[2024] UKUT 37 (LC)

The condition in section 35(2)(f) was met, and therefore the FTT had a discretion to vary the service charge proportions in the lease and should therefore have decided whether or not to do so. Both parties at the hearing agreed that if I reached that conclusion I should substitute the Tribunal’s decision and exercise the statutory discretion, rather than remitting the matter to the FTT, and I shall do so.

It is worth pointing out that the FTT did make a variation, by consent, by changing the word “Building” to “Block” in all the leases; it said nothing about why it had jurisdiction to do so. For the avoidance of doubt I therefore confirm that variation (having explained above why the Tribunal has jurisdiction to vary the leases, on the basis of section 35(2)(f)). The parties’ solicitors will need to ensure that the requisite entry is made by HM Land Registry on all the relevant titles to reflect that change.

That leaves the much more significant change that the appellant seeks, namely to change all the service charge proportions to 1/24 (instead of 1/38 or “a fair proportion”) so far as expenditure on the Block is concerned and to 1/38 so far as expenditure on the Estate is concerned. So far as I can see the only way in which the lessees are required to contribute to the Estate rather than the Block is where reference is made to the Common Parts of the Estate; quite what would be the effect of the change to 1/38 of expenditure on the Estate has not been explained.

But the important point is that the appellant wants to vary the residential leases so that the lessees are required to pay 1/24 of the landlord’s expenditure on the Block including the ground floor.

Mr Cowen KC explained that historically the appellant has charged the lessees only for those services that benefit them; it has not charged the residential lessees for the insurance of the Commercial Unit nor for anything else that benefits the Commercial Unit alone. It proposes to continue that practice, despite that not being the effect of the variations for which it applied to the FTT. In other words it proposed to make the lessees liable together for the whole of its costs in insuring, repairing, maintaining and decorating (etc) the block, but not actually to enforce that liability in practice. Mr Cowen KC explained that the applicant took the view that that was the simplest way, doing least violence to the drafting of the leases, to achieve what it wanted.

Section 38 of the 1987 Act states that the FTT must not order a variation if it appears:

“(a)

that the variation would be likely substantially to prejudice—

(i)

any respondent to the application, or

(ii)

any person who is not a party to the application,

 and that an award under subsection (10) would not afford him adequate compensation, or

(b)

that for any other reason it would not be reasonable in the circumstances for the variation to be effected”.

The Tribunal cannot order a variation in respect of which either (a) or (b) is met. No reassurance that the landlord does not really mean it and will not demand service charges that would substantially prejudice the respondent can enable the Tribunal to make such a variation. In any event such a reassurance could not take away the prejudice or make an unreasonable arrangement reasonable. Even if the residents were confident that the appellant would keep that promise they would be unable to persuade a purchaser to take the same view. Their leases would be devalued if not unsaleable. And how would such a promise be enforced if the appellant were to sell the freehold?

Therefore the Tribunal has to look at the variation sought on the basis that the appellant means what it says and wants the residential leases to be varied so that the 24 leases pick up the whole cost of the landlord’s expenditure on services for the Block, defined as agreed to include the eastern half of the Commercial Unit.

The respondents’ position, Mr Swirsky explained, is that they are perfectly content to reimburse expenditure incurred for their benefit but they object to meeting these costs for their landlord – or indeed for a third party if the appellant should decide to let the Commercial Unit in future.

The appellant’s arguments in favour of the variation it sought before the FTT are as follows.

First, it is said that this is what the original parties intended. The drafting of the leases, which identify the demised premises by reference to plot numbers rather than to flat numbers, indicates that originally there was no intention to separate the property into two blocks; the idea was to have 38 flats and have the service charge divided equally between them, but when it was decided to divide the property into two blocks the drafting did not catch up.

I agree that the most likely explanation for the division into thirty-eighths is that there are thirty-eight flats altogether (rather than any conscious decision to make the occupant of the eastern half of the Commercial Unit responsible for 14/38 of the whole); but I do not understand why it might be supposed that the original residential lessees actually intended to pay for the landlord’s expenditure on the Commercial Unit as well as on the residential part of the Block. Be that as it may, that is not what the leases as executed provide, and the question is whether it would substantially prejudice the respondents, or would for any other reason not be reasonable in the circumstances, if the variation sought by the appellant were made.

Second, it is said that if the Tribunal refuses to make the variation proposed that will generate inconsistency with the position of the single long lease in Peter House, which the appellant says is responsible for a proportion of the expenditure on the whole Peter House Block including the ground floor. I was not given any coherent explanation of what is actually charged to the lessee of Peter House; in any event if the lessee of flat 14 Peter House is in fact responsible for part of the costs of the Commercial Unit, that is not a reason for imposing such an arrangement on 24 other flats.

Third, it is said that where the original parties to the lease intended the landlord to make a contribution to the services they made specific provision to that effect in clause 7(7) (see paragraph 14 above where the lease requires the landlord to contribute where any of the flats is not let on terms that make provision for payment of the service charge). That is a technical drafting point and it does not provide a reason why the parties should have intended the residential lessees to be responsible for the landlord’s expenditure on the Commercial Unit.

Finally, it is said that the appellant puts its profits back into its housing projects; it is a registered provider of social housing with approximately 2,000 rented units and 1,000 long leasehold units. Mr Cowen KC in his skeleton argument said that there is therefore “a rational basis for A ensuring its costs are met entirely from leaseholders as that supports its charitable objects.” How that is consistent with the assurance that the appellant does not actually intend to charge to the residential flats the costs of insuring and maintaining (etc) the Comercial Unit is a mystery.

The appellant is running a business and of course has to cover its costs. But why the costs of maintaining its office should be the responsibility of this small group of tenants, rather than being funded by its overall income from a few thousand lessees, is not explained and cannot be justified.

The variation sought by the appellant would make the residential lessees of Painter House responsible for the whole of the landlord’s expenditure (as defined in clause 7(5) of the leases) on the ground floor offices. That would be a bizarre arrangement. One can imagine the estate agent’s particulars should the appellant choose in future to let the Commercial Unit: “No service charge, the flats above pay for everything!”; and one can imagine the effect of that arrangement upon the rent that the appellant might charge.

To amend the leases as the appellant sought in its application would substantially prejudice the respondents and would be unreasonable, and I decline to do so.

At the hearing the appellant put forward an alternative case, namely that “Painter House” be defined in the leases to mean floors 1 to 5 plus the Common Parts, the roof and the foundations. Mr Swirsky was understandably unable to take instructions on that proposal since not all his clients were present. But he pointed out that it left too many questions unanswered. There is no information from the appellant as to where the service installations are – where is the air conditioning, for example? Why would the lessees be responsible for the roof and foundations, when the Commercial Unit benefits from them? I would add that merely re-arranging the definition of Painter House does not work, because whilst the lessees would then be responsible only for the cost of insuring floors 1 to 5, they still need a covenant from the landlord to insure the whole block including the ground floor.

Mr Cowen KC suggested that if I were minded to make the variation now proposed in the alternative I should allow the appellant a week to consider any consequential amendments or unforeseen problems. In my judgment it would be unfair to the respondents to give the appellant the opportunity to do now the work that it should have done before making the application to the FTT. I decline to make the alternative variation now proposed.

I said above that I was not quite so optimistic as the FTT in regarding the present arrangement as satisfactory. It would be an odd coincidence if the eastern half of the Commercial Unit really does consume 14/38 of the appellant’s expenditure on the Block. I think it more likely that, as the appellant suggested, the figure of 38 comes from there being 38 flats, but that the drafter overlooked the existence of the Commercial Unit (which is not mentioned in the leases), and originally assumed a block of 38 flats and nothing else, with each flat contributing 1/38. That is speculation. What is perfectly obvious is that something has gone wrong.

The leases ought to contain a rational apportionment between the residential part of the Block and the Commercial Unit. It may be that that is better achieved by adjusting the proportions rather than by carving the building up by description. Perhaps it is not fanciful to hope that the lessees and the appellant could work together to come up with something mutually acceptable.