[2024] UKUT 37 (LC)

It will be recalled that the “gateway” at section 35(2)(f) is that the lease fails to make satisfactory provision with respect to the computation of the service charge, and that the lease meets that description only if:

“35(4)…

(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 referred to in paragraphs (a) and (b) would [either exceed or be less than] the whole of any such expenditure.”

It is worth pausing over that wording to notice that the provision is binary. Either the proportions payable by the tenants add up to more or less than the “expenditure incurred”, or they do not. Nothing is said about that expenditure, and in particular the sub-section does not say that the expenditure must be incurred solely for the benefit of the lessees. An example discussed at the hearing is a block comprising ten flats. Assume that each flat is the same size and consumes about 1/10 of the landlord’s expenditure in insuring, repairing, maintaining and decorating the block. If all ten are let, the service charge is defined as the landlord’s expenditure on the block, and each flat pays 10%, then the condition is section 35(2)(f) is not met. But if the ground floor flat is not let and is the landlord’s home, the service charge is defined as the landlord’s expenditure on the block, and each of the nine leased flats pays 10% then the condition is met – even though in such a case it is hard to imagine any reason why a variation should be made. So the gateway at section 35(2)(f) is rather a blunt instrument; getting through the gateway does not necessarily entail a successful application for variation. I apologise for labouring that example but it is going to be useful later.

The first ground of appeal is that the FTT was wrong to decide (at its paragraph 120, quoted above) that “proportions” in section 35(4)(b) means only numerical proportions, and that the requirement cannot be met if any of the leases has to pay a descriptve proportion, as do flats 9 and 11 which have to pay “a fair proportion”. The FTT took the view that for this provision to apply it must be possible to compute a total, which of course it could not do.

Mr Cowen KC argued that the FTT was wrong about this. Even though the proportion payable by flats 9 and 11 cannot be computed, it is obvious, he argued, that 16/38 shared between the two flats would not be fair, and that therefore the requirements of the subsection were met. He pointed out that there is no policy reason for excluding proportions expressed as descriptions rather than as numbers. He gave the example of a block of 10 flats where 9 of the flats have leases that provide for payment of 12% of the service charge and the other provides for the payment of a reasonable proportion of the service charge. Notwithstanding that those provisions together mean that there would be an over-recovery of service charge, on the FTT’s construction of the 1987 Act there is no jurisdiction to vary the leases.

At the hearing Mr Swirsky did not press his opposition to this obviously correct argument. The appeal succeeds on this ground; the FTT misconstrued section 35(4) and therefore came to the wrong conclusion about section 35(2)(f).

It is not in dispute that the consequence of that is that the circumstances meet the condition set out in section 35(2)(f), so that the FTT then had a discretion whether to vary the lease.