Leasehold enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Lease extension – Service charge provisions – Appellant applying for new lease – Existing lease providing for payment of service charge in fixed percentage of expenditure – Aggregate of service charges payable by lessees in building substantially exceeding 100% of expenditure – Whether this a “defect” requiring modification of service charge provisions in new lease under section 57(6) of 1993 Act – Appeal allowed
The appellant was the long leaseholder of a flat in a late Victorian building overlooking the river Thames in London SW1. The respondents were the freeholders of the building. The appellant applied to the first-tier tribunal (FTT) to determine the terms on which he was entitled to acquire a new lease of his flat under the leasehold enfranchisement provisions of Chapter II of Part I of the Leasehold Reform, Housing and Urban Development Act 1993. An issue arose as to the service charge provisions to be included in the new lease.
The appellant’s existing lease required him to pay a service charge in a fixed percentage of the expenditure incurred in providing the relevant services. Leases of other flats in the building were in similar terms. Originally the service charge contributions payable by the lessees in the building had added up to 100% of the relevant expenditure but, owing to the creation of new flats and the subdivision of others over the years, a situation had been reached where the aggregate of service charge contributions was well in excess of 100% of expenditure, amounting to 129%. However, an extra-contractual scheme was operated under which the service charge actually levied was adjusted so that no more than 100% was collected.
The appellant contended that the service charge provision in the new lease should be modified, under section 57 of the 1993 Act, to require him to pay a fair proportion based on the floor space of his flat. He submitted that such a modification was necessary “in order to remedy a defect in the existing lease” within the meaning of section 57(6). Rejecting that contention, the FTT held that the existing regime, while not perfect, did not amount to a sufficiently serious “defect” to justify a variation of the service charge provisions under section 57(6). It determined that the service charge provisions in the new lease should be the same as those in the existing lease unless the parties agreed different terms. In doing so, it adopted the same reasoning as the leasehold valuation tribunal (LVT) in an earlier decision concerning an application by the lessees in the building for a variation of the service charge provisions under section 35 of the Landlord and Tenant Act 1987. The appellant appealed.
Held: The appeal was allowed/dismissed.
The FTT had exercised its own judgment on the facts and argument before it and had not simply echoed the reasons given by the LVT for refusing to vary the service charge provisions. It had sought to apply that reasoning within the statutory context for its own decision. While it was not bound by the LVT’s analysis and was free to differ, it had found support for its own conclusions in that analysis. There was nothing wrong with that approach in principle.
However, the FTT had erred in the conclusions it reached on section 57. Section 57(6) provided the opportunity to ensure that defects in the existing lease were remedied when a new lease was granted. The task of the FTT, under section 57(6)(a), was to establish whether, in its judgment, there was a proper basis for regarding the disputed term as defective. If there was not, it had to leave the term in place. The question was whether, in the light of any relevant changes in circumstances since the existing lease was entered into, it would be unreasonable in the circumstances not to interfere with the term that was now contentious. That was a wholly objective question, which the FTT had to deal with by exercising its own judgment on the relevant facts and circumstances of the case before it, as it found them to be.
Under section 57(6)(a), not only had a defect to be clearly identified in the existing lease, but the party seeking the exclusion or modification of the term in question had also to be able to show that the exclusion or modification contended for would remedy that defect. The concept of necessity was a demanding one in that context: Waitt v Morris [1994] 2 EGLR 224 applied. The crucial question was not whether it was necessary to remedy the defect in the existing lease, but whether, given that there was a defect which had to be remedied, it was necessary to make the exclusion or modification in order to achieve that. The proposed modification or exclusion had to be demonstrably capable of remedying the defect.
Applying those principles, the appellant’s existing lease was defective in the respect which he had identified and that defect was sufficiently serious to require a remedy. It would be wrong to include in the new lease a term replicating the provision for a fixed percentage service charge contribution in the same amount as the existing lease. If the lease, and others in the building, were sound then there would be no need for the voluntary abatement scheme which operated, without the force of contract, to reduce the lessees’ liability for service charge contributions to a percentage figure materially below the figure in their leases. The existence of that voluntary scheme, and the fact that it was regarded as a necessary means of mitigating the effect of the service charge provisions in the leases, served to confirm that those provisions were unrealistic and out of date. It would not be right for a defect of that nature to be incorporated into the new lease. It followed that the service charge provision in the existing lease contained a defect of the kind contemplated by section 57(6)(a) of the 1993 Act, and a modification of that term was required in the new lease. Moreover, in view of the changes which had occurred since the commencement of the existing lease, the inclusion of that term unmodified in the new lease would be unreasonable in the sense of section 57(6)(b).
However, the appellant’s suggested alternative approach to the calculation of service charges was unconvincing. It had the attraction of mathematical precision but it was not supported by evidence on the practicalities of managing a large and complex mixed-use development of the kind in which the flat was located. While it would be possible simply to substitute for the fixed percentage figure in the existing service charge provision the percentage which had been applied in the voluntary abatement scheme, neither party had contended for that outcome. In all the circumstances, the proper course was to remit the matter back to the FTT to determine, in the light of full evidence and submissions from the parties, how the service charge provision in the appellant’s new lease should be formulated.
The appellant appeared in person; Jonathan Upton (instructed by Pemberton Greenish LLP) appeared for the respondents.
Sally Dobson, barrister
Read a transcript of Rossman v Crown Estate Commissioners here
