Landlord and tenant – Variation of lease – Service charge – Computation – Appellant landlord seeking variation of respondents’ leases under section 35 of Landlord and Tenant Act 1987 concerning proportion of service charges payable by respondents – First-tier Tribunal refusing application – Appellant appealing – Whether variation sought reasonable or substantially prejudicial to respondents – Appeal dismissed
Painter House, Sidney Street, London E1, was a block of 24 flats held on long leases. It was one of two connected blocks in a mixed-use, purpose-built development. The two blocks were attached and appeared to be one property from the outside. However, they were vertically separated on the upper floors and had separate roofs.
There was a large commercial unit spanning the ground floor of both blocks and residential flats on the upper floors. The appellant landlord owned the freehold of the whole development and occupied the commercial unit as its head office.
Section 35 of the Landlord and Tenant Act 1987 conferred upon the First-tier Tribunal the power to vary leases which failed to make satisfactory provision with respect to, amongst other things, the computation of the service charge payable under the lease (section 35(2)(f)).
The appellant applied for variations of the respondents’ leases concerning the proportion of the service charge payable by the respondents under their leases of the flats in Painter House.
The FTT decided, amongst other things, that “proportions” of expenditure in section 35(4)(b) meant only numerical proportions, and that the requirement in that provision was not met if any of the leases had to pay a descriptive proportion. For section 35(2)(f) to apply it had to be possible to compute a total, which could not be done as the leaseholders of flats 9 and 11 had to pay “a fair proportion” rather than a specified numerical proportion of such expenditure. The appellant appealed.
Held: The appeal was dismissed.
(1) Under section 35(4), for the purposes of section 35(2)(f) a lease failed to make satisfactory provision with respect to the computation of a service charge payable under it if: (a) it provided 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; (b) other tenants of the landlord were 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 would either exceed or be less than the whole of any such expenditure.
It was agreed that those were the only circumstances where section 35(2)(f) applied, essentially where the lessees had to pay “a proportion” of the landlord’s expenditure on services and the proportions together did not add up to 100%.
(2) The grounds in section 35(2) were gateways and, if the applicant passed through one of them, the FTT had a discretion to vary the lease. It might make the amendment requested by the applicant or such other variation as it thought fit (section 38(4)). If it made a variation, the FTT might order the applicant to pay compensation to any party to the lease or to any other person in respect of any loss or damage they were likely to suffer as a result of the variation.
Even though the proportion payable by flats 9 and 11 could not be computed, the proposed share between the two flats would not be fair and therefore, the requirements of section 35 were met. There was no policy reason for excluding proportions expressed as descriptions rather than as numbers; the FTT misconstrued section 35(4) and therefore came to the wrong conclusion about section 35(2)(f).
It was not in dispute that, consequently, the circumstances met the condition set out in section 35(2)(f), so that the FTT then had a discretion whether to vary the lease.
(3) The gateway at section 35(2)(f) was rather a blunt instrument; getting through the gateway did not necessarily entail a successful application for variation.
The FTT had a discretion to vary the service charge proportions and should have decided whether or not to do so. In the circumstances, the Upper Tribunal would exercise the statutory discretion, rather than remit the matter to the FTT.
(4) Under section 38(6), the FTT should not make an order if it appeared that: (a) the variation would be likely substantially to prejudice any respondent to the application, or any person who was not a party to the application, 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.
The tribunal could not order a variation in respect of which either (a) or (b) was met. No reassurance that the landlord did not really mean it and would not demand service charges that would substantially prejudice the respondent could enable the tribunal to make such a variation. In any event such a reassurance could not take away the prejudice or make an unreasonable arrangement reasonable. Even if the residents were confident that the appellant would keep that promise, they would be unable to persuade a purchaser to take the same view. Their leases would be devalued if not unsaleable and such a promise could not be enforced if the appellant were to sell the freehold.
Therefore, the tribunal had to look at the variation sought on the basis that the appellant meant what it said and wanted the residential leases to be varied so that the 24 leases picked up the whole cost of the landlord’s expenditure on services for the block, defined as agreed to include the eastern half of the commercial unit.
(5) The question was whether it would substantially prejudice the respondents or would for any other reason not be reasonable in the circumstances, if the variation sought by the appellant were made.
The variation sought by the appellant would make the residential lessees of Painter House responsible for the whole of the landlord’s expenditure on the ground floor offices which would be a bizarre arrangement. To amend the leases as the appellant sought in its application would substantially prejudice the respondents and would be unreasonable.
In all the circumstances, the appeal failed because, although the appellant was right about the construction of section 35(2)(f), the tribunal would decline to exercise its discretion to vary the residential leases. Consequently, the outcome remained as decided by the FTT.
Gary Cowen KC and Edward Blakeney (instructed by Capsticks Solicitors LLP) appeared for the appellant; Adam Swirsky (instructed by Direct Access) appeared for the respondent.
Eileen O’Grady, barrister
