Landlord and Tenant Act 1987 – Variation of leases – Service charge provisions – Seven blocks of flats – Service charge contributions of lessees calculated in such way that landlord recovering 100% of cost of managing blocks – Tenants acquiring one block by collective enfranchisement – Landlord thereafter able to recover only 85.55% of costs of managing remaining six blocks – Application under section 35 of 1987 Act to vary leases to bring contributions back up to 100% –Leasehold valuation allowing variation but refusing to backdate to date of transfer of seventh block – Whether having jurisdiction to backdate variation – Appeal allowed
Until 2006, the appellant’s predecessor in title owned the freehold of seven blocks of flats in a development in London N16. Many of the flats were let on long leases at low rents; the respondent was the lessee of one such flat. The freeholder was entitled to recover its costs of repairing and maintaining the buildings from the lessees pursuant to the service charge provisions in the leases. Each lessee was required to pay an appropriate proportion of those costs based on the rateable value of the flat; the proportions were calculated in such a way that, when added together, the freeholder recovered 100% of its costs.
In a transfer executed in 2006, qualifying tenants acquired the freehold of one of the blocks by collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993. The freeholder continued to be responsible for managing the remaining six blocks but, because of the way the proportions were calculated, was able to recover only 85.55% of its costs from lessees; the missing 14.45% related to the block acquired by the tenants. In 2007, the freeholder consulted lessees on a proposal to vary each lease in the remaining six blocks by adjusting the proportions payable, so that it could once more recover 100% of its costs. It asked the lessees to agree to deeds of variation and indicated that, if they did not, it would apply to the leasehold valuation tribunal (LVT) for an order under Part IV of the Landlord and Tenant Act 1987. Few lessees responded to that request.
In early 2010, the freeholder granted 100-year headleases of the six blocks to the appellant, which thereby took over the freeholder’s rights and obligations under the leases of the flats. The appellant applied to the LVT, under section 35 of the 1987 Act, to vary the leases in the terms that the leaseholder had proposed, with the new proportions backdated to the date of the 2006 transfer of the seventh block.
The LVT held that the leases in their present form did not make satisfactory provision for the computation of service charges, such that they could be varied in accordance with section 35. However, it declined to backdate the amended proportions, holding that they should apply only from the date of its decision. In that regard, it noted that the appellant, or the freeholder before it, could have made an application for variation at any point in the past several years; it took the view that, where they had not done so, the lessees should not be required to make contributions in excess of their contractual obligations at the relevant time. The appellant appealed on that issue.
Held: The appeal was allowed.
(1) The purpose of section 35 of the 1987 Act was to enable a party to apply to the LVT for a variation of a lease in circumstances where the lease failed to make satisfactory provision with respect to certain matters; in other words, to cure a defect in the lease. A defect might arise and exist for a long time before any party recognised its existence and sought to do something about it. Some of the variations contemplated by section 35(2), such as those dealing with the repair and maintenance of certain property, were of a kind that it would not be helpful or effective to backdate, since the purpose was to deal with the future. However, the position was different with regard to a variation under 35(2)(f) to remedy inadequate provision for the computation of a service charge. Where the leases were defective by reason of the inability of the landlord, from a certain date, to recover 100% of the expenses of providing services, there was nothing in the statute to indicate an intention to leave the defect in place for an indeterminate period until the date of an application to the LVT or the date of the LVT’s decision, so as to cure the defect only prospectively from one of those dates rather than dealing with it from the time that it arose.
If a lease were varied by agreement of the parties, to alter the proportion of the total service charge costs paid by the lessee, that could be effected by entering into a deed by which it was agreed and declared that, as from a stipulated past date, the lease should be read and have effect as if it were worded in the amended fashion. A deed expressed in that manner would have contractual effect and would enable the parties to insist on the calculation of service charge payments for past periods in accordance with the terms of the amending deed. Since a variation of that kind could be effected by agreement through entering into a deed, then it could also be ordered under the 1987 Act, with a similar retrospective effect, in the absence of any contrary indication to be found in the statute. The statute expressed in wide terms the nature of the variation that could be applied for and ordered. There was nothing to indicate that an order varying the lease could do so only prospectively from some particular date, such as the date of the application to the LVT or the date of its decision. The LVT therefore had jurisdiction to order that the variation take effect from the transfer date in 2006.
(2) The LVT had erred in holding that it should not exercise the jurisdiction on the facts of the case. The fact that an application for variation could have been made earlier was not a self-standing reason for refusing to exercise the jurisdiction. Nor was there any reason why the lessees should not be required to make backdated contributions in excess of their contractual obligations; on the contrary, there was clear evidence as to why they should be required to do so. The lessees would obtain an unintended windfall if the variation were not backdated. They had been properly notified from an early date of the defect in the lease and of the prospective application to the LVT if they did not agree a variation. They had, through inaction, resisted a legitimate request to vary the leases, thereby forcing the appellant to go to the LVT to get an order for that justified variation. The lessees had enjoyed the provision of the services and there was no reason why the appellant should be prevented from recovering 100% of the cost. The variation was not of a kind that was likely to cause substantial prejudice to the lessees, such that, pursuant to section 38(6), the order should not be made. Although the lessees would be in a worse position if the order were made, the substantial prejudice contemplated by section 38(6) could not include the removal of an unintended and undeserved windfall flowing from the inability, following enfranchisement of one of the blocks, to recover 100% of the cost of services to the remaining six blocks. Nor was the loss of that windfall the type of “loss or disadvantage” in respect of which compensation should be paid under section 38(10). The leases should be varied with effect from the 2006 transfer date.
Gary Cowen (instructed by Wallace LLP) appeared for the appellant; the respondent did not appear and was not represented.
Sally Dobson, barrister
Landlord and Tenant Act 1987 – Variation of leases – Service charge provisions – Seven blocks of flats – Service charge contributions of lessees calculated in such way that landlord recovering 100% of cost of managing blocks – Tenants acquiring one block by collective enfranchisement – Landlord thereafter able to recover only 85.55% of costs of managing remaining six blocks – Application under section 35 of 1987 Act to vary leases to bring contributions back up to 100% –Leasehold valuation allowing variation but refusing to backdate to date of transfer of seventh block – Whether having jurisdiction to backdate variation – Appeal allowedUntil 2006, the appellant’s predecessor in title owned the freehold of seven blocks of flats in a development in London N16. Many of the flats were let on long leases at low rents; the respondent was the lessee of one such flat. The freeholder was entitled to recover its costs of repairing and maintaining the buildings from the lessees pursuant to the service charge provisions in the leases. Each lessee was required to pay an appropriate proportion of those costs based on the rateable value of the flat; the proportions were calculated in such a way that, when added together, the freeholder recovered 100% of its costs.In a transfer executed in 2006, qualifying tenants acquired the freehold of one of the blocks by collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993. The freeholder continued to be responsible for managing the remaining six blocks but, because of the way the proportions were calculated, was able to recover only 85.55% of its costs from lessees; the missing 14.45% related to the block acquired by the tenants. In 2007, the freeholder consulted lessees on a proposal to vary each lease in the remaining six blocks by adjusting the proportions payable, so that it could once more recover 100% of its costs. It asked the lessees to agree to deeds of variation and indicated that, if they did not, it would apply to the leasehold valuation tribunal (LVT) for an order under Part IV of the Landlord and Tenant Act 1987. Few lessees responded to that request.In early 2010, the freeholder granted 100-year headleases of the six blocks to the appellant, which thereby took over the freeholder’s rights and obligations under the leases of the flats. The appellant applied to the LVT, under section 35 of the 1987 Act, to vary the leases in the terms that the leaseholder had proposed, with the new proportions backdated to the date of the 2006 transfer of the seventh block.The LVT held that the leases in their present form did not make satisfactory provision for the computation of service charges, such that they could be varied in accordance with section 35. However, it declined to backdate the amended proportions, holding that they should apply only from the date of its decision. In that regard, it noted that the appellant, or the freeholder before it, could have made an application for variation at any point in the past several years; it took the view that, where they had not done so, the lessees should not be required to make contributions in excess of their contractual obligations at the relevant time. The appellant appealed on that issue.Held: The appeal was allowed. (1) The purpose of section 35 of the 1987 Act was to enable a party to apply to the LVT for a variation of a lease in circumstances where the lease failed to make satisfactory provision with respect to certain matters; in other words, to cure a defect in the lease. A defect might arise and exist for a long time before any party recognised its existence and sought to do something about it. Some of the variations contemplated by section 35(2), such as those dealing with the repair and maintenance of certain property, were of a kind that it would not be helpful or effective to backdate, since the purpose was to deal with the future. However, the position was different with regard to a variation under 35(2)(f) to remedy inadequate provision for the computation of a service charge. Where the leases were defective by reason of the inability of the landlord, from a certain date, to recover 100% of the expenses of providing services, there was nothing in the statute to indicate an intention to leave the defect in place for an indeterminate period until the date of an application to the LVT or the date of the LVT’s decision, so as to cure the defect only prospectively from one of those dates rather than dealing with it from the time that it arose.If a lease were varied by agreement of the parties, to alter the proportion of the total service charge costs paid by the lessee, that could be effected by entering into a deed by which it was agreed and declared that, as from a stipulated past date, the lease should be read and have effect as if it were worded in the amended fashion. A deed expressed in that manner would have contractual effect and would enable the parties to insist on the calculation of service charge payments for past periods in accordance with the terms of the amending deed. Since a variation of that kind could be effected by agreement through entering into a deed, then it could also be ordered under the 1987 Act, with a similar retrospective effect, in the absence of any contrary indication to be found in the statute. The statute expressed in wide terms the nature of the variation that could be applied for and ordered. There was nothing to indicate that an order varying the lease could do so only prospectively from some particular date, such as the date of the application to the LVT or the date of its decision. The LVT therefore had jurisdiction to order that the variation take effect from the transfer date in 2006.(2) The LVT had erred in holding that it should not exercise the jurisdiction on the facts of the case. The fact that an application for variation could have been made earlier was not a self-standing reason for refusing to exercise the jurisdiction. Nor was there any reason why the lessees should not be required to make backdated contributions in excess of their contractual obligations; on the contrary, there was clear evidence as to why they should be required to do so. The lessees would obtain an unintended windfall if the variation were not backdated. They had been properly notified from an early date of the defect in the lease and of the prospective application to the LVT if they did not agree a variation. They had, through inaction, resisted a legitimate request to vary the leases, thereby forcing the appellant to go to the LVT to get an order for that justified variation. The lessees had enjoyed the provision of the services and there was no reason why the appellant should be prevented from recovering 100% of the cost. The variation was not of a kind that was likely to cause substantial prejudice to the lessees, such that, pursuant to section 38(6), the order should not be made. Although the lessees would be in a worse position if the order were made, the substantial prejudice contemplated by section 38(6) could not include the removal of an unintended and undeserved windfall flowing from the inability, following enfranchisement of one of the blocks, to recover 100% of the cost of services to the remaining six blocks. Nor was the loss of that windfall the type of “loss or disadvantage” in respect of which compensation should be paid under section 38(10). The leases should be varied with effect from the 2006 transfer date.Gary Cowen (instructed by Wallace LLP) appeared for the appellant; the respondent did not appear and was not represented.Sally Dobson, barrister