A lease which has a descriptive definition of the proportion of service charge payable may be found not to make satisfactory provision but a variation will not be granted if it substantially prejudices the lessees and is unreasonable.
In Tower Hamlets Community Housing Ltd v Leaseholders of Painter House [2024] UKUT (LC), the Upper Tribunal (Lands Chamber) considered an appellant landlord’s appeal from the refusal of the First-tier Tribunal (FTT) to vary leases under which the respondents held their flats at Painter House, Sidney Street, London E1.
The appellant was the freeholder of Painter House, which comprised a block of 24 flats adjacent to another block containing 14 residential units. On the ground floor of Painter House was an office (the commercial unit) which included a flat roof such that it had a larger footprint than the residential units above. There was no internal wall dividing it from the commercial part of the neighbouring block – office space spanned both units. The commercial unit and the neighbouring office space was occupied by the appellant. Twenty-two of the flat leases were in identical terms and required the lessee to contribute 1/38 of the landlord’s expenditure. The other two leases required payment of “a fair proportion” of the same costs. The appellant wished the leases to be varied such that the contribution to landlord’s expenditure be 1/24.
Section 35 Landlord and Tenant Act 1987 gives the FTT the power to vary leases in certain circumstances. These grounds are, in effect, gateway provisions and are set out in s35(2). The grounds at s35(e) and (f) are that a lease fails to make satisfactory provision with regard recovery of service charge expenditure or the computation of a service charge payable. S35(4) clarifies that 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 of contribution to the costs of repair and maintenance and the building’s insurance would exceed or be less than 100% of that expenditure.
When an applicant has passed through one of the gateways the tribunal has the discretion to vary the lease. Under section 38(4), the tribunal may make the amendment requested, or substitute its own amendment. However, no order effecting a variation of a lease shall be made if it appears to the FTT that the variation would be likely to prejudice any respondent to the application or any person who is not a party to the application and that a permitted compensatory award would not afford adequate compensation or that for any reason it would not be reasonable in circumstances for the variation to be effected.
The UT held that the FTT was incorrect to find that leases with the requirement of payment of “a fair proportion” could not satisfy s35. Section35(4) does not apply only to numerical proportions – a descriptive proportion may also fall within it. Therefore the gateway had been successfully passed but the UT declined to make the variations sought. Although the leases were not satisfactory, the variation the appellant sought would require the residential lessees to pay 1/24 of the landlord’s expenditure, including that spent on the commercial unit. The landlord sought to assure the UT that it would continue its practice of only charging for matters benefiting the residential parts but such an assurance would not allow a tribunal to make an otherwise prejudicial variation. The variation sought was substantially prejudicial to the respondents and would be unreasonable. Although the tribunal declined to exercise its discretion to vary the leases, it did note that the leases ought to contain a rational apportionment between the residential parts and the commercial unit and expressed the hope that the parties could work together to come up with something mutually acceptable.
Elizabeth Haggerty is a barrister
