NAME] say they are entitled to withhold those service charges because of the RTM Company’s failure to carry out necessary major works and maintenance in a proper and satisfactory manner, and that it is has failed to comply with its various statutory obligations under the Landlord and Tenant Act 1985.

10. At the start of the hearing all parties agreed that it would not be appropriate for the Tribunal to make findings of fact and fault in respect of these matters. It is highly relevant to these proceedings that there is this unfortunate dispute. But it is not necessary to go into the respective rights and wrongs. Indeed, we were told that these matters will be dealt with in separate s.27A proceedings between the parties to be held in April 2024.

11. The dispute between the parties has given rise to a problem from the point of view of the RTM Company. The problem relates to the control of the [NAME]. The RTM Lessees, of course, own a clear majority of the shares. Mr [NAME] and Mr [NAME] between them own a minority of the shares. On the Companies House register, however, Mr [NAME] and Mr [NAME] alone are shown as directors. There is a dispute as to the propriety of this.

12. The RTM Lessees do not have the power to forfeit the Leases of Mr [NAME] and Mr [NAME] arising from their failure to pay service charges, because that is a right reserved to the [NAME] under the legislation. Mr [NAME] and Mr [NAME] are very much in a minority. If the RTM Lessees were able to take control of the [NAME] then the maintenance and repair problems and the recovery of service charges could be sorted out from their point of view.

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13. The Company Law dispute is, of course, outside the jurisdiction of the Tribunal. The [NAME]

14. The Applicant has made an [NAME] to vary the Leases to ameliorate 3 problems as they see them. In outline, the problems with the Leases as at [NAME] drafted are as follows (they will be set out in more detail below). The recovery of legal expenses issue 15. First, the lack of an ability to recover the costs of taking proceedings against Mr [NAME] and Mr [NAME] (either by way of a direct administration charge or indirectly through the service charges) means that the RTM Company has no funds with which to pursue them and places an unacceptable risk on it (“the recovery of legal expenses issue”). The RTM Company costs issue 16. Secondly, there is no provision for the costs of the RTM Company in complying with its statutory duties (such as filing accounts at Companies House) to be recovered through the service charge (“the RTM Company costs issue”). The insurance broker issue 17. Thirdly, there is no clear entitlement when undertaking their responsibilities to insure the Building that the costs of a broker can be recovered through the service charges (“the insurance broker issue”). The legislation 18. s.35 Landlord and Tenant Act 1987 provides (emphasis supplied): (1) Any party to a long lease of a flat may make an [NAME] to the appropriate tribunal for an order varying the lease in such manner as vis 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— … (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 or of a number of persons who include that other party; … (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. 19. s.38 Landlord and Tenant Act 1987 provides: (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…

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(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 other variation as the tribunal thinks fit…

(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 (b) that for any other 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 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 hearing 20. A face-to-face hearing took place. Ms [NAME] represented the RTM Company. Mr [NAME] represented himself. Mr [NAME] represented [NAME].

21. We were supplied with a well-organised bundle containing 819 pages. The bundle included helpful statements of case from each of the parties. Counsel each provided a skeleton argument. As we have said, no oral evidence was needed or given. Mr [NAME] was focused when [NAME] his oral submissions, and sensibly adopted what Mr [NAME] had to say on the recovery of legal expenses issue. The Lease: service charge provisions:

22. The bundle contains a sample Lease. By clause 4 (1) [NAME] covenanted: During the subsistence of The Term to pay to [NAME] or its Agents the Interim Charge and the Service Charge at the times and in the manner provided in the Third Schedule hereto …

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23. By paragraph 1(1) of the Third Schedule: “Total Expenditure” means the total expenditure incurred by [NAME] in any Accounting Period (i) in carrying out their obligations under Clause 5 of this Lease (emphasis supplied)… 24. The amount to be paid by each [NAME] is that particular [NAME]’s proportion of the Total Expenditure. The usual provision for interim and final payments is made, with an adjustment, if necessary, once the accountants’ certificate has been provided after the end of the accounting year. The insurance broker issue 25. Clause 5(f)(i) of the Lease requires the [NAME]:

To insure and keep insured the Building including the Lift with such Insurance Office of repute as [NAME] shall from time to time determine against the Insured Risks… 26. Clause 5(f)(iii) requires the [NAME]:

To pay to the Insurer forthwith upon the same becoming due the insurance premium for the Building 27. This is a standard insurance clause to be found in long leases.

28. The RTM Company uses the services of a broker in placing the necessary insurance. It pays for those services. It is unsure as to whether Clause 5(f)(i) entitles it to charge the Lessees for the costs of a broker, whereby the costs can be recovered by way of service charge pursuant to paragraph 1(1)(i) of the Third Schedule.

29. The RTM Company argues that by engaging a broker it ensures the overall costs to effect the insurance is reasonable and competitive, and would be less than the costs of the RTM Company procuring the insurance itself.

30. For the avoidance of doubt on this issue, the RTM Company asked for a variation to be made to the Lease. It is a variation it says that falls fairly and squarely within s.35(e).

31. The variation proposed is that paragraph 1(1) of the Third Schedule be varied so as to add to the costs recoverable through the service charges the following words at the end those costs: (vi) in paying any fees for insurance brokers.

32. Mr [NAME] submits that it is not necessary to engage a broker. There is no reason why the RTM Company cannot do it for themselves. There are plenty of instances where a [NAME] owned [NAME] does not make use of a broker, but places insurance itself. The commission paid to brokers has gone sky-high. The obligation of the RTM Company under the clause 5(f)(iii) of the Lease is to make payment to the insurer and not to a broker.

33. On this issue, Mr [NAME] broadly agrees with Miss [NAME]. He says that he agrees that the Lease does make provision for the recovery of a broker’s costs. If that is right then the Tribunal has no jurisdiction to vary the Lease.

34. We agree with Ms [NAME] and Mr [NAME] that, on its true construction,

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clause 5(f) is wide enough to allow for the costs of engaging a broker to be passed through the service charge in accordance with paragraph 1(1)(i) of the Third Schedule. Therefore variation is unnecessary.

35. Whilst we accept the Mr [NAME] is right that on occasions the services of a broker are not used, this does not mean that such services can never be used so as to form part of the service charges. It is a decision for a landlord to make on a case-by- case basis. So this [NAME] fails. The RTM Company costs issue 36. The RTM Company says it is obliged by law to file documents at Companies House annually for which a fee is charged, and a failure to comply would lead to the RTM Company being struck off.

37. The RTM Company does not have funds of its own and there is no provision under the model articles for [NAME] to call upon its members to inject funds to meet company costs.

38. Under the terms of the Lease there is no ability to recover RTM Company costs from the Lessees.

39. The variation proposed is that paragraph 1(1) of the Third Schedule be varied so as to add to the costs recoverable through the service charges the following words towards the end those costs: (v) in connection with the costs , fees and disbursements reasonably and properly incurred in the management of [NAME] to include Companies House filing fees, directors and officers insurance, company secretarial services and bank account charges.

40. In his statement of case Mr [NAME] drew our attention to the decision of the First-tier Tribunal in LON/OOBK/LSC/2016/004 which was a case between the [NAME] and the Lessees in which at [40] the Tribunal held that such company costs were payable by the RTM Company and could not be passed through the service charges.

41. He also drew our attention to both the ARMA’S Standards and RICS’ Code which draw a clear distinction between service charges and company expenditure. An RTM Company cannot use the one to recover the cost of the other.

42. Mr [NAME] did not dissent from this analysis.

43. We are satisfied that the RTM Company is not entitled to pass company costs through the service charge as has already been decided in the previous decision. So this [NAME] fails The recovery of legal expenses issue 44. On this issue a variation is sought both of (1) an administration charge and of (2) the service charge. (1) The administration charge 45. Clause 3(13) of the Lease provides that [NAME] is: To pay all expenses including solicitors’ costs and surveyors’ fees incurred

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by [NAME] of and incidental to (our emphasis) the preparation and service of notice under Sections 146 and 147 of the Law Property Act 1925 (or any other notice hereunder) notwithstanding that forfeiture be avoided otherwise than by relief granted by the Court.

46. Ms [NAME] argues that since the RTM Company cannot forfeit a Lease, the Leases should be amended so that an administration charge can be raised directly against a particular [NAME] when proceedings (other than forfeiture) are brought against that [NAME] to enforce a covenant in the Lease.

46. The variation sought is as follows. A clause new 3(13A) should be inserted: To pay to the Landlord on demand the reasonable costs and expenses (including any solicitors', surveyors' or other professionals' fees, costs and expenses and any VAT on them) incurred by [NAME] in connection with or in contemplation of the enforcement of any of [NAME]’s covenants.

47. Mr [NAME] argues that we have no jurisdiction to vary an administration charge. He says this for two reasons. First, s.35(2)(e) cannot apply because the Lessees can only vary a lease to recover expenditure incurred on their behalf for the benefit of another party. Any expenditure under the [NAME] clause sought to be varied would not be for the benefit of another party, but in fact to his detriment. Secondly, s.35(3A) clearly applies to service charges but not to administration charges.

48. Ms [NAME] argues that we do have jurisdiction to vary an administration charge. She refers to (1) [COMPANY] ([COMPANY] v [NAME]/LVL/39/06, (2) 68 [COMPANY] v [NAME]/00AN/LVL/2021/0007 and (3) [COMPANY] v [NAME]/00BC/LVL/2012/0022. 49. [NAME] was a s.35(4) [NAME]. It was decided on the papers, and there is nothing to suggest that this jurisdiction point was taken. In [NAME] the [NAME] failed to engage with the proceedings at all, and there is nothing to suggest that this jurisdiction point was taken. In [NAME] the [NAME] was unrepresented and again there is nothing to suggest that this jurisdiction point was taken.

50. We are not bound by previous first instance decisions, but as a matter of judicial comity there are usually strong reasons to doing so. However, since this point was not taken in any of those cases we can start with a blank canvas. We prefer and agree with the submissions of Mr [NAME].

51. If we are wrong, should be exercise our powers to make the alterations suggested? 52. In this context it is important to understand the difference between two important recent decisions of the Court of Appeal. As already stated the relevant wording in our case is of and incidental to... .

53. In Kensquare v Boakye [2021] EWCA Civ 1725, it was held (issue iii) that a provision for recovering expenses incurred by the landlord for the purpose of (our emphasis) the preparation and service of a s.146 notice notwithstanding forfeiture may be avoided otherwise by relief granted by the court, was wide enough to recover costs of Tribunal proceedings for breach of covenant.

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54. By contrast, in [NAME] v Tower Hamlets LBC [2022] EWCA Civ 831, it was held that a provision for recovering expenses incurred by the landlord incidental to (our emphasis) the preparation and service of s.146 notice was not wide enough to cover subsequent litigation costs (see Newey LJ at [50]).

55. This is therefore a [APPELLANT] case, not a Kensquare case. So why should the Applicant recover litigation costs when the [NAME] could not recover litigation costs? Why should the lease be varied in this way when the existing clause is clear and workable: see [COMPANY] v Stride [2019] UKUT 99 (LC) and Camden LBC V Morath [2019] UKUT 193 (LC).

56. So, even if we felt we had jurisdiction would not make the variation suggested. (2) The service charge 57. At [NAME], there is no power to recover legal expenses through the service charge. The variation proposed is that paragraph 1(1) of the Third Schedule be varied so as to add to the costs recoverable through the service charge the following words at the end those costs: (iv) in paying the fees of any Solicitors or other professional in connection with or in contemplation of the enforcement of any of [NAME] covenants in [NAME] where such fees are unable to be recovered from the defaulting leaseholder as an administration charge in accordance with clause 3 (13)(A).

58. It seems to us that as drafted it does not engage if we do not insert clause 3(13)(A). Putting that to one side, the first point to consider is whether we have jurisdiction to vary the service charge. Ms [NAME] relied upon the 3 cases referred to in paragraph 48 above. The same comments, however, made in paragraph 49 above equally apply.

59. Mr [NAME] submits that there is no jurisdiction under either s.35(2)(e) or s.35(3A). We agree with his submissions under s.35(2)(e). See our reasoning in paragraphs 47-50.

60. However, Ms [NAME] in this context also relies upon s.35(3A) which can conveniently be set out again: 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.

61. Mr [NAME] says that this should be given a narrow interpretation. It permits the recovery of interest or another fixed charge payable if a service charge is not paid on the due date. It does not permit landlords to pass on legal cost to tenants.

62. This is an interesting point upon which there appears to be no properly argued authority.

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63. It is known that the 1987 Act was not a well drafted one1. We feel we should give s.35(3A) a wide and purposive construction to fill a significant lacuna in the Act as originally drafted. We find we have jurisdiction.

64. The most detailed and authoritative decision under s.35 is that of the Upper Tribunal in [COMPANY] v Barnett [2012] UKUT 375 (LC), consisting of HH Judge Gerald and [NAME].

65. At [107] it is said: It is in our judgment a quite exceptional, and substantially prejudicial, thing to enable the landlords to recover its costs not only of recovering the service charge but also of enforcement of all of its covenants from all tenants through the service charge, particularly where the landlords are not owned or controlled by the tenants and there is no evidence that the landlords cannot afford to do so or that the absence of such covenants has caused any difficulties in the past or will or is likely to in the future. It would enable the landlords to decide how, when, by whom and at what cost they should enforce covenants. That would shift all the financial risk and liability from the landlords to the tenants whose only control would be proceedings via the LVT and all the time, trouble, cost and uncertainty that that involves. The appellants have put forward no justification for such a major risk and liability transfer and all that that entails. In our view the proposed variation would significantly affect the way in which the landlords, given virtual financial impunity (subject to any 1985 Act challenge), make future decisions about whether to enforce and pursue breaches of covenants.

66. It is true that the facts of this case are very much removed from the remarks underlined above. However, the word “particularly” is by no means the same as “except when.” In other words, the approach taken by the Upper Tribunal is not confined to those cases which fall within the remarks underlined above.

67. There is no reason why this approach should not apply to [NAME] as well.

68. We therefore decline to exercise our discretion so as to add a completely new provision for the recovery of legal expenses by way of the service charge. Conclusion 69.

For the reasons set out above, the [NAME] for variation of the Leases fails. Name:

[NAME] [NAME]: 20 March 2024 Rights of appeal

1 For example, see the comments of Sir [NAME] V-C (as he then was) in Denetower v Toop [1991] 1WLR 945G, observing in relation to Part I (right of first refusal) that the 1987 Act is “ill drafted, complicated and confused”. It is ill drafted because it was rushed through Parliament on 15 May 1987, so as not to fall with the disillusion of Parliament on 18 May 1987 caused by the General Election of that year. It was therefore never properly scrutinised.

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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, the property 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). List of leaseholders and their respective flats

1 [NAME] and [NAME]. 2 [NAME]. 3 [NAME]. 4 [NAME] . 5 [COMPANY]. 6 [NAME] and [NAME]. 7 [NAME] and [NAME]. 8 [NAME]. 9 [NAME]. 10 [NAME]. 11 [NAME].

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