Varying leases to recover costs

Difficulties can arise in the management of buildings when lessees fail to pay their service charges on time or at all. To compel compliance, a landlord or right-to-manage company may be left with little choice but to seek enforcement action. This may be cost-prohibitive if the provisions of the relevant leases do not allow for the recovery of such charges, either as an administration charge – payable directly by the defaulting lessee – or through the service charge payable by all leaseholders. In 56 Westbourne Terrace RTM Co Ltd v Polturak and another [2025] UKUT 88 (LC); [2025] EGCS 50, the Upper Tribunal (Lands Chamber) was asked to determine whether it had jurisdiction to vary such leases to allow for a cost recovery clause under section 35 of the Landlord and Tenant Act 1987. The problem 56 Westbourne Terrace, W4, was a house divided into 11 self-contained flats, each held under a long lease. The appellant, 56 Westbourne Terrace RTM Co Ltd (56 WT), was the RTM company formed by the leaseholders to take over management of the building after a period of discord between them and the freeholder, 56 Westbourne Terrace Freeholders Association. Two of the lessees, Jeremy Polturak and Robert Davies, who held the leasehold interest in three of the flats, stopped paying their service charges. 56 WT argued that this adversely affected its ability to manage the building due to the substantial service charge arrears accrued. The leases of the flats, which were all in substantially the same form, did not allow for the recovery of the costs of enforcement action as an administration charge or through the service charge. 56 WT made an application under section 35 to vary the leases to enable the same. Polturak and Davies resisted the application and were successful before the First-tier Tribunal. Jurisdiction Section 35(2)(e) permitted an order to be made to vary a lease only in so far as the lease failed to make satisfactory provision for the recovery of expenditure. It permitted one party to the lease (A) to recover from another party (B), expenditure incurred by A for B’s benefit. The FTT determined that it did not have jurisdiction to vary the leases to include the recovery of legal costs as an administration charge under section 35(2)(e) or through the service charge, because such a variation would only be permissible if it was for the benefit of another party. The UT found that the FTT had incorrectly construed the provision. The UT determined that section 35(2)(e) should be read as permitting A to recover its original expenditure, if it was for the benefit of B. The UT underscored that the scope of the FTT’s jurisdiction was defined by section 35(2). If the lease failed to make “satisfactory” provision for any of the matters set out in subsections 35(2)(a) to 35(2)(f), its jurisdiction would be engaged. It had the power to vary the leases to make each leaseholder responsible for the costs of enforcement of their own covenants arising from their own alleged breach. Workability The FTT also determined that, in circumstances where the existing cost recovery clause of the leases, which allowed the landlord to recover the costs of enforcing its right to receive the service charge, “were clear and workable”, it was unnecessary to vary the same. The UT found the FTT had also erred in its understanding of the statutory requirement. Having regard to the relevant case law, the UT held that “clarity and workability” could not provide a comprehensive test. One had to look to the language used in the statute itself. Section 35 asked whether the provisions being considered under the lease were “satisfactory”. There was no reason to substitute that wording for a more restrictive language that would, nevertheless, not be permissible as a matter of interpretation. The decision remade In the present case, the UT was willing to vary the leases. 56 WT had standing to make the application in reliance on section 102(1) and paragraph 10 of Schedule 7 to the Commonhold and Leasehold Reform Act 2002. As an RTM company, it was entitled to make an application under section 35 as if it was a party to the leases it sought to vary. Further, the UT found that the leases failed to make satisfactory provision for the recovery of expenditure under section 35(2)(e) in so far as the structure of the lease meant that the expense of enforcement fell on the members of the RTM company or the whole body of leaseholders. On the relevant considerations of prejudice and compensation, the UT found that it was unlikely that Polturak or Davies would be substantially prejudiced by the proposed variations due to the statutory safeguards in place. They would only be required to contribute their proportionate share, if it was just an equitable for them to do so. If they were prejudiced, there was no reason why, in principle, that could not be compensated in monetary terms. There being no other reason why it would not be reasonable for the variations to be made, the UT made a retrospective order varying the same with effect from the date of the application. Elizabeth Dwomoh is a barrister at Lamb Chambers Image © Ekaterina Bolovtsova/Pexels