Section 35 of the Landlord and Tenant Act 1987 enables a party to a long lease of a flat to seek an order varying the provisions of the lease relating to the computation of the service charge.
The legislation clearly applies where leases are unsatisfactory because the proportions of the service charge payable by the tenants add up to more, or less, than 100%; the statute expressly provides for this. In Morgan v Fletcher [2009] UKUT 186 (LC); [2010] PLSCS 14, the Lands Chamber of the Upper Tribunal was asked to decide whether it has the jurisdiction to intervene in cases where the computation of the service charge is unsatisfactory for some other reason. In particular, can a tribunal adjust the tenants’ service charge contributions where there is some obvious unfairness but the aggregate of their contributions totals exactly 100%?
The applicants – some of whose service charge contributions were 16 times larger than the contribution payable by the tenant of the largest flat – argued that parliament must have intended the legislation to apply in such cases. They cited the example of a developer that converts a building into two flats and lets them on the basis that the tenants each pay 50% of the service charge. The developer could then build an extension to house a third flat and then sell or let that flat on the basis that the maintenance of the building is met by the original tenants, thereby gaining a more valuable flat.
The judge sympathised with the tenants. He accepted that their service charge contributions were disproportionate and resorted to the reports of the parliamentary debates in Hansard to help interpret the legislation: Pepper Iinspector of Taxes) v Hart [1993] AC 593. These indicated that the statutory provisions are directed at service charge schemes that are seriously defective.
Parliament’s original intention was to ensure that landlords did not profit from service charge contributions. It subsequently amended the legislation to enable tribunals to adjust proportions to eliminate service charge shortfalls, in order to encourage landlords to keep buildings in proper repair and condition. Had the jurisdiction been wider, there further legislation to effect this change would have been unnecessary.
The judge was obviously concerned that he would be opening the floodgates to assorted arguments on what is and is not fair were he to decide that tribunals have a general power to reapportion service charge contributions among tenants on the basis of what they consider to be fair and reasonable in the circumstances. Consequently, the judge ruled that section 35 applies only in cases where the aggregate of the tenants’ service charge contributions falls short of, or exceeds, 100%.
The decision confirms the courts’ reluctance to interfere with the freedom of parties to negotiate their own contracts, unless parliament expressly authorises them to do so. It remains to be seen whether parliament agrees with the tribunal or decides for policy reasons to amend the legislation again.
Allyson Colby is a property law consultant
