[2024] UKUT 37 (LC)

The appellant asked the FTT to amend all 24 Painter House leases by:

The appellant’s Statement of Case in the FTT made no mention of the Commercial Unit. Reading that document without background knowledge one could only conclude that Painter House is a block of 24 flats and that the problem is that only 24/38of the landlord’s expenditure on that block of 24 flats is recoverable.

The appellant’s Statement of Case at paragraph 15 asked for the variation to be back-dated so that its historical charging practice would match the terms of the leases.

A number of the Painter House lessees opposed the application and filed a joint Statement of Case which stated at its outset that “Painter House” or “the Block” comprised 24 flats on floors 1–5 and the eastern half of Commercial Unit on the ground floor occupied by the landlord. They were content for the word “Building” to be changed to “Block”, but they resisted any other change to their leases. They argued that the service charge arrangements might well have been deliberate (aside from the inconsistency between flats 9 and 11 and the rest); the proportions as set out ensure that the landlord is liable for 14/38 of its expenditure on the Block, so that in effect it pays the costs attributable to the ground floor. Insofar as that was found not to be the case they asked for expert evidence to be called so as to ascertain the correct apportionment of services between the ground floor and the rest of the Block.

The lessees also complained that they were already being charged for some services consumed by the Commercial Unit, and regarded the proposed variation as an attempt to reinforce an already unfair system. They also argued that compensation would be payable if a variation was ordered.

The appellant’s response to the lessees, in the FTT, said:

“11.1.3

It is appropriate for service charge contributions in the leases in the

Block to total 100% of the relevant expenditure, particularly where

THCH is a community benefit society.”

However, the appellant’s reply also said that the Commercial Unit was billed separately for certain services (electricity and gas are separately metered, fire alarms and fire risk assessments were separately billed) and that insurance was apportioned between the Commercial Unit and the residential lessees, and that the cost of major works “would potentially be shared” between all those in the Block and in Peter House, depending on the scope of works. The appellant called evidence about the way that water charges had been apportioned. The cost of utilities is of course not one of the items of expenditure set out in clause 7(5) of the lease so the arrangements made for gas, electricity and water were of questionable relevance.

The FTT agreed that the term “Building” should be replaced by “Block”. Otherwise it rejected the appellant’s application. It said this:

“117.

At first sight, the applicant’s case appears attractive. There are 38 flats in Painter and Peter Houses, the original intention was for each flat to be pay an equal 1/38th contribution to “the Service Provision” and there was an error in the drafting of the leases. However, this does not take account of the substantial Commercial Unit, used as the applicant’s head office. Based on the Tribunal members’ knowledge and long experience, gained from hearing numerous service charge cases, it is common for service charges to be apportioned between residential and commercial units on mixed-use properties. …

119.

Turning now to s.35(2), the applicant contends the service charge

proportions do not add up to 100% as twenty-two flats pay 1/38th and

the other two pay “A fair proportion”. The Tribunal accepts the

Commercial Unit must be disregarded when calculating the total

proportions, as submitted by Mr Blakeney. Section 35(4) refers to “a

lease” and “leases” and there is no lease of the Commercial Unit.

120.

Where the Tribunal differs from Mr Blakeney is on the meaning of

“service charge proportions” at s.35(4)(b). Logically, this must refer to

fixed proportions, expressed as a fraction or percentage, otherwise it is

impossible to compute a total. Descriptive proportions that can vary

over time, such as fair or reasonable, are not compatible with this section

or s.35(2)(f). In this case, Flats 9 and 11 each pay “A fair proportion”.

The Tribunal is not determining what a fair proportion means, has not

heard from the leaseholders of Flats 9 and 11 and has no details for their

flats. Whilst a total of 16/38ths is unlikely to be fair, the Tribunal cannot

determine this issue.

121.

The Tribunal agrees with Mr Swirsky, who drafted the collective

response. The applicant cannot rely on s.35(2)(f). Not all the leases

express a proportion within the meaning s.35(4). If the Tribunal is

wrong about this, it still would not vary the leases as the current service

charge provisions are perfectly workable and satisfactory (see paragraph

126, below).

122.

Section 35(2)(e) is much broader than s.35(2)(f). The applicant

contends the leases fail to make satisfactory provision for the recovery of

service charges in two respects:

(a)

clauses 7(4), (5) and (7) incorrectly refer to the “Building” rather

than “Block”, and

(b)

it can only recover 24/38ths (or 22/38ths and two fair proportions)

of the service charge costs at Painter House.

123.

The applicant succeeds on the first ground, as the use of “Building” is a

clear defect. The variation is necessary to cure this defect and should be

backdated to the respective dates on which the leases were granted.

Compensation does not arise, as the variation benefits all parties and

there is no prejudice, let alone substantial prejudice, to the respondents.

124.

The second ground is less clear-cut. [The FTT discussed and rejected some of the lessees’ arguments]…

126.

Having said that, the Tribunal accepts the underlying principle that

1/38th proportions are satisfactory when you take account of the

Commercial Unit. The current service charge provisions are perfectly

workable, as the applicant can recover 24/38ths (or 22/38ths and two fair

proportions) of the Painter House costs from the respondents. This is

well over half. The applicant must fund the shortfall, but this is

satisfactory as it occupies the substantial Commercial Unit and derives

considerable benefit from the communal services (insurance,

maintenance, management, repairs etcetera).

…

128.

The applicant has not established the gateway ground at s.35(2)(e), in

relation to the service charge proportions. It is therefore unnecessary for

the Tribunal to decide whether to vary the leases and, if so, whether to

backdate and/or award compensation.”

Nevertheless, the FTT made an order changing the word “Building” to “Block” in all the Painter House leases. It made no order on the lessees’ application for an order under section 20C of the Landlord and Tenant Act 1985 on the basis of the appellant’s confirmation that it would not seek to recover its costs of the proceedings from the lessees.

The appellant sought permission to appeal on seven grounds, and the FTT gave permission on five of those grounds.